The following is a response to the below linked article

“Ignorance is Liberal Bliss“

Dear Friend,

I apologize for taking some time to respond to your email concerning the article in the American Spectator, but I will say I wanted to wait until I had time to read the full article and respond to it in breadth.

First, I like the title a lot, “ignorance is liberal bliss”… It’s definitely witty. I know that you might expect for me to have taken a clear stance defending Barry, but I promise you I am very critical of Obama, Tiny Tim, and Benny Boy on a regular basis in my analysis of the U.S. economy. However, I also don’t fit into the camp that lambastes liberals for their ignorant or economically unintelligent platforms.

I’m the guy that hates the game, not the players. My article title might read, “Ignorance is Political Bliss (Referring to the Ignorance of the Constituents & Representatives if Any Are to Remain in Office)”. I think that this is the stance of most young people these days, but unlike most I have reasons for my stance. Perhaps the slogan of the juniors in my demographic, should read “Ignorance, Youth, Unemployment and Engaged to be Married is Bliss”… That seems to be the route many of my peers are championing.

Before raising my flag and claiming ground here, I’d like to bring up this quote again (I really like it):

“In relation to social questions, the concept of an interdependent system has two important implications: that things are the way they are for some powerful reason or reasons, which have to be understood if effective social solutions are to be devised; and that any social solutions so devised and applied will have repercussions elsewhere, which will have to be faced and which ought to be taken into account.”

Basically, my takeaway from this is that (a) things are the way they are for a reason, and (b) when we screw around with those things, we’re likely to change stuff we didn’t want to in the process of reaching our goal. Furthermore, that other stuff (externalities) can be really frustrating and many times cause equal or greater damage than intended good. Now I realize the past +/- 15 months have been choppy, and that we are likely to re-enter a global recession. I think that the basic laws of physics are equally inherent in financial markets and global economies than any other field. The truth of our current global predicament is very simple and even more scary… THERE’S NO QUICK FIX! This is something that isn’t even proposed behind closed door meetings with cabinets, administrations, and capital hill interns… It’s the death sentence to any politician.

I will concede that on average liberals can come off looking economically dumber than conservatives because they try to manipulate their spending plans mixed with smoke and mirror tax raising schemes. Nancy Pelosi aught to be shot between you and me… I’m fine with Mrs. Clinton jet setting around the world and doing photo ops, but I would sigh in relief if she were absent from the U.S. political spectrum. Barny Frank is clinically retarded… I’ve watched the tapes of Frank proposing all of the regulations that were enacted at Fannie and Freddie where they adopted higher caps on the percentage of Sub Prime ARM mortgages, which led to their decline. Then I also watched as he criticized the leaders of Fan and Fred for their devious management practices and poor risk awareness. So YES there are liberals who are more than guilty of Economic Retardation who still serve in office and probably will for years to come.

Still there’s a boatload of Republicans, mainly Congressmen, whose political platforms could also use a bit of waterboarding. The Republican strategy has worked very well so far, despite failing to block healthcare, which basically aims to block anything proposed by Obama or the Left and stay as far out of the spotlight as possible while doing so. Republicans come out to play whenever there’s a batch of CEO’s in industries uncommon among their constituents and give ‘em a good lickin, but otherwise they are keeping their heads down and voting “no” to every bill. We’ll see if it works in the midterm elections…

Okay, now I hate to live in the past, but this quote SCREAMS President Bush…

“Another important reason for the left’s disregard for economic understanding is their almost exclusive focus on intentions rather than results.”

Coming from the guy who started a war in Iraq using incomplete evidence and leveraging the emotional fear of his country to band behind the effort. We’ve spent nearly a trillion bucks on Iraq, and during that period Bush lowered taxes. First time in modern history that’s happened I believe. Now Bush was a feisty one, always liking to add hybrid minorities to his cabinet with conservative souls (i.e. Condy), but he did appoint Bernanke (The Jew From South Carolina). And his Treasury Secretary started this spending fiasco with 600 Billion USD TARP Fund.

