Naked Short Selling

The campaign is gathering steam. More and more influential fund/money managers are organizing to stem the abuse from naked short selling. More company execs are starting to increase campaigns regarding the abuse of Wall St. and Bay St. ( and Howe St. in Vancouver).
Now the FBI needs to get involved and step over the SEC which is a toothless liger in the back pockets of the Big Money of Hedge Funds.

Speculators in the News Again

The CFTC is being pressured by the US Congress to stop the evil Speculators. The solution to the problem is the same solution that would have defused the Housing Bubble. RAISE margin requirements. If the FED or Treasury or whoever oversees US Financial institutions should have increased down payment requirements instead of letting the no doc, 0% down mortgages. Now the CFTC should jack up margin requirements on all commodity contracts. Allowing too much credit in any mkt distorts the fundamentals of the mkt. JACK up margin and reserve requirements. Funny enough, aren' t the Chinese doing this.

The Crux of the Issue

Doug Daschle (via CNBS) had a very interesting comment regarding the inflation/deflation debate and the role of specualtors.
In essence he says that from 2002 to 2007, everybody loved specualtion because the specualtors were buying stuff that people were generally long-houses, equities, bonds. Now the 'speculators' /investors are buying stuff that people are generally short-oil and food. Hence we now have a situation where US consumers are long stuff that is going down -due to an oversupply of houses, stocks and bonds (funny how that is a the laws of supply always rule in the long term). To make things worse, US consumers are short the stuff going up-food and oil. Talk about a margin squeeze.
The only way out of this mess is for the US consumer to cut back on their consumption and to earn more money. That will be tough given global wage arbitrage. Time will be required and it could be a long time.

Drinking their own Kool Aid.

Quick comment how the insider buying in the Financials and the big stock buybacks in Financials over the last few years has blown up large. Not only are those purchases massively underwater, but these very same firms are now issuing stock (in large amounts) to rebuild their capital bases. Most Wall Street execs and producers are paid in stock and options at bonus time. When the price is rising substantially, everybody wins-except the shareholder. Of course when the stock is tanking, nobody wins. The Wall Street brokerages are on life suppport-soon to be joined by 50% of the newly created hedge funds. As history will show-when Sam Zell sold his real estate empire-the top was in for real estate. When Blackstone went public, the top was in for Private equity and Hedge Funds. The Top is in for now-just like the top for brokerages was in shortly after Goldman Sachs went public in mid 1999.

The real Oil Speculators.

Over the last 3 weeks, I have been racking my head over who is buying oil at 125+. Surely the Chinese and Americans do not want it this high-I doubt they have been chasing especially given the demand destruction over the last month or two. How about the Saudis? Not likely. Maybe the Russians? More possible but also unlikely as they are happy cranking out 100$ bills for every barrel. Then maybe this is a forced buyin-ie a massive margin call on some of the 'shadow financial' system. For years there has been plenty of commodity selling in the paper form-whether oil, nat gas, gold, wheat, copper-and delivery was always put off as most contracts settled for cash. But ever since the oil price went to contango, the game has changed. My theory is that there is a massive short in oil among the US Brokerages as they played the same game with oil as they played with sub prime mtgs. Keep piling on the positions until it breaks. Well they have broken. Selliong oil at 60, 70, 80, 100, 110, 120 etc has taken its toll on the capital of these firms. With these firms busy diluting themselves (ala Nortel) by raising capital at decade lows, all capital requiring positions are going to be unwound. If the CFTC wanted to limit the speculation in the mkt-raise margin requirements. Unfortunately that is probably the last thing they want to do since the buyers are cash buyers while the sellers are on margin. Raising margin requirement would involve the brokers and financial intermediaries needing to raise even more capital to cover their margin calls.

SP 500-1340 remains the key

Will the SP 500 hold 1340. Technicals on bonds and stocks are not positive. The retail money is not entering the mkt-why? because they have none. They are busy paying off mortgages, car leases, and credit cards. The last thing they are doing right now is saving for retirement. On top of that, levered money is deleveraging-more pain to come. Mkt not yet at the slam bids everywhere stage, but there is plenty of stock above the mkt.

Here comes a policy shift

G* meeting today and tomorrow. US May CPI .6% , core at .2%. Yoy 4.2 % and 2.3% respectively.
Theory-Interest rates are going up, but money supply is also going to increase and Fed Liquidity is about to kick into high gear.
If interest rates go up, US financial institutions will be under margin pressure. The Yield curve has flattened significantly ( Two 3+ sigma events took place in the last 2 weeks) Hedge funds and levered money is in the cross hairs of the Central Banks. Central Planners are trying to regain control of the elements. The battle rages.
This theory is a twist on the Greenspan doctrine-print money at low interest rates and allow anybody to build anything and that creates intense competition-witness the automakers and airlines.

Energy prices are too high for the avg US citizen-demand has dropped. Question is will they fall or just stop going up.

