"Biggest fraud in the history of the capital markets"

Karl Denninger has been covering "Foreclosuregate" for some time now and it appears that his analysis has been spot on with regard to the consequences.

He makes a clear case for this with the following description of how the MBS creation process actually occurred:

No, what happened then (and still does today) is that these MBS are sold first and filled after!

That is, a pension fund calls up Vampire Squid Bank and says "I need $100 million of MBS that pay a 5% coupon."

Vampire Squid Bank takes the $100 million dollars and then proceeds to securitize loans.

But in doing so it took the $100 million on a prospective pooling and servicing agreement in which they agreed to provide loans of a certain credit quality and specification to the buyer.

So it's much worse than "we didn't know." It's "we took the money, then we build the security and didn't look, even though we told you we would."

biggest fraud

Capice?!! The Pension funds, or any other investor (Chinese, European.. etc) placed an order for a MBS structure paying a certain dividend. Then the Investment Bank (Goldman, Bears.. etc) packaged a bunch of mortgage notes together, got them rated by the Rating Agencies, then took that investment rating and obtained insurance from the Mortgage insurers (Ambac sym=ABK, Radian=RDN, PMI=PMI,) and others.

Ambac was the #2 mortgage insurer out there and it has been literally wiped out (put in "run-off" status) by this mortgage fraud. However, on the Sept 29th, they sued Bank of America=BAC for $16 Billion, alleging that 97% of some 6300 mortgages that Ambac analyzed violated origination standards (also known as Representations and Warranties). So, they and the other mortgage insurers (also known as Monolines) have had to pay the mortgage payments to the originators, which then gets paid to the security holders, leaving the banks off the hook for the swindle they perpetrated.

So.. the question is whether Denininger is correct and a Resolution Trust (RTC) structure is going to be required to finally resolve this mess and make those who were victimized (including the mortgage insurers and security holders) whole again. It strikes me that it will require this ultimately. But obviously the banks, and the politicians who receive their campaign donations, are trying to put this off as long as possible.

I have noticed that there is a lot of market activity in the Mortgage Insurer (Monoline) sector over recent days. I'm not sure if the perception is that these companies are finally going to receive their day in court. I definitely believe were victimized by the fraudulent ratings and "representations and warranties" that were presented to them when they insured these MBS entities. I will admit that back in 2008 I lost a lot of money betting on ABK, under this same premise, but that was at much higher stock prices. But I've always felt they had a solid case for denying payment of claims against these fraudulent MBS. The problem was that they needed a legal finding to justify doing so.

The fraud that was perpetrated on the Monolines is, IMO, like a person going to obtain vehicle insurance and lying about all the DUIs and Reckless Driving citations they've received. If you lied when you applied for your insurance, it's a clear cause for denial of claim should you get in an accident. You've lied in your personal "representations and warranties" related to your driving record.

Now supposedly the insurer is supposed to verify your driving record, but in the case of the Mortgage and MBS insurers, they heavily rely upon the Ratings Agencies (RAs) (Moody's, S&P, Fitch.. etc). Well.. the RAs were PAID by the investment banks (IBs), so they obviously didn't scrutinize these securities very closely.. Would have been bad for business if they didn't give the rating the IBs wanted. It was a very incestuous conflict of interest, which has been well covered in the news. But now one has taken the issue this far into the political arena, as we're currently seeing.

NOW, it would appear, that the issue is finally reaching a political head and Obama has "officially" vetoed that sneaky little notarization bill that the bankers wanted so much:

Obama's "pocket" veto with memorandum of disapproval

Obama knows this is a political hot potato. Banks don't vote.. They just pump money into the political system. And those who do vote have a lot of reasons to hate the banks at the moment, especially if they are getting foreclosed on. But they also hate the banks because they were forcing qualified home buyers to compete with sub-prime borrowers and even illegal aliens (it's true!!) to buy a home. Those unqualified borrowers resulted in a tremendous "false" demand that drove home prices up. So now, when the sub-primers default and the illegals bail out back to Mexico (or change their names) those who were qualified homebuyers find the prices on their homes plummeting back to earth.

Now.. I know.. no one forced them to buy that house. They could have continued to rent, as I have opted to do (but I just like my freedom to wander to another location.. ;0). But you know how much pressure husbands are under from their wives.. That damn "nesting instinct" that drives a woman to have a home of their own and few marriages survive defying it.

However, I've talked with a number of folks who have decided to undergo a "strategic default", bank their cash, and attempt to recover at some point in the future.

And as I saw on the Daily Show last night, even the Mortgage Banker's Association in Washington, DC has defaulted on their $79 million loan on their previous building (This is pretty damn funny, but probably not for those are undergoing a foreclosure):

MBA defaults on their offices

Good for the Goose.. Good for the Gander?

Really hard to have much sympathy for a Mortgage Banker when they can't even maintain the payments on their own "home".

Thus, if many Americans happen to have watched that, and start tuning into the Congressional hearings on Foreclosure and Mortgage Fraud next month, they may be even less inclined to continue making payments on a mortgage that is severely under water.

This is going to be interesting to watch.

My question is whether being an investor in the severely beaten down Monoline insurers is the sign of a potential recovery in the sector, or merely a short-term speculation. Some of these companies, if they can get out from under their obligations on these Fraudulent MBS insurance contracts, have a TON OF MONEY stashed away in reserve for paying claims. They could actually surge tremendously over the next year or two, if the courts see things their way, or the Government comes in and performs the "Mother of all RTC" programs.

Scrutinizer

Fed chief FINALLY tells it like it is

US on the brink of disaster


Bernanke Speech link

Edit 10 Oct, 2010

MERS has released a PR stating their side of the issue:

MERS PR

Here's more detail on exactly what the role MERS plays in the securitization and foreclosure process:

MERS

Scrutinizer

More on the MERS mortgage/foreclosure fraud

The following statement by a California Judge in this case sums up what has happened to most people's mortgages:

"Lenders passed around the deed to Vargas’ house as if it were a whiskey bottle at a frat party."

Here's the link from a year ago:

But Vargas, hero, citizen and family man, has been sucker-punched along with millions of other American homeowners, taxpayers and the nation’s entire economy by the mortgage-lending debacle.