I understand WHY an economist with a conservative agenda would publish an article like this, because it’s an easy target. Obama’s in office and the National Debt is around 60% of GDP in the U.S., looking to reach 80% by 2035, and should we keep the Bush tax cuts we would reach 185% GDP by 2035 according to the Financial Times (http://www.ft.com/cms/s/0/1e99df8c-8499-11df-9cbb-00144feabdc0.html).

Furthermore, U.S. States are all on the brink of bankruptcy. California, which is indeed a very liberal state, but has been managed by the Governator for the applicable past years, and is still in a state of disrepair.

So my response is, “Yes for liberals [and conservatives] economic ignorance is bliss [in Washington].” I like what maybe 5% of politicians have to say and the rest is just noise. I really like a lot of what representatives from both of our states, Graham and McConnell, stand for, but am ashamed that they refuse to step outside party lines to pass effective legislature. The entire system is so damn ineffective.

The moral of the story, which transcends the article in question, is that in economic recessions “career” politicians spend money. Conservatives spent money on TARP and liberals finished up with a stimulus. But I can guarantee that McCain would have enacted a stimulus plan. Sure tax cuts proposed by Mccain are by definition more efficient, but they’re equally unsustainable, because we DO have deficit issues and the Bush tax cuts are IMPOSSIBLE to be made permanent, unless we pull out of the middle east and stop spending so much on Defense. Thus the same end game… the same results…

It’s not just W though, it’s Clinton, Big Bush, the whole damn modern era that became founded on money made out of nothing and calling it the free market. We as a country have refused to believe that the charade will end. It’s been going on for so long that we forgot what an honest wage felt like. Greed and Excess are the name of the game, and until we shut up and take our medicine to start fresh, we’ll continue in the boom bust cycle.

We would be right smack dab where we are at this moment under either political party, because the damage was already done when liberals took the reigns. I agree with the underlying argument of the article, that we should not mess with the free market economy. But we did. And this time it was Hank Paulson that started the merry go round that liberals now ride. No one is innocent and the potential devastation that waits around the bend will be merciless and unrelenting, because the global economy is refusing to concede defeat.

The market is fair, most people are ignorant, and politicians are snakes.

I hope this satisfies your query,

Rob

What is Quad Witching?

Generally there’s a great deal of confusion concerning the term “quad witching” and what this day may constitute in financial markets. As a result, we would like to take this Quad Witching Friday, March 19, 2010, and demystify the phenomenon once and for all.

“Witching” signifies the expiration of an entire group of derivative or futures financial vehicles.  While usually void of economic indicators, the ”Quad Witching” Friday is assuredly more volatile, as financial markets antiquate the time value of derivative contracts leading into expiration.

“Quad Witching” is a term used to describe the expiration of Stock Index Futures, Stock Index Options, Individual Stock Futures, and Individual Stock Options contracts.

Triple and Quadruple Witching days are generally synonymous with high trading volume and volatility, due to contracts expiring and the calling in of contract obligations to be honored. Many derivatives hold certain values based on expectations concerning the value of the underlying security and the length of time until expiration. This causes many losing positions to be covered in a hurry when the strategy goes bust and large numbers of shares to trade hands as prices swing through wide ranges.

More complicated factors such as Delta, a derivative of options contracts, representing the time until expiration, are also traded and constitute additional positions which must be closed on a Quad Witching day.

Alas, it becomes clear why the talking heads on business television and traders on the floor expect anything other than ”business as usual” on a “witching” day.

Even after the TARP fund liquidity injections in the U.S. financial sector in 2008, the E.U. has decided to bail out one of it’s member states, Greece, from insolvency. How can this even be considered?

Yes, the EU constitution is a whopping 7 years young and therefore demands a minuscule thread of adherence by member states, but it still directly contradicts two clauses of the charter, which stipulate the EU has no role in assuming the debts of any one state or backing the credit of any such state so that it may issue debt.

In making an elementary comparison between the financial meltdown in the U.S. and similar insolvency in weaker E.U. member states, let’s first answer a simple question: “In the case study of financial institutions failing in 2008, who would best represent Greece… Bear Stearns or Lehman Brothers?”

