Morning Charting- The Island

I am a Technical Analyst. I don't believe that fundamentals really offer as much insight into the short/medium/long term prospects of a company as Technical Analysis. So with that said, time for some knowledge.



The Island is a fantastic charting pattern in my opinion due to the high predictability of it. An island requires it to be retested at some point in the future and how the market goes about testing the island gives you a great look at who is in control of the market. It is a reversal pattern, so there are a couple of ways you can interpret outcomes when it comes to an island.



-The first is where sellers extend down a little bit and then allow buyers back in to test the islands range much too optimistically before taking back control and extending downward to the origin of the pattern




-The next is when sellers get ahead of themselves without testing some part of the range of the island, leaving that test outstanding. This creates a magnetic attraction to those prices and if sellers take the downleg too far, to fast, that excessive pessimism gets exploited by buyers and the retest of the island is a mere blip before powering to higher highs.

There are more outcomes and there are a lot more variables to consider but this is not a TA blog and I thought a little bit of TA knowledge can't hurt.

Cash for clunkers Halted. Plan Already Broke!

This just in. The cash for clunkers program has been halted. Apparently the plan might already go broke due to how immensely popular it was.

From USATODAY

The government suspended the explosively popular "cash for clunkers" program, fearing it would go broke before it could pay what it still owes dealers for a huge backlog of sales, according to congressional offices and a dealer group.

........

"The thing has exploded. It has exceeded everyone's expectations," said Miller, who was involved in writing the original legislation, known as CARS, for Car Allowance Rebate System. "Throughout our history, it has been auto sales that have pulled us out of recession. People are more likely to buy cars than houses. Not to be too Pollyannaish, but we're gettin' our mojo back. This could be the pivot" that begins an economic recovery.

Wow apparently Miller is getting ahead of himself. all this is doing is incentivising people to take their cars that are already on the road (everyone knows used cars are the most eco friendly cars out there) and exchange them for new cars. This puts more money into the carmakers pockets and takes business away from local repair shops. Onece again the government is helping out big business at the expense of little ones.

Just another personal comment. If they can't even manage this simple plan effectively then how am I to expect them the immensely complex healthcare system?

Citi Trader Due to make $100 Million Bonus... or is he?

So I am actually surprised that people (read-the media) aren't making a very big deal over this Citigroup trader named Andrew Hall (That's a picture of the castle that he owns) who is suing Citigroup for non-payment of his compensation package of $100 Million. It is for this specific reason why I think this compensation czar is an absurd idea. This guy makes over a billion dollars for Citi and then they have the gall to not pay him? I'm usually not one to jump to a judgment but this is a little unnerving. We bail out these companies and then refuse to pay the talent??? Guess where they will go? To non-bailout firms leaving the bailout firms mere skeletons, causing more taxpayer losses.

From WSJ:

A top Citigroup Inc. trader is pressing the financial giant to honor a 2009 pay package that could total $100 million, setting the stage for a potential showdown between Citi and the government's new pay czar.

The trader, Andrew J. Hall, heads Citigroup's energy-trading unit, Phibro LLC -- a secretive operation, run from the site of a former Connecticut dairy farm, that occasionally accounts for a disproportionate chunk of Citigroup income.

Mr. Hall's pay package puts Citigroup in a tight spot. Ripping up the contract could trigger Mr. Hall's departure and a potentially messy legal fight. But making any large ...

Well apparently we'll find out sooner or later when Mr. Pay Czar has his say...

The White House will leave decisions about a Citigroup trader’s potentially $100 million bonus in the hands of Special Master Kenneth Feinberg, the Treasury Department official in charge of compensation for executives who work for companies that received tens of billions in government aid.

Here's the rub

The Treasury Department spokesman noted that “Mr. Feinberg can't force companies to break a contractual obligation that is grandfathered in the statute. If the contract is not grandfathered by the statute (i.e. entered after the Feb 12 date), and is inconsistent with the limitations in the statute, then it is the statute that would require the contract not be followed, not Mr. Feinberg.”

What are your thoughts... do you really think that this guy doesn't deserve to be paid his bonus that was signed by both parties in legally binding contract?

Why trying to curb oil speculaion by forcing deliver might create another Hunt Fiasco

interesting article in Fortune discussing the potential ramifacations from Obama's plan to try and stop people buying oil who have no plan on taking delivery:

Curb oil speculation? Why that's folly

Yes, oil companies also faulted speculators for high prices last year, but who can blame them for wanting out of the political firing line? Oil company traders knew full well that the commodity funds that buy and sell futures contracts are not equipped to take or make delivery of oil. Oil refiners understood that speculators must sell their futures contracts before they expire. That's why the near-future price of oil -- the price of oil for September delivery, say -- cannot get too far away from the realities of supply and demand in the physical market. No oil company trader worth his salt is going to pay an above-market price to a commodities fund manager who is under time pressure to sell.

