Like I Am Buying This Line

I just saw this and had to do a minipost on it. Some idiot at JPMorgan says we are going to have a robust recovery due to pent up demand. Makes me glad I did put options on JPMorgan last week. With advice like this they are truly in for a world of hurt.

http://www.bloomberg.com/apps/news?pid=20601109&sid=avR3wifbUr1w

Disclosures: I have a put option on JPMorgan. All of about $500, but I may be adding after reading this piece at Bloomberg.

Skittish???

Is anyone out there just a bit skittish?? I ask as I am seeing a lot of press, yes even mainstream press, about how far the market has rebounded so fast and how the P/E on the S&P is at its highest level in half a decade. Main stream press is wondering out loud whether this rally can last, whether this is a V shaped recovery, a U shaped recovery or a double-dip recession. The Wall Street Journal also carried a piece this week discussing how the markets seem to traditionally have doldrums in the fall, roughly late August through the end of October, with September being quite the culprit. Reading all this, and seeing the markets reaction to a worse than expected Consumer Sentiment number today, I have to think people are a bit skittish, as in walking on egg shells, as in on the edge of their seat, as in worried. Sure, no one wants to miss a V shaped recovery, but no one wants to be there if the V is simply a Bear rally destined for a massive plunge in the fall. If you read my blog, you know where I stand.

And if you are not skittish yet, I highly recommend reading this short post at Calculated Risk. Some very nice charts show just how far we have come and how we are in almost identical alignment with a bounce during the Great Depression. Graham Summers at Seeking Alpha noted the other day that the alignment to that bounce has a .8 correlation, which is very high. I am not saying we will retrace the Great Depression, but I am a bit skittish.

http://www.calculatedriskblog.com/2009/08/market-and-bank-watch.html

And Another One Down . . .

I was a big Queen fan in high school. I know this dates me, but, as my wife says, I am still a kid at heart. In any event, Queen apparently predicted our current banking crisis. And those that follow bank failures know that the FDIC pretty much always announces the bad news on a Friday after the markets close so they have the weekend to clean up the mess. Well, this week in particular, we have a pretty big failure - the largest since WaMu. Colonial Bank went under, with $25 billion in assets. This is the sixth largest bank failure ever.

http://www.nakedcapitalism.com/2009/08/colonial-bank-fails-biggest-since-wamu.html

Now I highly recommend going to the linked post at Naked Capitalism as there are a couple of other points worthy of note discussed in more detail there. First, is the point that the FDIC, despite government backing for any buyer, had a difficult time finding any institution willing to take over Colonial's operations. They did find an institution, but apparently there were few bidders. Second, another Alabama bank, Regions Bank, has more than five times the assets of Colonial and, if you read their latest quarterly report, they basically admit that the loans on their books are being carried $22 billion over what they are worth, which is a good $4 billion over shareholders equity. I noted yesterday that the government has gone out of its way to allow financial institutions to say whatever they want about the assets on their books and this is a good example.

Mind you, Regions Bank is not alone in this. As noted in this linked post, 150 institutions are in serious trouble yet most are reporting themselves as well capitalized. Go figure.

http://www.nakedcapitalism.com/2009/08/guest-post-more-than-150-us-banks-are.html

And Colonial Bank was not alone in yesterday's pain. The norm is now to have several failures each Friday and this Friday was no exception. Here are some details on four other banks to fold.

http://www.calculatedriskblog.com/2009/08/bank-failures-75-77-union-bank-national.html

http://www.calculatedriskblog.com/2009/08/bank-failure-73-dwelling-house-savings.html

Commercial Jingle Mail

I noted yesterday how the Congressional Oversight Panel on TARP had issued a report noting that financial institutions could suffer big time if commercial real estate were to take a dive. I also noted that in fact it already is. As further proof for this proposition, here is a discussion on how hotel owners who are under water are simply walking away. The delinquency rate for CMBS tied to hotels in the second quarter was up to 4.75%, up from a mere .5% last year. And Fitch Ratings predicts this rate will climb to 10-15% by year end.

http://www.calculatedriskblog.com/2009/08/hotel-owners-walking-away.html

Yep, green shoots everywhere.

Disclosures: None

Brown Shoots Abound

In this linked post, the author notes that the latest TARP Congressional Oversight Panel Report is a bit less than rosy. Now this panel has been criticized a bit for being too critical, but perhaps they are simply being realistic. Wow, that is truly something you do not expect from the government. I would say it is refreshing but the reality they are perhaps reporting is not refreshing. Perhaps depressing is a better description. Their big complaint seems to be about transparency. Lest you missed it, the government has taken numerous steps to actively avoid banks having to mark down or be honest about the value of their assets. Things do seem much better when you are allowed to lie about how bad they are and that is what this report demonstrates.

http://www.nakedcapitalism.com/2009/08/next-wave-of-financial-crisis-is-coming.html

Report aside, let us consider a couple of items for those that think the troubles are behind us. First, if you read the link above, you will note the Panel believes something like a crash in commercial real estate might worsen the problem. Guess what (you know where I am going here), commercial real estate in the U.S. is vastly overbuilt and taking a very nasty turn these days. Here is one indication:

http://www.calculatedriskblog.com/2009/08/cbre-retail-cap-rates-increase-sharply.html

The fact that we have twice the retail space of any other country might give you a good indication why commercial real estate is doing poorly. In short, we are way overbuilt in this area.