It would seem that the role of the maiden union state to cry “uncle”, akin to Bear Stearns in Spring 2008 at the Hand of then Secretary Paulson, is now cast to Greece. However, looking at the sovereign debt situation as a whole, one could make the argument that it was first the UAE who bailed out the Dubai World Sovereign Fund on Thanksgiving night 2009. For humor’s sake, lets assume that Greece is the Bear Stearns of 2010 and limit our scope to the EU. It is after all a united body making decisions sure to cause repercussions, which will be at least initially contained within its members’ fiscal borders.

So then of course the second major nation to go effectively bankrupt, will be one of the remaining three PIGS (Portugal, Italy, Greece & Spain). Considering the leadership in all remaining states and the tie amongst them for impotence, incompetence and corruption; it could be any of the three. However the next to go will spur a decision a lot like the U.S. Lehman deliberation in 2009.

Whether anyone wants to admit it or not, it’s a good thing that Lehman was allowed to fail in 2009. Yes, I said it… growl and moan all you want, but we needed a shred of moral hazard to keep our capitalist hearts beating and Lehman was the sacrificial pig. Little Timmy Geitner would have danced the populist Obama jig right down the line bailing them out one by one, but luckily Bazooka Paulson was in the midst of a grudge match with on of the largest rivals of his alma mater, Goldman Sachs (GS). The only mistake was to then concede defeat to the frozen credit markets by shuffling around a smoke and mirrors bailout plan which ended up profiting the biggest U.S. banks at the expense of tax payer funded backstops. But we digress…

Unfortunately for the world, France is charging ahead and towing the rightfully reluctant Germans towards TARP 2.0. Germany is by far the most solvent of the EU states and the most crucial to a working bailout of Greece, yet France’s Sarkozy is pulling the reigns. The interesting sub plot here stars the leader of the IMF, the institution that would normally intercede as lender of last resort, no other than a Mr. Dominique-Strauss Kahn, the French contender for Sarkozy’s office in the next election. Alas, its no surprise that Sarkozy wants to go to bat with the tax payer’s dollars rather than admit a fellow EU member is among the ranks of Mongolia, Togo, Haiti, and the long list of states faced with the decision to admit IMF intervention or crumble bankrupt.

So will there be a Lehman equivalent EU state nearing a bond payment one dollar too high and an EU governance that tells them tough luck? Absolutely not. There won’t be a Lehman equivalent in the EU because, (a) countries are more difficult to break up and sell off than firms; (b) the expansive and centrally funded social welfare systems of European states must continue to distribute capital to citizens, lest the union be disgraced by the impoverishment of its constituents; and most importantly, (c) a currency crises due to real or assumed default by any state will have systemically negative effects on the value of the Euro itself, forcing the cost of the central welfare programs to rise across the Union. In turn there will form a negative feedback loop, where the next weakest countries to fail will default and the Euro will become even weaker.

The only option for EU leaders is to bail out as many as all four of the PIGS and hope that China keeps buying goods. If the Chinese engine starts to sputter, the gig is up and we will see one of the most atrocious currency crises in the history of money, beginning with underlying currencies of the sovereigns which have spent the most and recovered the least since the recession began.

The IMF currently has 163 billion SDRs (Special Drawing Rights) available to loan out in the event that a country needs loan assistance. Equating to almost 250 billion USD, the current lending capacity of the IMF could cover the cumulative deficits of the PIGS in 2009 (totaling $198 billion). Yet referring to the visual below, after accounting for the PIGS’ summed liabilities and net debt interest in 2009, the IMF itself may not have large enough reserves to cover the outlays of these four nations, should vacant labor markets continue to stress the fiscal resolve of European social security.

Greece now has the support of France and Germany, but no one really knows how the drama will unfold when the April Bond payment actually comes due. Will Spain face a similar fate as Prime Minister Zapatero grapples to reign in government spending in the face of striking unions and 19% unemployment? Can the economies in Italy and Spain find a way to continue making bond payments should jobs not return before state coffers are drained?

These questions should make for the most current drama in the seemingly bottomless pit of systemic risk. The nasty twin brother of the benefits of interdependency, from economy of scale and scope of multinational firms and massive trade agreements, systemic risk has matured from private markets to macro trade agreements and this time there may be no lender of last resort.