A series of loans from some of America’s largest mortgage lenders cost him nearly $200,000 in less than two years and destroyed financial security it took a lifetime to build. Documents reviewed by msnbc.com show that loans sold to Vargas by mortgage brokers on behalf of the lenders were loaded with features that federal officials say are the hallmarks of predatory lending.

Lenders passed around the deed to Vargas’ house as if it were a whiskey bottle at a frat party. Ultimately, he wound up in foreclosure proceedings. And, finally, bankruptcy court.

Vargas’ story is the Cliff Notes version of what has happened to the larger American economy. It is a story of greed, lax lending standards, lack of government oversight and the fantasy that real estate prices will always rise.

Mortgage Deeds and Whiskey bottles

I also just read today that Ambac, previously the #2 provider of Mortgage insurance (PMI) has sued Bank Of America for $16 Billion:

ABK sues BAC for $16 billion over countrywide mortgage fraud

BAC bought out Countrywide and at that point assumed their liabilities. ABK is alledging that...

... 97 percent of 6,533 loans it reviewed across 12 securitizations sponsored by Countrywide didn’t conform to the lender’s underwriting guidelines, according to the complaint filed yesterday in New York state Supreme Court. Many of the loans were made to borrowers with limited or no ability to meet their payment obligations, Ambac said.

97%!!!!! of all the loans that ABK insured for BAC/Countrywide were violations of "warranties and representations".

It's evident that the financial crisis is not over. We have some SERIOUS PROBLEMS still remaining with the entire system that will likely take years to unravel (with, or without, congressional intervention).

Edit Oct 7th And it would appear that this congressional intervention has, in part, arrived. Much of the controversy over this foreclosure fraud was that documents were being presented with notarized signatures that were not accepted by other states. I also understand that some documents were electronically signed and notarized, which is contrary to the whole notary process (actually witnessing the signing of the documents). Well, Congress has QUICKLY passed the following bill and now Obama is sitting on it for signature. One has to wonder if he's wondering what the repercussions to his political career will be if he does:

n other words, with one simple signature Obama has the capacity to prevent tens of billions in damages to banks from legal fees, MBS deficiency claims, unwound sales, and to formally make what started this whole mess: Court Fraud perpetrated by banks, a legal act, and to finally trample over the constitution. Will Obama do it? Potentially - the banking lobby certainly has enough power over him and his superiors, the members of the FOMC. On the other hand, the populist revolt that will surely follow the enactment of such a law will certainly end any dreams of a second term, and potentially of a completed first one. The drama is now on: will Obama openly side on behalf of the bankers (without a "blame the republicans" fall back this time) or of the foreclosure "victims" (granted, the bulk of whom are deadbeat homeowners who should never have owned a home to begin with). We doubt a decision will be reached before the midterms, although quite a bit now hangs in the balance.

Obama's quandary

Yet, the market continues to climb on the back of a declining US dollar. The USD is down over 10% since May (input UUP, which is the "bullish dollar ETF" in the following link). But be sure to look at the weekly DOW chart first to make the comparison between it's performance and the UUP:

DOW Weekly Chart

Scrutinizer

Shades of 1937

Tell me this isn't downright SPOOKY!!

1937 compared to current market

The Prediction?

Scrutinizer

Lord, Have MERScy

Note: Stay tuned for additional updates on this post as more information becomes available.

Ever since 2008, there has been a growing controversy with regard to entire Foreclosure process. It involves a bizarre financial entity called MERS (Mortgage Electronic Registration System). It's well worth doing further research on this complex legal entity, but suffice to say that it was created to manage the transfer of mortgage note ownership within various Mortgage Backed Securities (MBS). Apparnetly mortgage notes get bought and sold on a regular basis from one MBS to another and MERS is supposed to track the re-assignment. As of current date, apparently 60% of all US mortgages are registered in the MERS system.

But when it comes to foreclosure, it's important that the actual note holder be represented as the debt holder in question. But if these notes are bought and sold constantly, it's difficult to identify who actually holds those notes at the time of foreclosure. And if you can't identify who actually holds the note, legally you can't foreclose. At least, that the argument that is being debated in various courts. There are very specific laws related to foreclosure and I don't pretend to be an expert in any of it. But the fact that legal authorities, including the Kansas Supreme Court, have stepped in to question how MERS has been utilized is good enough for me.

So, that said, here are few links that are worth reviewing. The first one deals with the apparent fact that MERS has no employees. Therefore, the agents they assign at various banks have no one to report to. This very fact calls into question the legitimacy of MERS, which apparently lacks any duly authorized personnel to oversee foreclosures:

There's no life at MERS

And quite a little cottage industry is rising up to contest MERS:

Foreclosure Defense Nationwide

More on MERS..

And Bloomberg had this article the other day that bares reading:

Foreclosure Flaws may delay US recovery

Zerohedge is piping in on this issue as well:

Representative Alan Grayson has a nice synopsis of MERS:

Foreclosure Fraud Crisis

Q2 Foreclosure sales about to be reversed?

(Edit Oct 5th) Link to Zerohedge article suggesting that the MBS market may collapse over this foreclosure fraud issue. Title insurers are starting to halt coverage for foreclosed homes, out of doubt about who actually holds the title. No title, no sale.:

Title insurers terminating title insurance for foreclosures

If banks are engaging in foreclosure fraud, it could add impetus to the questioning of the entire MERS system and leave banks on the hook for the entire mortgage loan amount.

And if the banks on the hook to the MBS holders, it's going to get VERY UGLY!! So ugly that it's going to require Federal (Congressional or Executive order) action to resolve it.

That's not a good scenario for the US financial system. And it's becoming increasingly clear to me that this is going to take a major political initiative to resolve, with consequential uncertainty in the markets. But it's going to take something that supercedes the current foreclosure and bankruptcy courts.

Take some time and Google MERS and study up on the subject and legal questions. You'll be amazed!!

Scrutinizer

Recession is officially "over"

Much of the recent market gains seems to be due to an economic report stating that the recession is officially over and ended in June, 2009. Well.. it might be official, but for the millions of Americans living on food stamps and other government assistance it sure feels like we're still in one.. So is the market just going up as a response to a declining US Dollar, or in response to a rising gold price (indicating inflation and price recovery)? Or are just pumped up on an economic "sugar high" from that stimulus that increased our national debt by over 10%, a stimulus that may lead to a major hangover.