His conclusion

My response: Be careful what you wish for. If you tell investors that they have to take delivery in order to invest in oil, that's exactly what they will do. They will store oil in every onshore oil tank or offshore supertanker they can get their hands on, thereby siphoning off oil that would otherwise be available to consumers. It will be a replay of the late 1970s, when the Hunt Brothers took delivery of 10% of the world's silver supply, causing silver prices to quadruple.

Don't believe me? Consider what happened in January, when the price of oil futures four months out was $15 a barrel higher than the spot price, which incentivized oil companies and investment banks to store oil like crazy.

So if Congress and President Obama really want to enact regulation that encourages hoarding, I say go right ahead. It will prove my point -- albeit at the expense of 300 million American consumers.

Recovery? I think not. Just ask your parents/grandparents

A fantastic piece by David Welch in Business Week explaining how baby boomers are the economy and what their new found frugality means to this so-called recoveryt

Mercedes is the quintessential boomer brand. Drive down an American highway, and odds are good that the person piloting the Benz in the next lane was born between 1946 and 1962. And Mercedes-Benz has prospered right along with America's huge postwar generation. Back in 1986, when the first baby boomers turned 40, Mercedes sold 99,000 cars in the U.S. In 2006, when those boomers hit 60, the automaker moved almost 250,000 vehicles, a fifth of its global total.

Not so long ago, boomers were never going to die. Filled with a self-confidence born of unprecedented prosperity, many thought rising markets would assure their future. If the economy faltered, well, it would rebound more strongly than ever, as it had so many times before. And so boomers spent — and borrowed — as if there were no tomorrow.

Meet Tim Woodhouse, 56. He owns Hood Sailmakers in Middletown, R.I., a business that helped finance a plush life. Woodhouse owns a boat, five Ducati motorcycles, and every few years treated himself to a new Porsche 911. He figured he'd retire when he felt like it. Then the markets crashed, the economy tanked, and suddenly Woodhouse felt a lot poorer. In April, with business slowing and his real estate holdings leaking value, Woodhouse hit the brakes. "I was scared," he says. "My net worth took a real hit." Woodhouse sold the Porsche and bought a Mini Cooper. The boat spends more time tied up these days than out on the water. He and his wife dine out less often, and they don't entertain at home much either.

Woodhouse and millions of boomers like him are doing what people normally do when they near retirement: They're living more frugally. Companies have long factored in this actuarial reality, gradually tweaking their products and marketing to appeal to the next generation. With boomers, however, many companies became complacent. It wasn't that they ignored younger consumers but that they counted on boomers to keep spending longer. And why not? Until recently boomers typically reached their spending peak at age 54, according to McKinsey. Contrast that with the previous generation — a thriftier bunch whose consumption typically peaked at 47.

Now many companies are scrambling to appeal to Generations X and Y. You can already see this thrust in the stores. Clothing designer Vera Wang is selling a casual line called Lavender aimed at twenty- and thirtysomethings. It's fashion, but not the pricey garments the company typically has sold. Meanwhile, says Wang, her namesake brand needs to get a lot less expensive. In one instance, Wang made a high-end dress using fabric that costs $5 a yard instead of $12 but used the fabric in several layers to give the garment a richer look. As a boomer herself, Wang, 60, feels her generation's pain. "You don't have 30 years to reinvent yourself," she says.

Now after enjoying the article, I want you to pay closer attention to these McKinsey statistics that relate to the aging baby boomer population.


* $400 Billion: Amount that will come out of annual U.S. consumption as thrifty boomers push savings rate from 1% to nearly 5%.

* 47%: Boomers share of national disposable income in 2005 before the bubble burst. Boomers contributed only 7% to national savings.

* 2.4%: Forecasted GDP growth over the next three decades as boomers ratchet back. GDP has grown 3.2% a year since 1965.

* 69%: Portion of boomers aged 54 to 63 who are financially unprepared for retirement.

* 78%: Boomers' share of GDP growth during the bubble years of 1995 to 2005

This doesn't exacly scream inflationary pressure now does it. How are we to expect to grow GDP at 2.5% as Bernanke predicts (a level that curiously is supposed to keep unemployment at current levels) if the majority of our discretionary economy is becoming more frugal.

Guess what people... we haven't seen the end of the layoffs or the top of unemployment.

Wow totally didn't see this coming!

Courtesy of the WSJ: GSEs Unlikely to Repay U.S. in Full

WASHINGTON -- Fannie Mae and Freddie Mac are unlikely to repay the government in full for all the capital it has pumped into the companies, according to their regulator.