The oil issue has been speculative to this point. It's hard to argue against 90 dollar oil when we saw 145 in July 2008, but the fundamentals aren't congruent with the price growth we've seen and this trader finds it easier to argue FOR $60/ barrel oil. Crude supply in the U.S. remains high, at 330 million barrels, while gasoline demand remains week and imports are rising. Crack spreads for refiners are reflected in their output averse management of facilities, where capacity utilization rates have stagnated at 81.3%. Refiners are the effective buyers of crude and the capacity numbers are sending signals of distress. The IEA's world demand predictions for 2010 were recently raised from the current 2009 level of 84.9 Million Barrels / Day (mb/d) to nearly 87 mb/d by 2010 Q4. (It should be noted that predictions for Q4 2009 global demand at 85.5 mb/d overshot the actual level of 84.9.) Rate hikes in China this week will calm the giant and should increase the likelihood of U.S. rate hikes in the first half of 2010.

Rate hikes will cool speculative trades and pull a significant amount of upward speculation out of Crude, as they increase capital holding costs and the risk of trading on margin. Softening Chinese growth will also cool global supply and demand speculation, with respect to crude, in an equally bearish development for the commodity.

The Consumer

Earnings season may present upside risk to short positions, which is why our stops have been tightened on our SDS and SCC positions. SPX might make it's way to 1200 where a lot of traders are calling the next Fibonacci resistance level, but momentum seems to be sputtering as earnings have begun.

The December Retail Sales report showed -0.3% growth combined with the revised higher 1.8% November rate, and makes it difficult to gauge buying sentiment moving into 2010. However the negative growth in the month of Christmas will leave many scratching their heads, and suggest that energy prices are playing a bigger role in retail sales than previously thought.

All in all, crude seems to be weakening, even on the backs of solid earnings from Intel, which should have been interpreted as positive to the overall economy. In after hours trading Intel traded up around 0.8% on a 0.55 EPS report vs. 0.34 EPS expected. Granted the day saw some sour economic fundamental data from the previous mentioned reports, but the market response was weak for a 62% profit beat.

Financials

Markets are becoming tougher to surprise at these levels and we could see more weakness from the banks. Soc Generale (SCGLY.PK) had an awful quarter in France and the U.S. regional First Midwest Bancorp (FMBI) missed the -0.07 EPS consensus by 76 cents, at -0.83 EPS. If regional financial problems due to MBS and the potential for more mortgage pain continue to show their fangs, financials could sell off through earnings.

Financials are the guts of the recession and will surprise many at how fast they can lower the tide for all. JP Morgan (JPM) will answer questions in this category on Friday, where weakness from the best in breed lending giant would create malignant concern in the banking sector at large. 

Disclosure: Long SDS, Long SCC, Long DTO (see: DS Portfolio)

To institutional investors who have to decorate their books to look "pretty" for investor relations meetings, the end of the year is important, but to actual investors, traders, analysts, etc., (i.e. readers of this blog, Seeking Alpha, WSJ, FT, Bloomberg) these kind of articles are crap. Why must readers wait until Decmeber 31st for these mantras of wisdom to enlighten our inner traders? What has kept the information within these articles secret until the turn of the year? I understand that the new year has an effect on all human beings as we reflect and look forward, but as traders and analysts we should be stronger than that. We must maintain a constant regiment of reflection and foresight, regardless of the date. 

The ugly truth is that most individuals, including readers of this site, do think about things at year end because they are forced to by financial statements, resolutions and a primal desire to start the cycle of time fresh. I hope we can be big boys and take this soap box rant with us into the new year as a prompt for a real New Years Resolution. Make the resolution to not read another 2010 finance article searching for answers, when the vast majority are pounding home already discounted information that will make us less likely to open our minds to new possibilities, and thus potentially profitable positions, in the new year. 

While it's easy to set a target 10 pounds to shed by Easter and even simpler to purchase one year subscriptions to IBD, FT, or WSJ, the resolutions that matter are the inherently boring and difficult to abide by. Trading in one hour of CNBC prime time for an hour of Carl Marx might seem like the least profitable 2010 time portfolio shift, but parallels between 19th century labor market sentiment and the 2010 American proletariat may surprise and enlighten. (Shameless plug… Communist Manifesto available through Amazon in Deep Reads on Left Sidebar.)