Well at least residential real estate has bottomed and is recovering, right? Again, you know where I am going here. Where do we start, there are so many places. Let's start in Illinois where foreclosures are increasing, yep increasing:

http://www.calculatedriskblog.com/2009/08/illinois-foreclosures-increasing-again.html

Mind you, Illinois has a lot of company. Indeed, foreclosure filings were up 7 percent in July from June overall, not just Illinois.

http://www.calculatedriskblog.com/2009/08/report-record-foreclosure-activity-in.html

How can this be you ask. I am reading that housing is bottoming out and perhaps improving in certain areas. Well let us consider a few contributors here. First, there are a lot of homeowners under water on their homes at the moment. Indeed, 15.2 million mortgages, i.e. 32.2 percent of all mortgaged properties, are in negative territory and that is a big negative.

http://www.calculatedriskblog.com/2009/08/american-corelogic-more-than-152.html

Now add to this continuing job losses and you have a boat load of homeowners who cannot pay their mortgage and who cannot sell their homes. Answer, foreclosure.

Are you ready for the really optimistic news? As if this were all not enough, we have a boat load of adjustable rate mortgages resetting the remainder of this year and next year. Many more than the first half of this year. And some of them are option ARMS, which were loans where the homeowner could choose to pay less than even the monthly interest such that they now owe more than when they took out the mortgage. Their payments are going to go through the roof unless they can refinance, which they cannot because their homes are under water. Add in the job losses and this leads to an explosive situation. And yes, we still have a lot of job losses.

http://www.calculatedriskblog.com/2009/08/weekly-unemployment-claims-increase.html

You decide: are those shoots green or brown?

Disclosures: None.

Moral Hazard - Heelllloooooo!

So I am mega-bank and investing in all sorts of toxic assets. All of a sudden the rug is pulled out from under me and everything I have invested in (bet upon) turns out to be pretty much worthless. Fortunately, my good friend from GS has a nice high level government job and he and his friend, let's call him Uncle Ben, are willing to save my arse from all the extreme troubles I have caused for myself and my shareholders. They provide billions - oh I mean trillions - in support for me and my compadres. This is fantastic. I make tons of money and everything is fantastic; I lose tons of money and the government makes everything fantastic. Sure there is a bit of bad press about executive comp and bonuses, but we are a smart lot and can work our way around that. Thank you Uncles - as in Ben, Hank and Sam. You guys are great!! By the way, where did you get all the money we sucked away from you to support our bonuses?

Folks, this is making me sick. The companies that brought us here are making a mockery of our government support efforts. There is no company too big to fail - period!! Yes, the failure needs to be controlled with government support but companies abusing the process should fail and have to fail. At a minimum they have to be acquired by the taxpayers, taken apart and sold off in pieces. None - ABSOLUTELY NONE - of the companies should be allowed to profit off taxpayer dollars, be it from their own taxpayer support or the support for their counterparts. For example, Goldman Sachs was repaid billions in obligations from AIG which was paid by taxpayers at a time when GS was paying some major salaries and bonuses. We, my friends, need a (merrily) lynch mob. Government officials giving multi-billion dollar gifts to their former companies is not going to serve them or the taxpayers.

I am really upset (and I would say this differently but this is a family oriented blog). The bigger issue to me is not the trillions we have wasted on the AHOs (I saw this sign today on an AHO construction company) that got us here, but the moral hazard this has created.

Let's face the facts, the current bounce or recovery is just a government spending, government debt, induced bounce. That aside, the last bubble was due to certain financial companies not playing by the rules, not following basic economics and not caring about any of this. Their God was the almighty dollar and they pursued it with reckless, and I mean reckless, abandon. Now that we (as in taxpayers) have saved their collective arses, we are all in a world of hurt in the country to come. The abuses will continue and be magnified to a magnificant level. Wait and see. Meanwhile, read this:

http://www.nakedcapitalism.com/2009/08/jp-morgan-chase-caught-speculating-with.html

Why would we do this to ourselves? Seriously, folks, the proper response is absolute outrage. Extreme outrage!!! Our taxpayer money, and trillions of it, is now gone with a familiar flushing sound behind it.

And where does this leave us? A lot of AHO financial institutions that got us here are surviving while thousands of worthwhile U.S.companies are folding. U.S. debt, total private and public, is still setting new records (so much for deleveraging). Unemployment is still rising - though at a slowing rate. There is no clear economic recovery in sight, though all the financial instutions are there (with our dollars) to lend if any company actually becomes worth lending to. Commercial backed realty is still on the decline, with no help from the financial institutions that got us here. And I see green shoots everywhere I look. Okay, on this last line I fibbed just a smig. I did a lot of weeding this weekend and maybe those are the shoots in my memory.



Disclosures: None.

NOT!!

I keep seeing supposed green shoots and am not yet buying it. Here are some green shoots from some people that I have quoted in the past. They think the economy may be on the brink of recovery:

http://www.bloomberg.com/apps/news?pid=20601109&sid=aXgtL5wHZN8k

I beg to differ. Our debt levels are still near record levels on consumer levels (as in we have barely begun to deleverage) and our public debt is shooting through the roof. Golly gee, that spells recovery in my book. And the S&P is doing so well lately that the PE is 24. That is a PE for good times, very good times, so the good news is more than built in. Personally, given the debt loads in the U.S., there is no recovery in sight unless another country leads the world from to depths - right. I am not demeaning other countries but none that are doing economically well, which is very few, have the economic weight to correct a world wide recession. Sorry folks, from my view we have a stimulus based bounce, perhaps bubble, but nothing more. I have been wrong before, but I have been right before too. You decide.

Disclosures: I did increase my put options this week, but not in any stock I have discussed lately. By the way, my older put options for this year are all down over 80%, so this is not a recommendation.

NOT!!