"My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."
.....
One of the studies found that Fannie and Freddie have been using fees they collect for guaranteeing less risky single-family mortgages to subsidize the fees for backing riskier loans.

As a result, borrowers with 15-year fixed-rate mortgages and adjustable-rate mortgages were subsidizing borrowers with 30-year fixed-rate mortgages, which are more risky for the mortgage giants to guarantee.

"The riskiest loans were not fully charged for the additional expected costs associated with them," Federal Housing Finance Agency Chief Economist Patrick Lawler said at the panel discussion.
.....
Mr. Lockhart said Fannie and Freddie would likely see their reserves continue to decline next year, but could return to strong profits in two to three years. But he cautioned that the companies' thin capital and huge exposure to the mortgage market make it unlikely they will be able to repay the government in full.

"The book is so large that it is hard to see that they could actually repay all that," he said.

Just goes to show that government intervention perpetuates the flawed practices that caused the bailed out entity to need the bailout in the first place.

The Disappearing Male

IMO A must watch for everyone

Commercial Real Estate... Getting closer to Implosion

FT Lauderdale, FL

This is someone's photo essay of the commercial real estate carnage in Ft Lauderdale
Has to be seen to be believed: you will not see these pictures anywhere in traditional media.

He also provides the following color:

I took a drive this evening from 5.30 pm - 7.30 pm and shot over 200 pictures of Florida real estate in crisis. What is really amazing if you notice the time and date on each picture . I was able to shoot a picture about every 45 seconds while all alone driving in traffic including stopping for traffic lights and gas and parking in a safe place each time for each shot . Everywhere you turn something is for lease or rent.

All these headlines in the media dont seem to have any effect on people so here is one road in one town ( out of thousands ) in Fort Lauderdale Florida up to Pompano Beach ( about 8 miles ) I pretty much only shot the right side of the street because I did not want to do any u turns . Some pics I shot across the street . This does not even include office buildings .

There is something for lease or rent in almost every single plaza or strip mall without exception . I also missed a lot more because of traffic and buildings set back from the street. This does not even include offices , homes , condos etc, this is just stuff abandoned or had a sign in front of it and I missed a LOT of signs . This is not even all the empty lots that sit because the developer abandoned the project after buying up the whole neighborhood .

This is Fort Lauderdale Florida . The Gold Coast , The Venice of America the Yachting capital of the world folks.The pictures start at the Fort lauderdale beach on Sunrise Blvd. and go west to federal Highway ( rte 1 ) north to Pompano Beach about 8 miles and finish in a random warehouse district off the main road . After that it got dark and I had to stop .

You will see Exotic car dealerships Burger King, Wendys , Fuddruckers , Hooters , Pier one , furniture stores , restaurants , clubs boat dealers, Business that have been there 20 + years , Supermarkets , Saks 5th avenue ( big white building in beginning ) Macks groves , Flaming Pit , the old 50's diner . A Ford dealer and a Dodge dealer . A golf course in beginning of slideshow . All GONE in just one 8 mile strip . Folks this is the good side of town with the money I did not even go to the other side of the tracks or to other streets just one !!!

Why this multi-week rally has me on the sidelines awaiting more violence

I would like to take a moment to explain a little bit about how my TA theory comes into play in identifying sustainable vs unsustainable moves in the market.

IMO the current rally was a lot of things, just not sustainable. It is violent, enticing (who doesn't want 3% daily gains), and lengthy (going on a couple weeks now). But the key to identifying what kind of buyers are able to maintain moves such as we are currently experiencing are the manner to which they allow sellers to get ahead of themselves and go "top hunting". Similar to "bottom fishing" top hunting is something that all rallies have and they are healthy in that they allow buyers to take a breather and suck in some gullible sellers into lowering prices for these sustainable buyers to come back in with more bids. These "top hunting" events usually occur at relevant technical levels.

The key to any sustainable rally are healthy pullbacks and they have been suspiciously absent over the last couple of weeks. Buyers can do a couple things to maintain a rally

(sustainable) healthy pullbacks allowing price action to "refuel" buyers for another higher leg

(unsustainable) buyers swarm in at key technical levels with bids, overwhelming sellers and powering upward

(bubble-type) buyers attempt to entice "top hunters" but are strangely absent which creates a void causing buyers to propel price even higher

Given the recent price action over the last 3 days, I'm starting to move towards the Bubble type scenario. This rally was unsustainable and over this 3 day period it indicated that the buyers that started this rally were gassed. This should have resulted in either the unsustainable or sustainable scenarios occurring. Neither did. 3 days of nothing leads me to the conclusion that sellers are strangely absent. This is likely creating a void in price action and although I would not put money on it, it seems to me like we might end up with buyers coming in and filling this void propelling prices higher. Sellers need to Act and soon.