Please review the following and ask yourself if we're out of recession:

The following are 15 shocking poverty statistics that are skyrocketing as the American middle class continues to be slowly wiped out....

#1 Approximately 45 million Americans were living in poverty in 2009.

#2 According to the Associated Press, experts believe that 2009 saw the largest single year increase in the U.S. poverty rate since the U.S. government began calculating poverty figures back in 1959.

#3 The U.S. poverty rate is now the third worst among the developed nations tracked by the Organization for Economic Cooperation and Development.

#4 According to the U.S. Department of Agriculture, on a year-over-year basis, household participation in the food stamp program has increased 20.28%.

#5 The number of Americans on food stamps surpassed 41 million for the first time ever in June.

#6 As of June, the number of Americans on food stamps had set a new all-time record for 19 consecutive months.

#7 One out of every six Americans is now being served by at least one government anti-poverty program.

#8 More than 50 million Americans are now on Medicaid, the U.S. government health care program designed principally to help the poor.

#9 One out of every seven mortgages in the United States was either delinquent or in foreclosure during the first quarter of 2010.

#10 Nearly 10 million Americans now receive unemployment insurance, which is almost four times as many as were receiving it in 2007.

#11 The number of Americans receiving long-term unemployment benefits has risen over 60 percent in just the past year.

#12 According to one recent survey, 28% of all U.S. households have at least one member that is looking for a full-time job.

#13 Nationwide, bankruptcy filings rose 20 percent in the 12 month period ending June 30th.

#14 More than 25 percent of all Americans now have a credit score below 599.

#15 One out of every five children in the United States is now living in poverty.

The Middle Class Recession

So am I buying into this economic recovery scenario? Not yet.

My view of the market action of late is that we're in a short-squeeze scenario. With everyone being so negative, including myself, it shook a lot of people out of the markets, while others were going short. And short interest is a terrific level, so short-covering could fuel a significant rally if buying interest continues:

NYSE Short Interest Remains Near Record

Personally, considering the lack of volume being seen, it's not a sustainable rally. But it can go on for a few more weeks, or completely collapse tomorrow. It's very vulnerable to "event risk".

Be nimble and look for longer term trends.

Scrutinizer

CSO's.. The "Mother" of all Derivatives"

If you thought Credit Default Swaps were bad, here's a discussion of the CDS monster that Wall Street has created.. the CSO (Collateralized Synthetic Obligation)..

To visualize a CSO, imagine a bunch of CDS contracts put into a basket (much like Mortgage notes were combined into CDO's (Collateralized Debt Obligations).. NOW imagine multiple "baskets" of these CSOs into another "basket" and called a CSO (squared) and you have a recipe for disaster.

Matt Taibbi of Rolling Stone has written an excellent article on CSOs and how a bankruptcy of British Petroleum could have ignited another Financial Meltdown. It's a must-read:

BP's Shock Waves

Btw, I'm on the sidelines in this market.. We're seeing the potential for a reverse H&S formation taking the markets higher, but the lack of volume really has me spooked. If I trade it, I won't be holding any position overnight.

For those of you who had the guts to hold, or buy at sub- DOW 10K, I applaud your guts...

Just make sure you know where to find the exit.

Scrutinizer

Should the public be permitted to videotape Police as objective witnesses?


Police continue to harass citizens who record them.

I have only a few words on this matter. YES.. And cops conducting raids, or activities with a high likelihood of physical contact and/or use of force, should be required to wear a head mounted camera.

I know that SpecOps folks wear them for their missions (although for classified afteraction review and intel gathering), so there is no reason that SWAT personnel shouldn't be required to wear them when they are in a position where their actions might be called into question.

This can serve as a tool for protecting BOTH the public and the police force.

Scrutinizer

Market Crosscurrents: Is the Russell 2000 (RUT) intermediate chart indicating more market upside?

A lot of traders, including Christian at PSA, rely primarily on daily charts for determining market direction and overbought and oversold conditions.

However, I try and incorporate weekly and monthly charts into my analysis in order to look for hidden trends that are longer term.

I like to use the RUT as a leading indicator for the S&P and DOW as Small Caps generally lead the overall markets into, and out of, recession.

Now.. looking at the daily RUT, it would appear to be overbought. But we've seen in previous cases where that Stochastic will hover above 80 for some time before finally succumbing to gravity and returning to oversold conditions.

NOW.. if we look at the WEEKLY RUT, we'll see that it bounced off of the 20 level on it's Stochastic and reversed upward.

This is also a chart that distinctly indicates the value of Bollinger Bands in determining trading ranges for equities. We can see that the RUT has consistently remained within it's weekly Bollinger Band envelopes (minus the May 6th "Flash Crash"). This COULD give the RUT the potential of seeing 700 over the next few months before reversing off a WEEKLY overbought condition.

But let's look at the Monthly RUT chart to see if there are any confirmations that would support a further move to the upside.

As we can see, the monthly RUT chart is DRAMATICALLY OVERSOLD and looking to bounce off that 20 level on it's Stochastic, where it has bounced twice previously at it's previous March, 2009 low. Furthermore, we can see that the MACD has been struggling to go positive and it's histogram appears to be leveling out, rather than descending. So this month will be critical to determine the future direction of that histogram and whether the MACD returns to negative, or continues it's positive path.

What's LACKING in that monthly chart is a "hammer" on the candlesticks, unless one counts the hammer that was put in back in April. But I'm not sure that hammer is still valid given what has occurred since the "Flash Crash".

This is NOT a recommendation to go long the markets, as I still see the fundamentals deteriorating, which could undermine the technical analysis. But it does represent something that should be considered if the next pull back on the daily chart is at a higher level than previously, or results in a strong hammer bounce on the daily.

Scrutinizer

Mutual Funds: All in?

Despite all the hoopla over the past few days, Mutual Funds are at the lowest cash levels in 5 years of data that Decisionpoint has been charting. Usually when Mutual Funds are short on cash, it's an indicator of a market top as they are at risk of redemptions from investors..

Mutual Fund cash levels at 5 year lows.

Decisionpoint chart

Edit: Sep 8th

Don't know how I missed this article, but Zerohedge reports that we're seeing the 17th STRAIGHT WEEK of investor redemptions from Mutual Funds. So I thought it definitely pertained to this posting and worth the edit.

