Subprime Insight

Here is the last post I wrote before taking the two month break from the Blog. I did not post it, but as a way of getting back into the fray, here it is.

I have previously claimed that it was me who brought Non Borrowed Reserves to the attention of Wall Street with my Monterroza Research blog. I will admit that I had help from Mish’s Global Economic Trend Analysis who introduced me to Net Free of Borrowed Reserves, but I was pointing out how much non-borrowed cash banks had in their accounts. So I looked for the number and found that the trend was was literally off the charts. Immediately after my first blog post Wall Street began it’s offensive to dismiss the number as irrelevant and as the writer as a conspiracy theorist. Unfortunately for them, the number is neither irrelevant and the writer was an accounting major, economics minor and investor. Shortly after, there was an announcement that the Bush administration was shutting down a website that aggregates major sources of economic indicators from many federal websites. I thought nothing of it at the time but I thought that the reason for shutting down the website was ridiculously idiotic: the website was shut down due to budgetary constraints. However, when I went back to check my favorite data series, Non Borrowed Reserves, I was startled at what I found: the series was altered.

If you check the Fed of St. Louis website right now what you will see is a series entitled Total Non Borrowed Reserves and Term Auction Funds. What is amazing is that the two phrases, “Non Borrowed Reserves” and “Term Auction Funds” are a conundrum when put together. Non Borrowed Reserves are just that non borrowed, while the TAF loans are temporary loans that were invented three months ago. Non Borrowed Reserves have since the 1960s never included any type of borrowing, not even discount window borrowings. If someone does not call the government out on this small data manipulation who knows what they will be inventing next and what crap we’ll be accepting next.

I analyzed the difference between total reserves and non borrowed reserves since the 1960s in excel last month but I did not bother to post the charts since I thought people would get the point. Since people have not, I will release the data and excel soon. It is important to note that I made this during the beginning of February.

I have not blogged about many things that I have followed in the market simply due to time restraints. The truth is I read and analyze a lot more than one post a day of market news. The market is way too complex to accurately analyze properly with minimal analysis, but just simple enough to meaningfully predict profitable trends. With that said, there has been a sad trend that I have followed but not really talked about because I thought it was unimportant to the market. However, this past week I was proved wrong.

I missed out on predicting most of the month of March due to my spring break being right in the middle of the month. However, I can finally come to my weekly article with rest and confidence as many of my predictions have, to my surprise, eerily come true all too soon. I’d like to remind everyone why it is so important to make general predictions. As I said about a month ago: if you know where you are going, you know what to expect on the way there. Right now, the Market is using an old map to get to a place they’ve never been before (15,000 on the Dow).

• CORRECT: An inter meeting fed cut is likely to occur or a dramatic fed cut during the meeting (75 basis point).
  • This could be put on hold as inflation concerns, due to the weak dollar, underscore Fed moves. But now we know the Fed could give a rat’s ass about inflation.
  • I think it’s interesting how the market FINALLY agrees with me. It took them long enough. I’ve been saying this for the past month.

Comment on the Prediction:

When everyone said 50 basis point cut, I said 75. When everyone said 100 basis point cut, I said 75. Remember, I said 75 basis point cut back in the beginning of February, so that is foresight. I also put the bond ETF TLT in my original crash portfolio due to this prediction and it has outperformed all other bond ETFs out there. That is amazing. Why didn’t I go with a 100 basis point cut? Strategy. If the Fed cut 100 basis points, it would lose 25 basis points of future “ammunition,” as it is being called nowadays. Furthermore, giving the market less than what they expected is a bullish sign. It is the Fed telling the market, “things aren’t as bad as you think, really.” However, anyone that knows anything knows that completely false.

• CORRECT: The next time we drop to 12,000 we won’t stop there.
  • It just might be this week! If we don’t get there within two-three weeks, I don’t think we’ll test new lows.
  • All the cool kids on the block are talking about, “testing new lows.” The Market is simply comprised a bunch of followers.

Comment on Prediction:

I hit this right on the nose again. I’m even amazed how accurate the time frame I gave was. I said on March 3^rd that we could be seeing new lows within the week and said that if we didn’t cross that 12000 barrier within the next weeks, we wouldn’t test the lows. Now, two weeks later, it just so happened that we retested the lows within the week. Then, I advised wrote about why I was buying Apple call options by the end of the week because we would be seeing a rising market in the near future.

Read the rest of this entry »

It even amazes me just how bad things could get for the stock market. CNBC is reporting:

The Citigroup research of Meredith Whitney, executive director of CIBC World Markets, triggered a staggering global selloff, and now she’s warning that banks could face additional write-downs of up to $70B if bond insurers are downgraded.