The worst mistake any of us could make, would be to completely rewrite our play books from 2009 for no reason besides the changed date. The global economy and the world will continue to evolve and so must we.

Ok rant over…

We'd like to take this chance to say "Thank You" to all of our readers in 2009 for our first year of e-syndication! We here at Diamond Slice wish that you and yours have a very prosperous and stimulating 2010. If you enjoy Diamond Slice, we suggest that you subscribe for free to our full content, by clicking on the Feedburner marquee, Email Subscription link, or Bloglines button in the upper left sidebar. 

Happy Trading in 2010,

Robert Eberenz

Founder & Editor- Diamond Slice

Question:

"So a lot of chatter here about the housing recovery and this being a good time to buy companies such as whirlpool and sherwin williams. (Basically stuff people put in their house after moving in.)

2. Do people have enough income? Is fear about the future easing enough for people to buy these high ticket items?"

Answer:

Here's the thing my friend…

I think that if you have money to invest for 10 years then now might end up being a pretty good time to put money into durable goods firms (e.g. Whirlpool and Sherwin), but placing bets on a housing recovery now is pretty risky, given how much upside we've already seen in housing stocks and the secondary effects on durables. 

The housing recovery has been 100% funded by the government to date and we're already seeing signs of fear in the eyes of Builders in the form of construction spending numbers, which have shown deterioration in October and November. The new and existing home sales are getting better and one report of home prices in the 10 and 20 largest metro areas in the country shows a bottom in the median price of homes, but again this was all leading up to the original expiration of the first time home buyer tax credit. 

Now there are debates going back and forth as to whether the extension will milk any more sales out of the beneficiary demographic targeted the first time around (young renters looking to get into the market). Home purchases are large decisions which take time, a great deal of capital raising, and job security and I don't foresee enough individuals who qualified for the tax rebate in the first housing stimulus package, suddenly feeling more optimistic about their financial situation and/or the economy, and coming to the table for this last ditch effort by congress/Obama to spark a real recovery. We will, however, get some additional sales from current homeowners who now have the chance to buy homes for a tax refund through mid summer 2010 and it might be enough to really get all the pistons firing. Still, I'd keep an eye on the sales and prices over the next few months before making any drastic decisions to call the recent pop a "recovery" in housing. 

More importantly, if unemployment truly peaks and we see some job creation in this country, that will be the time for housing to recover. Unfortunately, stocks move way ahead of actual change and operate more on fluctuations of the second derivative of economic data (i.e. when things are getting worse at a lessor rate, stocks bottom) so the rebound in the names you've mentioned are "baked in the cake". This doesn't mean that you won't have a chance to buy the companies for a profit on future successes in their businesses, but there has been a great deal of piling into this market by institutions and big money players who are terrified of being in cash amidst the current currency debacle and the valuations on stocks just aren't pretty enough for me to advocate buying anything listed on the NYSE or Nasdaq. 

Most importantly, we must remember that the housing boom of 2005 and 2006 was the best two years in a lifetime for home builders and absolutely cannot be expected to return this time around. Unemployment is far worse than in 2004 and there has been a fundamental shift from the "upgrade" consumer mentality which fueled the overconsumption, on which the latest bull market thrived.

What you must do now is wait for a substantial pullback for the market to give you some better deals and then see if you still have the conviction to invest in a U.S. housing recovery. If you feel this way when the names have pulled back 10-20% then that will be the time to buy. Best of luck my friend and I am honored that you would ask my opinion.

This clip truly tells the story of Chinese growth and government stimulus in one stroke. Suprisingly, in the development void of inhabitants, most units have sold as investments.

Government owned, the city doesn't have to worry about the negative effects of waiting for tennants since there's no interest clock ticking at the bank.

Check back for an upcoming article on the Chinese Renminbi currency and how G20 policy might force it to "de-peg" from the dollar. What effects would an expensive Chinese Won (CNY) have on the Chinese, Western and Asian economies?