Scrutinizer

Counter-Trend Rally underway

We formed a very strong "Hammer" on the major index candlesticks on Friday. And tonight we're seeing Japan up 3% on word they are going to intervene to keep the Yen from appreciating.

But it's evident that the Nikkei's move tonight is bringing it smack dab into formidable resistance:

Nikkei chart

We can see that previous rallies have stalled at the 60 day MA, which is currently about 9500 for the Nikkei. So it will require confirmation tomorrow to see if the rally is sustainable.

Also, intervening against a continuing rise in the Yen means that Japan will have to buy US Dollars. And a strong US dollar may have a negative impact on Big Cap US stocks. But from the futures we're seeing, it's probably the US markets will also rally. However, I believe that rally will be unsustainable.

To see how interconnected the global markets are (especially the Currency markets), it's wise to review what some folks, who are much smarter than I, are saying.

Kyle bass made a fortune predicting the sub-prime mortgage meltdown and positioning himself to take advantage of it. His "street cred" is unimpeachable and he presents his views in clear, concise, and impeccably logical manner.

Deep Thoughts: Kyle Bass' take on Japan and the world.

Additional comments on Bass' views.

Interesting CNBC interview with Kyle Bass (starts 50 seconds into the clip).

Video link to CNBC interview

S&P 500 Chart possibilities

When Kyle Bass says he sees no reason to be in US equities, I think wise investors have to take note. And when he says he sees global GDP declining to -4%, that had better wake some people up.

But in between there will be these kinds of counter-trend rallies and the nimble can still take advantage of them for profit, while long-term retail investors can use them to sell into.

Scrutinizer

Counter-trend Rally possible, but how far will it take the markets?

Every bear market move to the downside has a bear market rally. Some opine that the 83% upside since the March, 2009 low had been nothing but a bear market counter-trend rally and now the original downtrend is continuing. I tend to agree with this opinion.

So it's not a surprise that we might get a minor counter-trend rally after the recent declines. But it's going to need to be more powerful to reverse the triple decline of the major moving averages.

As we can see, there's a possibility of the S&P 500 moving back up to 1080 before it comes into maximum resistance at the 20, 50 and 200 Day MA. But that last move downward left a bunch of people who had been buying the S&P for 3 weeks and were stuck in their positions after that one day plummet. Now they are hoping for a rally to bail them out, so there's expectation of major selling at the 1060 range.

S&P 500 Daily

The Russell 2000 is also coming into a similar band of resistance. It's also lined up nicely with it's downward channel, so if it manages to move higher tomorrow, it will break that down channel and rally up to 620.

Russell 2000 daily

Ron at Chart Pattern Trader has some good comments on using Moving Averages, especially when they are all in alignment in the same direction.

MA alignments

Now.. what's amazing is that we had lousy data today, but the market fell, then rallied to close positive. Some are taking that as a sign of selling fatigue and that's a distinct possibility. It could also be that a short squeeze was forced by jacking the futures, in order to give the longs a final chance to distribute at higher prices before the final plunge to lower lows (breaking the neckline of the Head & Shoulders formation that I've been discussing and which seems to be gaining acceptance by market technicians.

Tomorrow and Friday will be telling indications as we get the jobs report and on Friday, revised GDP. If jobs data is better than last week's 500K new unemployment filings, it might provide a short-term impetus for continuing the rally. Obviously many are hoping that last week was an aberration caused by Census workers being laid off. If tomorrow proves otherwise, it could create that impetus that takes us below the neckline.

What I'm wondering is whether these extended unemployment benefits which were passed will require folks to re-apply, therefore adding to unemployment claims. I believe that's the case and that could drive unemployment numbers up substantially as folks who had fallen off the UE rolls, reenter and get counted along with the newly unemployed.

In sum, it's about jobs, jobs, jobs.. which equal consumer demand, which impacts economic performance and housing. And it's about preserving job skills, which decline during long periods of playing Xbox and thumb twiddling.

And along those lines, here's something I read that I feel justifies being re-posted here:

Uncle Scam

Anyone reading that has to be amazed that we have much economic and jobs growth at all.

Best of luck through the remainder of this week!!

Scrutinizer

Market telling us: "May You Catch A Thousand Falling Knives"

I really hate to have such a negative attitude towards the market. However, (apparently) like so many other investors, the STILL UNEXPLAINED "Flash Crash convinced me that this market was hopelessly rigged by a Financial equivalent of "Skynet" (ala, "Terminator"), with it's High Frequency Trading "black box" computers, and those financial WMDs known as Credit Default Swaps, that it just doesn't make sense to anything but daytrade, primarily on the short side (betting the market goes down).

And now.. it seems that the predictions we've been hearing are coming true. As the US economy is forcibly weaned off the misspent, multi-trillion dollar government stimulus, we're coming down like a Heroin addict forced to go "cold turkey" in an unpadded cell.

Today "news" was the horrible existing home sales data, fully 30% beneath expectations, as well as hitting a 15 year low. Combine that with a 12 month supply of foreclosed and REO properties over-hanging the market, and it's little wonder there's little incentive for people to buy during what is normally the height of the summer buying season. Folks fully expect home values to come down even more. I know this personally, as I'm in the market for some investment property to deploy capital from my father's estate, since CDs are paying a pathetic return. But buying property only to see it decline in value by a further 10-20% means that it takes at least a couple of years of rental profit to break even.

Things may get much worse as we move into fall and winter, never a good time to sell houses given inclement weather issues.

And tomorrow we get durable goods and NEW home sales, neither of which should be positive given today's numbers. Durable goods are generally items that people either utilize credit to obtain since they often amortize them over the period of use. Household consumer durables, such as appliances, also make up this data, and if fewer homes are being sold and built, fewer appliances are being purchased.

And ultimately, we have the revised GDP data from last quarter, which has already been revised downward once. Expectations are for another downward revision, which calls into question the value of the original data and whether it was "spiked" to create the impression of greater growth than actually occurred. It also calls into question the value of governmental stimulus, since we jacked up the US national debt by approx 10%, yet obtained even less GDP growth than the perceived 3%. That's like taking a $1000 cash advance on your credit card, and putting a couple of hundred bucks into you pocket and calling it "income". I understand the rational for a stimulus, but it was incompetently misspent and failed to achieve an return on investment (ROI) for the US taxpayer. Little wonder there's very little enthusiasm for a repeat.