So currently my position is to wait and see. I'm a lot happier waiting for selling to start picking up steam under the prior high (SPY close under 95.50) before getting short. I can only play these bubble scenarios with very tight stops and even then I am not all that comfortable chasing them.

So be warned. Charts this violent usually remain violent continuing in the same direction or reversing just as violently.

The Daily Show's Hilarous Take on Geithner's Housing Woes

The stuff with Schiller is hilarious!

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Home Crisis Investigation
www.thedailyshow.com
Daily Show Full Episodes Political Humor Joke of the Day

AIG: Let me try and understand this

From Bloomberg:

March 5 (Bloomberg) -- American International Group Inc., the insurer that got four bailouts from the federal government, has been the subject of complaints from rivals who say the firm is underpricing commercial coverage, a regulator said.

Competitors have said AIG was able to charge lower rates after getting government help, said New York Insurance Superintendent Eric Dinallo in an interview with Bloomberg Television today.

So basically AIG takes billions of taxpayers money and then turns around and undercuts the good insurers who actually take part in non-risky underwriting. This screams of moral hazard. What makes it worse is that AIG is failing to realize that under no actuarial situations are these rates any good if there are claims longer term.

“We worry just as much about low pricing as high pricing,” because the industry needs to have enough capital to pay claims that may emerge years after policies are sold, Dinallo said

Government help “allows unhealthy insurers to grab more market share in the short term at levels that are unsustainable in the long term,” said David Sampson, head of the Property Casualty Insurers Association of America, an industry group, in a statement last week.

I mean its blatantly obvious that these type of situations will occur when the government is giving out free money and it sickens me that AIG is out causing more harm to their healthy counterpart.

An Excellent Analogy

an excellent analogy explaining why banks don't need more money they just need more time. (From Accrued Interest Blog)

Han will get that shield down...

First, let me start with an analogy.


I have a good friend, also in the finance business, who bought a condo about 2 1/2 years ago. It was part of an apartment building rehab, but is located in a very sought-after zip code in suburban Baltimore. And its a beautiful place. When my wife and I first went there she jokingly said we should sell our place and buy his.

Unfortunately for him, not only did he buy at the top of the housing market, but the builder doing the rehab went under and sold the project. The new owners are going to continue the rehab, but leave it as rentals, not convert to condos. So that's absolutely destroyed the value of his place. I'd guess in the -50% area or some such.

Now this guy is relatively young, and while I don't know much about his personal finances, I know he doesn't have huge amounts of liquid assets. So I can safely say that he owes more on his house than his entire net worth.

And yet he's earning a good income, as does his wife. In fact, he told me that he is well under the debt-to-income number that Obama's foreclosure relief plan is targeting. So I have no reason to believe he's going to default on his loan. Still, based on a simple assets vs. liabilities calculation, the dude is insolvent.

Obviously the bank would be incredibly stupid to foreclose on him now, even if the bank had that right. Allowing my friend to remain a "going concern" makes much more sense. Granted, the risk my friend poses has gone way up, as there is no longer any equity cushion. But if the bank were to foreclose now they'd be looking at a 50ish percent loss. Whereas if they look the other way and let the cash flows play out, my friend is very likely to pay off his loan.

Now stepping back, there are a lot of financial institutions in this same boat. They have gigantic paper losses, yet little in cash flow interruption. This brings us to the GE Capital discussion of the last couple days. I've mentioned a fundamental problem the finance sector is currently dealing with. This is essentially the source of my kobayashi maru title from the other day.

• Financials have made many investments (be it in loans, properties, securities etc.) that they wouldn't make today, at least not at the original terms.
• However, some of these investments will eventually work out alright from a cash flow perspective. Some won't.
• It stands to reason then that some financial firms will own more "good" investments and some will own more "bad" stuff. Only with time will we really know who is which.
• Unfortunately, the market isn't giving firms much time. The door for raising new equity money is now pretty much closed for any financial, and wild trading in CDS is stoking more fear.

Ideally we'd like to give financial institutions time to sort out who is who here, but private investors aren't going to accommodate. I mean, as a bond manager, I wouldn't be waiting around for three or four years to see if GE Capital can work through their problems. Investors as group, we made that mistake with Bear Stearns and Lehman and AIG and Merrill Lynch and WaMu and Wachovia and GSE preferreds and Citigroup etc. etc. etc. etc. etc. Most pros got stung or nearly stung with one or more of these disasters. We aren't waiting around any more.

This should be the focus of government programs to cleanse the financial system. Creating time. Otherwise, as Keynes said, we're all dead.