Meredith thinks C could be borrowing up to $3 billion in reserves. That amount of borrowing just for reserves has to hurt a banks cost of capital. She sees more possible dividend cuts and capital raising for C. Don’t forget the 20% in previous shareholder equity dilution. Quoting Meredith: “That’s unheard of.” Check out the video.

Disclaimer: I currently own C puts, I am not a CFA and I am not giving you investment advise. This is just my subprime opinion.

As if things didn’t need to look any worse: analysts are now suggesting a 50% stock drop in China could be in the cards. This is bad for a couple of reasons.

China is a valuable source of capital during these times of billion dollar write downs. If things start going bad for it there then they could be much willing to spare some change for our problems. China has already commented on how they felt slightly defrauded by their investments in America. One official compared China’s investments in the US like this: China was hunting for some fat rabbits. When it found a nice fat one it got excited about the catch but soon found the rabbit was shooting back at it.

His method of valuation is comparing stock market size to GDP size between China, Japan the US. When you compare the decline possible in Japan during the 1980s and the declines in the US during the early 1990s, you can see that china’s stock market to GDP is out of whack with historical norms.

Here is the video.

When I first saw this I was amazed. Some flippers are down 40% on $1,000,000 investments. I’ll definitely be checking this site to check up on the situation.
http://flippersintrouble.blogspot.com/

If you haven’t seen this, you should. It explains the Subprime Crisis in 15 minutes. That leaves you plenty of time to learn about the other problems.

CBS House of Cards:
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Although the article is long, if you stick with it there is an interesting surprise at the end. This article has been slightly edited for illustrative purposes.

An Article on Real Estate Speculation

A wise prophet observed many years ago that “when the blind lead the blind, both fall into the ditch” - a maxim which accurately describes our situation in both business and government today. In this respect the real estate field is no exception, unless it be in the extent of its mishaps and the number of people affected by them. It behooves us, therefore, to give some serious thought to the manner in which we have arrived in our present unhappy situation.

Read the rest of this entry »

Bloomberg is reporting that the worlds biggest bears are expecting another six months of stock market decline.

Take this with a grain of salt. They are bears after all.

However, think about it. The stock market is driven by fundamentals and pumped by news. I don’t think we’ll be seeing sustained levels of positive news for a while. If the bulls aren’t constantly reminded to buy, they won’t.

Jim Chanos, who called the ongoing situation with the bond insurers, argues that the government should stop the coming forced sales of securities by managers. He calls the current situation a result of, “people working hard to get the square peg in the round hole. Now that it’s jammed in there, no one wants to figure out how to get it out and make it fit better.” Why start selling now that ratings have caught up with reality if the problem had been present all along? The sellers will be taking advantage of and their shareholders robbed. It is in the best interest of the shareholders to keep the papers in this type of market.

I hope more people like Jim Chanos keep popping up: right now we need every smart idea we can get. No idea is too far fetched to stave off the massacre going on in the market place. If the problem gets too bad it will drag the entire economy down.

Watch the video.

Those pesky conspiracy theorists are at it again. News has been spreading about an old interview with Julian Robertson on CNBC where he is predicting a total and utter global collapse of the economy. Some of the statements are senstational. To set the record straight:

• The interview never happened this year. But actually it happened back in 2005.
• The global collapse comment I just linked to never happened. He just pointed out that the U.S. economy was looking a lot like Japan.

To those out there trying to spread the word: If you don’t get your facts straight people will think you are crazy and you will make everyone else look bad.

That being said, I would recommend this book called Money Masters of Our Time. I read the book when I was getting interested at investing. Who best to learn from than the greatest players of our time? Since you probably don’t want to read the whole chapter here are the interesting facts:

• He does not like the S&P 500 as he sees its growth is unsustainable.
• One of his best plays was back in 1991. He made a boatload buying puts on the Japanese stock market after extensive Real Estate speculation. He held those puts for years before they paid off.
• He interviewed bank managers and discovered that they lent to shaky customers fearing that if they wouldn’t some one else would. He shorted the Banks
• His losses during the end of his career stemmed from the “market feeding on its own momentum, leaving his value stocks behind.”

What is interesting to note is that Julian has made a wonderful come back recently based on his bets againts subprime. Now this old “tiger,” is making money by being a bear again. What is interesting to note is, that he held his views and position for a long time before they started paying off. It is also glad to note that he views the United States possibly following Japan with a soft landing.

So in conclusion: Stop speculating, get the facts. Don’t follow suit with the financial industries own mistakes.