Btw, again here's the link I use for the week's economic data reports. It's worth bookmarking if you're invested in this market.

As for videos tonight, Chart Pattern Trader has a very good video that all readers should watch.

And of course, Christian at PSA is telling us all to stay short as further selling is to be expected. He makes a compelling case for this via the divergences he's seeing in the Stochastics and price action. Always believe the Stochastics and RSI over actual market price.

I'm currently long TZA and VXX (VIX ETF).. I was stupid and chased TZA today as I sold out my position overnight and it ran up hard overnight, so I'm a bit underwater, but I think the market action will make me profitable in coming days.

I just don't see any reason to go long here, until we reach some level of identifiable support and then only for a bounce.

And btw, if you didn't read this article from my previous post, it's worth posting again. It discusses proposed accounting changes regarding corporate lease accounting. This could have a MAJOR IMPACT on future earnings for S&P companies, forcing a downward revision on book values and increasing liabilities.

I also need to do an post on how FASB "mark to market" accounting played a role in crashing the Securitized Mortgage markets. It's almost as if there is a concerted effort by the FASB to pull the rug out from under the current Corporate accounting rules. Makes one wonder if those original changes were meant to set corporate accounting up for a future fall by permitting them to take what should be consider liabilities, off their books.. only to make them add them again at some future date.

Oh.. and btw, here's a GREAT INTERVIEW with Former Fed Governor Mishkin, who apparently wrote a glowing report about Iceland just months before that country's financial system collapsed. Turned out he failed to mention he was paid $124,000 to write that report by the Icelandic Chamber of Commerce. This represents a clear (and all too common) conflict of interest. And it's very similar to the arrangement the Ratings Agencies had with the Investment Banks when they were paid to give AAA ratings to toxic sub-prime mortgage securities.

It's really amusing to watch him fumble over the interviewers very pointed questions. I really loved the part where he claimed that the title change was a "typo"...LOL!!

He should be investigated and fined/arrested, for failing to disclose such a glaring conflict of interest.

It's crap like this that undermines investor confidence in the public markets and is causing them to boycott them.

Have a good one!!

Scrutinizer

Selloff to continue?

Been busy the past few days and haven't had the time to keep this blog up to date. But I hope any followers are checking the links I have to the left for some insight into current and future market directions.

And I'm off again this weekend on a new apartment hunt, so the best I can do at the moment is offer some links of interest.

First off, Christian at PSA is informing us of his belief that we currently have 6 confirmation sell signals on the market. I think he makes a compelling case, especially with regard to the divergence between the stochastics/RSI and current market price levels. Something's gotta give and it appears that it's to the downside.

Secondly, Chart Pattern Trader suggests we've seen the end of the summer rally and goes on to discuss Grand Supercycle Trends with Elliot Waves. I don't use EW analysis since it's not conducive to trading, but does provide a good "20/20" hindsight analysis of longer term future trends, once the pattern is clearly established.

And sometimes I receive these free pattern analysis videos from Ino.com. I'll post this one as I thought it was rather intersting as "thought fodder" on market direction:

How A Japanese Chart Formation Could DOOM the DOW

And Richard Russell, Dow Theory GURU since the 1950's is telling his subscribers that the stock market is falling apart:

The stock market is crumbling

Clearly corporations are hunkering down in anticipation of another financial crisis. It's one reason that has been cited for why they are raising so much cash based upon the belief that banks may not be liquid enough to finance their operations.

But are corporations as liquid and cash flush as many assert? Zerohedge had an interesting column citing an Economist article that is discussing current accounting rule changes related to how corporations use lease arrangements to make their balance sheet appear stronger than it actually is. If this accounting change goes into effect in December, it could have the same catastrophic (but necessary) impact on stock valuations as "Mark to Market" accounting did with the banking and mortgage sectors back in 2007 (just before the big crash).

Also, there's been a lot of talk about the "Hindenburg Omen" which, as the theory suggest, sets up a series of conditions that predict an impending market crash (as if the several we've already isn't enough). Zerohedge points out that we now have the 2nd confirmation. Here's a link to the first confirmation.

If I get the chance, I'll update this post with more information as I sift through it. So check back..

Scrutinizer

Tony Robbins and Goldman Sachs give you their opinions on the economy..

GS trading desk predicting "meaningful decline" in stocks

Fed manipulating stock market?

And this is something everyone of you need to watch. Someone posted this link to a video blog by Tony Robbins (y'know.. the motivational speaker/mentor). Now Tony Robbins obviously has access to some MAJOR financial heavy hitters, given his providing services to many of them, as well as their managing his portfolios and assets.

Tony Robbins: 7 things you should consider about the economy

I was amazed when I heard him mention Credit Default Swaps!!! He specifically mentioned them, rather than just alluding to them indirectly. That caused me to definitely "trigger" on the rest of his comments as derived from credible sources.

Now.. he obviously can't give investment advice. But he CAN pass on some of the information that has been told TO HIM by his financial uber-brain buddies.

I don't normally follow Tony Robbins, but something in his conscience must have motivated him to share what he has learned.

Get short on any rallies, and if you're really bold, get Ultra-Short via the ultra-bear ETFs.

And if your suffering paralysis by analysis, just go cash, pay off debt, and save money (and make sure you have a personal emergency stash that's not in a bank, but well hidden).

Scrutinizer

Friday the 13th: Part VIIII

Not much time for an extensive post tonight. But let it be recognized that tomorrow is Friday the 13th and I have a gut feeling that there won't be many folks willing to buy and hold these markets based upon that superstition. Just a hunch I have, but it also appears we're in a continuation pattern on the charts, suggesting more downside tomorrow, with a possible reversal and relief rally on Monday.

It's ALSO "Cardinal Climax", which is the very rare alignment of a number of planets. Those who apply astrology to market sentiment (I'm not one of them, but there are many who do) have been suggesting major turmoil during this period.

Cardinal Climax

Query "Cardinal Climax" and you'll find a plethora of astrological sites explaining it.