Unintended Consequences

US interest rates are going UP. Why? Because nobody with money-ie Asia and the Middle East want to invest at 3% with a currency dropping like a stone. Bernanke will raise rates because he has to, not because he wants to. Foreigners are swimming in USD and they do not need anymore, in fact they are spending them on infrastructure projects.
China has raised reserve requirements again. Going up to 15 on June 15 and then 15.5 % on June 15. Hong Kong dropped 4.4 % and the Shanghai dropped 7.7%. China is going to slow in q2 and q3 as the heavy industries are geared down to clean up the air before the Olympics. I suspect late q3 and early q4 will see a significant rebound in activity.

LIBOR: Revised parameters for setting the rate. Not good for financials. Already today the rate moved from 2.68 to 2.77. Higher financing costs for financials equals lower profits-especially if you are levered 16-30X.
Hedge funds could become a dying breed-notice the drops in the CME and NYX. Could trading volumes be plunging?

More tough talk from Bernanke

Once again the US Fed Head is talking tough on interest rates. The 'massaging' of perceptions continues, but as Peter Schiff points out-'what is he going to do-raise interest rates 100 bps-big deal'. In addition, Treasury Sec. Paulson is talking once again about a 'strong dollar' and would not rule out intervention. No doubt they are going to do something about the relentless weakening of the USD. But how far they will go is anybodies guess, but the tough talk is unwinding some of the excess speculation. 2 yr bonds are closing in on 3%-currently 2.87%, while 10 yrs are at 4.05. The flatter yield curve and rising interest rates are not going to help the US Financials repair their balance sheets.
Lehman Brothers raises 6 bln in capital (4 bln common equity, 2 bln preferred at 8.75%) and participation is mainly US based-very little foreign buying. Maybe the foreigners (SWFs) have told the US that their money is no good anymore until they do something to stop the decline.

What does that mean-SLOW Growth if growth at all. The FED is once again following the mkt and not leading. ECB President Trichet called out Bernanke. Inflation is a problem and rates need to go up. Until rates rise above the money supply growth figures-talk is cheap.
Question remains-how vigilante, how long before initial move, how will higher rates affect the financials and real economy.

Time for Sacrifice

Here we are at the crossraods of history. The US needs to make a stand, or its role as the only remaining super power is about to be diminished. Over the last 20 yrs, the US has squandered its lead in technology, commerce, free speech, civil rights, and a host o other issues as the mistakes of history get repeated-AGAIN. The more things change, the more they stay the same as human nature is a difficult animal to corral.
The US is in a war-whether it is a War on Terror, or a War of Christian beliefs vs Islam, or a War of Imperical Power vs Colonial autonomy-it makes no difference. It is a war. In War, sacrifices need to be made. To date, 4000 US service men and women have sacrificed their lives. In addition, the secret, private war of third party combatants has also claimed numerous lives. What are the sacrifices at home. Besides the skyrocketing price of oil and essentials, there is no sacrifice. No taxes have been raised to pay for this war. No programs have been implemented to increase the war effort to add supplies and soldiers to the program. There is a clear lack of direction at the top. It is like a blind fighter swinging wildly at his opponent with no help from his trainers regarding direction. Something needs to be done to change this path of ruin.
Some sort of National Plan needs to be implemented. The War Hawks are running roughshod once again through the halls of the US Gov't. Remember Manifest Destiny. It is back. How many pompous US Congressmen and wamen have been hijacked by the indusrtial military complex. It is becoming ludicrous. In the past the US just printed more of the reserve currency. But that game is up. The Rest of the World (ROW) is up to their eyeballs in US$. They have enough. Now they want to spend them on either their own citizens or to consolidate their power. Strategic Resources are wanted. Food, Water, energy, shelter and Land are in demand. Things are going to get tense and hostile in the next decade. Is the US going to seize the day and return to glory, or will it join the Roman empire as a neat bit of history that my great grand children will read about.

More to come in later letters.

Plenty of action y'day

In what could be a turning point for the mkts in general y'day, stocks, and commodities rallied hard while bonds sold off. Maybe the inflation trade is starting to gain traction. In the early stages of an inflation, everything goes up-including interest rates. However, the trick remains to contain inflation before it gets out of control-difficult to do.

Some notes- the GLD and SLV have been rumoured to have loaned out their holdings. As qtr end approaches, the loans will have to be called back as the accountants step in. Could be interesting. Silver starting to outperform gold-maybe a warning sign of a top, or a sign of the long talked about short squeeze. Gold equities starting to outperform the physical, but it is still a way from normal levels.

Oil tacked on 5+ $ y'day to end close to 128. I still think we will see 110-115 this summer (not alone as several oil bulls have pulled back their horns-namely Frank Holmes and the Aden sisters). Oil is statistically overbought, but even the few brave souls looking to short are quick to cover-mainly because they have been burned since the 105 break.

If the inflation trade is going on-stocks are in and in particular real asset stocks. Still avoid financials-more writedowns dead ahead. MBIA and Ambac got downgraded y'day-the spiral continues.