These answers and more coming soon…

The real fear for banks is that the probable need for further equity offerings will come to pass in the near future. British and American bankers both face a real danger as equity prices become less and less attractive given the simultaneous declines of the currency in which shares are held. Over the past 200 days the S&P 500, the per ounce price for gold, and the WTI continuous spot price for crude oil have increased by 25%, 30%, and 80% respectively, while the US Dollar index fell by 10%. The three assets increased by varying degrees of intensity, responding congruently to market moving news throughout the period following the March 9th lows, while the dollar's value changed with a negative correlation. 

According to the chart, it were the commodities who outperformed the US equity market since the March 9, 2009 low of 666 for the S&P 500. Then, why should foreign investors risk allocating funds to U.S. corporations bearing 20+ P/E valuations and an increasingly jobless consumer base. It is increasingly likely that they will avoid such risky assets as U.S. stocks, where the average price appreciation over the past 200 days is halved when accounting for the drop in the value of the dollar. 

On top of these inflationary pressures, equities in the U.S. and Britain will most likely begin to depreciate as firms, not limited to the aforementioned banks, including U.S. Tarp recipients such as Bank of America and Citi Group find ways to raise additional capital needed by breaking off business arms and issuing more shares. It is the increasing share issuance, occurring as companies squirm for much needed capital, which will dilute shares in the coming months.

Finally, the dollar will likely continue it's inverse stickiness to equities as commodities maintain a direct correlation for a period of time following the imminent pullback in equity prices around the globe. The absence of stimulus and optimistic guidance for the next few quarters amidst rude reports of struggling economic activity will pull down all asset classes along with commodities. But should equities fall through one or more levels of resistance and begin to change the tone from one of hope to one of fear, commodities will break free from the current trend and spike upwards as the dollar begins to fall on the fears that inflation will mix with a retreating consumer.

The U.S. Fed, Treasury, and White House have made it brutally apparent that they will not take "no recovery" for an answer and will continue pumping money into the system by whatever means necessary. Yet there will come a time when the global appetite for U.S. debt will curb and the pressures of inflation will truly be felt. This time will be signaled by the market and will become apparent when equity markets fall on news of further stimulus spending. It appears that yields on long term treasury debt are already beginning to rise as the $300 billion Fed purchase program of such Long-Term U.S. paper has ceased, and may cause real interest rates on long term U.S. debt to increase. Unfortunately, such a decrease in demand for U.S. Debt would exacerbate the ill effects that a widening U.S. current account deficit will have on the dollar. A growing current account deficit had been largely responsible for the falling U.S. Dollar index from 2002 through 2006 that, despite it's narrow levels not seen since 1991 at 2.8% of GDP, will ultimately trend wider.

The weak dollar has most recently been fueled by the widespread dollar borrowing to fund "carry trade" investments, where the expectations for a near zero Fed Funds rate to remain low hurt the value of the dollar. When the Federal Reserve signals that it will begin tightening it's quantitative measures, another currency will take the place of the dollar, causing it to appreciate in the short term. However, fundamental headwinds facing the U.S. currency described above will ultimately outweigh waining carry trade borrowing to drive the value lower. 

More obtuse were moves by the American President to take further steps raising trade barriers with China, thus leading the pack of Western nations in their anti-competitive romp. The president announced a new tariff on Chinese made tires, which the U.S. International Trade Commission suggested start at 55% for three years, in order to stymie the leap in Chinese imports by 300% over the past four years. The plan represents thirteen tire companies and 15,000 workers which stand to lose their jobs given a complete takeover of the tire market by Chinese firms. A separate consulting firm however cites many U.S. based tire companies that have manufacturing facilities in China which will similarly be taxed under the plan. Such anti-competitive actions may save jobs in the short term, but will raise the average cost of goods sold in the united states and attempt to subsidize american industry towards competitiveness. Economists would agree that similar policy decisions, such as the tariff raising Smoot-Hawley Act of 1930, led the U.S. and world economies towards depression rather than recovery. Record low interest rates and a shifted liability from private to public sector balance sheets will not bring a roaring 2003-esque recovery, so long as unemployment, the hemorrhaging of our beloved “greenback”, and anti-competitive policies face the consumer in the future.

First came subsidized employment through the stimulus and now tariffs where stimulus dollars just aren’t enough. What comes when the dollars run out for a jobless consumer facing the inevitable inflation to be sown from two trillion dollars of government borrowing. What happens next?