Other than that, I'll let some other folks give their opinions on market dynamics for tomorrow:

PSA August 12th chart video

Chart Pattern Trader's take

August 13th chart reading (it may only be available on the 12th through 13th)

It's also hard to say what kind of candlesticks we've put in today. I've voting for a continuation tomorrow and more downside based upon what I see as a "on neck" continuation pattern on the SPY (S&P 500 Spyder ETF):

SPX daily

SPY Daily

On Neck Continuation pattern

Folks should also recognize that the past two weeks of market upside was wiped out in two days. That's NOT a very positive sign of underlying market strength. And now, all of those people who were buying over the past two weeks are currently underwater and will be looking to get even and get out.

So.. tomorrow we have Consumer Price Index information at 8:30 AM followed by Retail Sales. Both are considered market moving events. If you don't have this website bookmarked, you shouldn't be trading stocks.. ;0)

Economic Calendar

Any bad news tomorrow morning and we could have a violent sell-off.

That's all I have right now..

Scrutinizer

Credit Default Swaps: How To Blow Up A Financial System

Most folks on "Main Street" have heard the news about how Congress is attempting to regulate dangerous Derivatives, which are a financial instrument that derives its value from the price of an underlying asset. They know that abusive derivatives trading contributed to the financial crisis of 2008. They know that derivatives abuses brought down AIG, requiring the US government to loan them billions to remain liquid.

But most have never heard of Credit Default Swaps. If they have heard them discussed on the evening news, it's doubtful they actually understand what they are or how they have contributed to the financial mess the world finds itself in. And most do not realize that it was rampant CDS writing (selling CDS contracts) by 159 rogue traders at AIG, that resulted in bringing that huge insurance company to bankruptcy requiring the US taxpayer to bail them out and save the global financial system. CDS remain one of the most under-reported, mis-understood, financial instruments currently in existence.

The grievous problem of Credit Default Swaps is an issue I've been meaning to address for some time now. But it's a complex subject so I've held off until I had the time to properly address it. Rolling Stone is reporting on how the FINREG legislation, which was supposed to make these CDS transactions transparent, was effectively gutted and allowed Wall Street to resume "business as usual". Matt Taibbi, of Rolling Stone Magazine, has previously published a series of articles investigating Goldman Sachs and their involvement in the financial crisis of 2008

Wall Street's Big Win

But before you read that, here's some background on what a Credit Default Swap actually is.

Essentially, a CDS is unregulated financial "insurance" (though CDS traders go to great lengths to assert that it is NOT insurance). Two parties enter into a PRIVATE contract (not transparent to the market) buying and selling protection against the default of some underlying asset. HOWEVER, unlike typical regulated insurance, the two parties don't have to actually have an insurable interest in the underlying asset. These entities are known as "counter-parties" to that CDS contract.

Wikipedia gives a good explanation:

"A holder of a bond may “buy protection” to hedge its risk of default. In this way, a CDS is similar to credit insurance, although CDS are not similar to or subject to regulations governing casualty or life insurance. Also, investors can buy and sell protection without owning any debt of the reference entity. These “naked credit default swaps” allow traders to speculate on debt issues and the creditworthiness of reference entities. Credit default swaps can be used to create synthetic long and short positions in the reference entity.[4] Naked CDS constitute most of the market in CDS.[5][6] In addition, credit default swaps can also be used in capital structure arbitrage."

Edit: August 22, 2010: Here is an excellent article discussing the problems with developing a transparent clearing market for CDS derivatives, as well as CCP (central counter-parties) capital requirements and risks of oligopolistic (monopolistic) control over derivatives clearing.

The Sausage Marking begins..

CDS positions LACKING any insurable interest, are called "Naked CDS". They are essentially private BETS (eg: gambling) between two parties on whether an asset (that neither actually own) will default.

Now.. put that in terms that apply to each of in our daily lives. Imagine I'm able to purchase insurance on YOUR HOUSE, OR CAR, from a counter-party that will pay off if your house burns down. I don't own your house, nor am I a lender to you. But I'm able to purchase a "financial interest" in seeing your house burn down, or for your car to be stolen.

Naked CDS are like buying Fire Insurance on your neighbor's house

And even if I don't burn your house down in an act of direct arson, or sabotage your car, I can make you look like an incredibly poor credit risk by manipulated the cost of insuring your house. Supply and Demand for CDS would dictate the price of the insurance premium you pay to insure your own home. Therefore, if you have a thousand people demanding to buy insurance on your home, it would create the impression (to your insurer and bank) that you were ready to default at any moment, or that you were running a Meth lab in your home. Therefore, your insurance premiums would rise, and the perceived market value of your actual home, or just the mortgage note, would decline dramatically. All because a bunch of speculators have "ganged up" on you to make you look like trailer park trash to your creditors and insurers.

Thus, it's little wonder that participants in the CDS markets do not want them classified as insurance, let alone regulated as such. Because Insurance REQUIRES an insurable interest.

And, IN FACT, insurance was originally sold in a very similar manner to CDS. One didn't have to have an insurable interest to buy life insurance on another person. In effect, insurance PRIOR TO REGULATORY REFORM AND REQUIREMENTS was just a form of speculative gambling. Only by passing laws and regulations were these "surety bets" morphed into the actual insurance industry as we know it today.

But still the defenders of CDS parse words and split semantical "hairs" to keep them from being classified as insurance and requiring insurable interest in any CDS contract:

Repeat after me: CDS are not insurance

But the concept of such contracts not requiring insurable interest is nothing new.. Lloyds of London, once (or still are) the preeminent insurance entity, used to sell insurance on cargo ships to individuals lacking an insurable interest. It resulted in such an increase in insurance fraud (in the form of "accidental" sinkings, if not outright contracted piracy) that it resulted in Parliament passing the Maritime Insurance Act of 1746:

Maritime Insurance Act of 1746 Page 182

Legal Basis of Insurance: Insurable Interest

What's the bottom line about CDS?

Here's what the average investor has to think about. If powerful financial entities can purchase "insurance" via CDS on assets they do not hold, then they have every interest in seeing those assets devalue and default. At a personal level, if I wanted to force you and everyone on your block to sell your property to me so I could build a mall, all I would need to do is make financially intolerable for you to maintain your home insurance and mortgage. If you default on your mortgage, I own your house, as well as the property underneath it.

If I want to own your business or take you out as a competitor in the marketplace, I can round up a "cabal" of Naked CDS holders to devastate your perceived credit worthiness and make it untenable for you to issue debt for business expansion.

Now.. let's take this to the Sovereign debt level, what if I want to make your country's debt appear to be junk status? I get a bunch of my hedge fund buddies to buy CDS on your country's sovereign debt and force up the cost for you to insure and roll over that debt in the markets. This is what has happened with Greece and many of the other smaller, debt ridden states in Europe. As CDS premiums rise, so does the interest rate the market demands to roll over that debt. The only means by which a default can be prevented is for other nations (and their taxpayers) to front them money to "re-insure" that debt to prevent default.

Are you seeing the problem? To prevent sovereign collapse of their debt, taxpayers are put on the hook and money is "extorted" from them to prevent an even more grievous failure of the financial system. To prevent the collapse of both US and European banks considered "too big to fail", the US taxpayer was "blackmailed" into saving AIG and other banks via TARP. And then the Europeans were required to bail out Greece and (potentially) the other PIIGS at European TAXPAYER expense.

European CDS WMDs targeting Spain?

Now.. we have to ask ourselves, as common investors, why would we want to purchase ANY CORPORATE STOCK, OR DEBT, when such unregulated speculative FINANCIAL WEAPONS OF MASS DESTRUCTION are available to ATTACK the global equity and debt markets?

It's hard to imagine a better financial "tool" for transferring wealth from the masses (eg: taxpayers) to the few by destroying the value of their assets, whether equity or debt instruments.

It's also a fantastic tool for "supra-national" entities, or even sovereign countries, to conduct economic warfare to weaken their opponents and rivals, as well as sovereign states.

Heck, even China is now apparently being targeted by CDS speculators:

China CDS speculation rising.

This is why I've basically given up owning stocks for the long-term. I trade ultra-bull and ultra-bear ETFs and try to bank cash every day. And since Ultra-Bear ETFs are essentially CDS contracts on the underlying index, I recognize that, failing to "beat them", I've been required to join them... But I don't like the fact that I'm making money betting on the destruction of the US equity and financial markets, but right now that seems to be the only recourse left to me in an environment where our elected representatives are UNWILLING to regulate the CDS markets.

But destroy them they will, unless sovereign governments and their citizens DEMAND that they be regulated on a global basis, or outright banned as legally unenforceable contracts.

Scrutinizer

More reading on CDS and their financial impact:

Dissecting a Strange Financial Creature

CDS: Useful Risk Management Tool or Financial WMD?

Credit Default Swaps and Financial WMDs

CDS: The Monster that ate Wall St.

Pride Cometh Before The Fall?

Markets appear to be in a Rising Wedge formation during this period.

Rising Wedge Pattern

S&P daily chart

This is similar to the pattern that was observable (to the astute Technician.. ;0) back in April before the May "flash crash":

S&P 500 Rising Wedge during April, 2010

Also, I came across this link to a MUST READ Economic outlook that is predicting a recession in late 2010, early 2011. There are a lot of charts and discussion, but it should be understandable to even the layman out there.

The Future Recession In An Ongoing Depression (click on the embedded article for full screen viewing)

The primary crux of Pal's analysis is that the only economic growth we've had in the past year has been due to spending over a Trillion Dollars in government stimulus. Factor out that stimulus and it's evident that we're still in a recession/depression. It has NOT resulted in providing a buffer for GDP growth until the private market recovers.. The private market is still hunkering down, if not contracting, and they continue to lay off workers, therefore reducing consumer demand.

Now.. does that mean the market can't go higher? Again, I'm being VERY TACTICAL in my trading, and not yet betting on the "strategic turn" where I go all in and don't worry so much about trading, but more on riding the overall trend. It's coming, as all the fundamental data seems to indicate, but I don't want to be predicting the turn, but ready to be reactive when it finally manifests itself in a clear manner.

I see Christian from PSA is stepping out on a limb in predicting a sell-off prior to the Friday Unemployment report. The poor guy is STRATEGICALLY correct, but as for timing his swing-trade, he's obviously suffering a lot of pain.

Sell-off before Employment report?

I'm looking more at the SPX weekly chart with 100 Week MA for signs of ultimate direction to the market. It's going to lead every other US index.

Watch that MACD indicator.. If it continues upward in coming weeks, it's a powerful predictor of future price action.

Finally, I'm watching some of the currency turmoil we're seeing. The Yen is near a 15 year high against the USD and that is not a situation that can long continue without dramatic impacts on Japan's ability to export. Furthermore, the Euro has had a tremendous run since it's previous low of 1.18 against the USD. Part of what has apparently driven the US stock markets has been the decline of the USD.. Same can be said for oil and commodity prices, most of which are valued in USDs. The USD declines, the relative value of the stock and commodities markets appreciates. Watch for a reversal of this trend.

I often look at UUP, which is the USD bullish fund.. Plug it into the chart above and play around with it. Also, look at the VIX (VXX).. There is a new ETF that is the inverse to the VIX (XXV) that is going to be interesting to watch. The lower the VIX goes, the higher goes the equity markets.

That's all I have tonight.. Probably won't be trading tomorrow.. Got other obligations.

Scrutinizer

Signs of Impending Market Crash

I came across the link to this EXCELLENT SUMMATION of all the warning signs indicating another market crash. It's very readable to the layman, as well as the Technician.

Warning signs of impending market crash

Also, I get these emails from Stocktiming.com from time to time and they often include free charts. I'm currently contemplating a test subscription and will provide my review in a future post whether it's worth the money.

Anyhoo.. Marty Chenard brings up a VERY IMPORTANT point that helps us to analyze why the markets have performed they way they have. It has to do with "liquidity" in the financial system.

Do we have enough Liquidity in the system?

What's apparently from that chart is that the Fed was adding cash liquidity to the system at a breakneck past from March, 2009 up until April, 2010. They would drain ever larger amounts of liquidity, then ramp it up.. then drain even more.. Like weaning an Meth addict off a 12 month bender.. You can't do too much, without giving them a temporary fix.. but then you give them less and less.

However, just before the "Flash Crash" the Fed drained a ton of liquidity with the result that the market crashed. We've been fluctuating in "contraction" territory ever since then. But Chenard is telling us we're currently close to neutral and there are indications that the Fed is going to expand the money supply again based upon lagging economic data concerns.

No good "bringing down" the patient from his "addiction" if the result is that the patient dies as a result.

I don't know where Chenard gets his data on liquidity, but it does seem to show definitive correlations to market performance..

Can it be that easy? And doesn't that suggest that all market moves are "manipulated" by the supply of money in the system?

I'll have to do more reading on the subject and report back.

But in the meantime, be sure and read that article on "Warning Signs"..

And for your viewing pleasure, here's PSA's latest video on "exhaustion gaps".. It's a good lesson for aspiring Technicians to remember.

Exhaustian Gaps = Bear Market

Scrutinizer

Some Market Thoughts..

My apologies, beforehand, for any haste I show in putting this post together.

The Dow was up over 200 points today on the lowest ISM number since we "emerged" from the recession, but one that came in within estimates and still reflect positive economic growth.

Poor Christian, at PSA, failed to see the possibility of this low-volume uptrend being able to continue, despite his many short calls.. But this rally one can't be ignored, even though it's built upon flawed fundamentals and market technicals. It happened before during the period between January and April, and it appears to be happening again, potentially setting up for an October crash, which seems to be a favorite period for crashes.

Bulls can't win, Bears can't lose..

I actually agree with Christian, but I'm not as adamant about believing the crash is around the corner now. There are some financial "forces" at work that are hell-bent upon avoiding succumbing to bearish market readings.

And here is a look at global markets from Colin Twiggs who offers a free subscription to his excellent Technical Analysis insights:

Consolidation in a Bear Market

All of this economic data can be spun any number of ways, but the analyst must remember that it's based upon numbers that still include, BUT NOW ABSENT, government stimulus. And as the ECRI numbers (see below) indicate, we're ALREADY at a level where every other previous instance has resulted in recession. And any future data will reflect an economy not "juiced up" by government stimulus.

So I'm still not sold on a recovery, nor the resumption of a bull market.. No.. Not YET... This next two quarters will be the determining factor and we'll have to watch the weekly economic data before we're able to determine where we are.

But just because I'm not "sold" on recovery, not until I see the S&P 500 trading above 1250 which would quell fear of the Head and Shoulders, and set the index to revisit previous highs, AND we see positive trending economic and employment data. But it's hard to visualize such an event naturally occurring for the foreseeable future. And it's even more difficult to understand how this market has been climbing, on pathetic volume, and in the face of proven market indicators that suggest it's due for a 20% retracement and consolidation from it's March, 2009 lows. Even experienced market professionals are being whipsawed by this market action and it's undermining the public confidence in the equity markets.

But don't let it be thought that I want the market to continue crashing, or to live through another depression. I don't. I have NO INTEREST in seeing us slide into an economic hell. I only want to identify when it happens and protect myself, and my friends and family, from its effects.

And that's why I remain a short-term trader, buying and selling both ultra-bullish and ultra-bearish ETFs until we see some actual market and economic direction we can believe in. And many other investors are just selling out completely and hoarding cash. We've also seen hedge funds de-leveraging and standing on the sidelines waiting for direction.

But one thing that is paramount in avoiding recession, at least in the eyes of the Federal Reserve and Treasury dept, is that if consumers are not spending, a recession is nearly guaranteed. The velocity of money in the economy must be restored, as well as halting the de-leveraging consumer and debt defaults. If the "wind" (money) flowing through the economic "windsock" tapers off, then the economy will, like an actual windsock, sag and decline.

Now, I think there is significant evidence that would suggest that the value and direction of the stock market is critical to impacting the psychology of the average consumer, especially if their 401Ks have basically "flat-lined" for the past 12 years.

So.. is it possible that the Fed has been either directly buying, or facilitating the purchase by banks/institutions, of equities and equity futures, in order to ward off the insidious Head & Shoulders formation that I've been discussing and restore investor confidence, and therefore, consumer confidence?

Actually, this is not a new thought.. There was some commentary back in March from the CEO of Trimtabs, a VERY REPUTABLE firm that tracks all kinds of market data suggesting that the markets are being rigged by the Fed (or someone):

Who's buying the market?

It's frightening (to me) when such a reputable firm starts to question the independence of the markets from Fed/Gov't interference. And recall that this was BEFORE the "flash crash" of May 6th when investor money REALLY started flowing out of the markets.

Here's another article that discusses the global banking systems increases in Money supply over the past year. And it suggests that this is, in good part, reason for why the stock markets haven't crashed.

Money Supply expanding?

But that's also called a HUGE "moral hazard", if not a huge violation of the concept of "Free Markets" which could quickly ignite major inflation if people start believing the Fed and other Central Banks are effectively putting a floor under equity prices.

There's also another possibility, for which I have absolutely no evidence, but could explain why the Fed would be tempted to take the unprecedented step of intervening in our equity markets. Could it ALSO be that our markets have been under attack by foreign sources/governments via Credit Default Swaps? Could it also be that these "supra-national financial forces", only holding loyalty to profit, also attacked European based financial interests via our own CDS attacks against European debt? This is a theory that I've been trying to accumulate evidence for ever since I finally understood the destructive nature of CDS as a financial instrument.

Since CDS make perfect financial "weapons" due to their nature as "private contracts" not transparent to the rest of the markets, their use can be perceived as a national security threat. And such an attack could necessitate an active defense of our financial system and equity markets until such instruments are fully regulated and controlled (supposedly via "FINREG").

Here's another article comparing the housing bubbles in other parts of the world compared to the US. We weren't the worst, but given what the US is enduring, it will be not be very pretty as these other bubbles get popped.

Global Housing bubble choking World banking system

And Mish had some discussion of the under-reported (didn't see it on any business news websites or broadcast) ECRI data that's indicating we're set for another recession. Remember "double-dip" is essentially the same as a Depression.. They just don't want to call it that until the history books are written.

ECRI data is negative, practically guarateeing another recession

So.. the bottom line is that while the economic data doesn't support a higher stock market price at this time, it's likely we're going to get it for the foreseeable future because the "powers that be" refuse to let the markets fall.

The question is how long they can keep up this charade without publicly revealing their hand?

That's all for now..

Scrutinizer