Worried about the pitchfork crowd? Does that reveal a guilty conscience? Just wondering…

“I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.

Obama’s chief economic advisor apparently went all in on Harward’s endowment fund against all advice…resulting in major losses:

Mohamed El-Erian, would later sound the same warnings to Summers, and to Harvard financial staff and board members.

“Mohamed was having a heart attack,’’ said one former financial executive, who spoke on the condition of anonymity for fear of angering Harvard and Summers. He considered the cash investment a “doubling up’’ of the university’s investment risk.

But the warnings fell on deaf ears, under Summers’s regime and beyond. And when the market crashed in the fall of 2008, Harvard would pay dearly, as $1.8 billion in cash simply vanished. Indeed, it is still paying, in the form of tighter budgets, deferred expansion plans, and big interest payments on bonds issued to cover the losses.

Combined with the “dream team” of Geithner and Bernanke this is not exactly confidence inspiring. But it explains a lot in terms of recent policy.

They doubled down on debt in order to jump start the economy. It’s a gamble by an economic advisor who has a track record of gambling with other peoples’ money and losing…..

Despite all the public protestations of “containment”, I find actions speak louder than words:

The Sunday London Times newspaper was removed by authorities from shelves in the United Arab Emirates on Sunday amid intensive reporting of Dubai’s debt problems, an executive at the paper said.

The National Media Council ordered the paper blocked by distributors without providing a reason, an executive at the paper in Dubai told Zawya Dow Jones.

An instant classic:

A government official in Abu Dhabi, the capital of the U.A.E., said that the picture of Sheik Mohammed, which accompanied a story entitled: The sinking of Dubai’s dream, was “offensive.”

Under the U.A.E.’s media code, publications are prohibited from criticizing the sheikdom’s rulers.

Feel better about your 401K? Don’t. The recent advance in equity prices has been bought. How? A massive reduction in the federal government’s (yours) balance sheet via record low interest rates (0%) and massive issuance of government debt.

The proof? Just look at the correlation between the value of the dollar (decreasing) and the corresponding increase in equity prices:

In other words: The market has risen on a nominal basis, on a real basis: Not so much…

Classic example of misleading and ultimate useless media headline:

“U.S. banks less exposed to Dubai than European rivals”

And then right underneath:

“U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnectedness of the modern financial system make it difficult to know which institutions are ultimately exposed, analysts said this week.”

In other words: In a world of derivative swaps we don’t have a clue who has what exposure. But let’s just say US banks have less exposure, even though we don’t know. But it makes it sound more positive and let’s calm people down, even though they may be completely exposed. Anyone notice how Goldman Sachs stock has traded in the past few days? That’s right. Down. Hard. Someone is concerned about something.

Sub prime mortgages started the ball rolling, as consumers were over-leveraged. Bank balance sheets began to crumble under the weight of declining property values driven by an increase in supply. Lending seized as a result and banks were bailed-out. The consumer? Left holding the bag. But wait! $75 billion were set aside to help stressed consumers.

The catch? Mortgage companies are not helping:

“Last month, an oversight panel created by Congress reported that fewer than 2,000 of the 500,000 loan modifications then in progress had become permanent under Making Home Affordable.”

The reality: Home prices continue to sink and what is pushed as promising news in terms of sales in the past 3 months is a shell game. The $8,000 first time home buyer credit has produced sales in the low end of the market, is temporary, and has only resulted in more people taking on leverage.

The housing time bomb is continuing with record foreclosure and delinquency rates going into 2010. Things are still getting worse, not better.

The markets just enjoyed a nice rally in the past few days, in fact major indices rallied over 8% in just 4 days. But who are we kidding here? The increase came on very low volume during a seasonably favorable time. In fact I would argue the increase was largely aided by a tremendous bounce in oil which was aided by the Israel/Gaza trouble. Volume will be picking up on Monday when traders are coming back and reality will have to be contented with. Realities such as the total collapse in manufacturing output:

In the meantime it is becoming increasingly clear what Obama will write in his notebook during his first staff meeting as president:

All joking aside, the news flow will continue to be difficult. Anyone signaling the all clear and green (as some seem to do on CNBC, are highly irresponsible. I expect the recent advance to be tested in short order.

I was hopeful that David Gregory would be a good choice for heading Meed the Press. I am now sorely disappointed and maybe that’s my own fault. But I was hopeful after seeing him in clips like these. His recent interviews, however, have been very softball. This clip below with Chris Matthews though makes it perfectly clear as to why: He’s an apologist. Apparently he views the media to have a role in asking questions and taking notes. No follow-up, no challenge on the facts, no debate, no pointing out of factual errors or lies. Whose role is that? Apparently you the citizen. Are you kidding me? David, seriously why did you go to journalism school? We, the American people, NEVER have the chance to ask questions or confront our leaders. We can vote ever so often but we depend on you, the media, who have access to hold those in power accountable to the truth.

One of the key reasons that the Bush administration got away with so much bullshit over the past 8 years is precisely because you guys wouldn’t dig, wouldn’t challenge enough. It’s pathetic. Your view seems to be that journalism is intended to give those in power a platform with which to spew their propaganda unchallenged. Classic example is the 2nd clip below: Question 1: Your approval rating is low, why is that: Bush: bla bla bla that doesn’t address the question or the truth. Follow-up question by Gregory: Let me ask you about your style. Please, what seriously is the value of an interview like this? None, whatsoever. Gregory and others like him in the media should resign. We need a demanding media who watches out for the public and challenges the powerful. A good example is the third clip, when an Irish reporter asks Bush some difficult questions.

$50 billion fraud. Nobody knew right? Wrong. Another Bush appointee asleep at the wheel. SEC head Chris Cox ignored it completely. How could he have known? Well:

Madoff_SECdocs_20081217

How dramatic has the decline in oil been? This dramatic:

For years Bush kept reciting, like a parrot really, the phrase “free market principles”. With the phrase “free market principles”, or its related buzz word “deregulation”,  everything was justifiable: Lowering taxes on the wealthy to keep jobs going, avoiding mandatory health insurance coverage to avoid imposing taxes on employers, basically anything that would hurt businesses. Never mind, that some segment in the population would always get the short end of the stick.

Well game over. Another one of the mindless platitudes this president has inundated the American people with over the past 8 years has been exposed as empty rhetoric:

“I’ve abandoned free-market principles to save the free-market system,” Bush told CNN television, saying he had made the decision “to make sure the economy doesn’t collapse.

As with the war, or anything else, it came down to ideology. The phrases balance, or broader perspective never entered the vocabulary.

What a disgrace. In the final month of his presidency Bush had now to abandon the one principle Republicans have liked to cling to since Reagan: Free market principles. What a disaster that it took a scorched United States economy to realize that pure free market principles don’t work. As Ronald Reagen used to say ” Trust but verify”.

As we pointed out Sunday night these are dangerous time to be short the market. The Fed surprised the market today buy cutting rates even further than the expected 50 basis point cut:

The Federal Reserve slashed its target for overnight interest rates to a record low of zero to 0.25 percent

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Fed said.

The cut in the federal funds rate pushes it to its lowest level on records dating to July 1954, and the central bank said it would likely keep it at “exceptionally low levels for some time.”

“There is no more room to cut rates, as the target cannot go negative,” said economist Chris Rupkey of Bank of Tokyo-Mitsubishi.  “Quantitative easing will be the new way for the Fed to stimulate the economy going forward.”

In addition to the rate cut, the Fed said it was prepared to expand already announced large purchases of debt issued by government-sponsored mortgage agencies to support the battered US housing market.

This action set the stage for a massive buying and short covering rally just a week before the Christmas holiday. Given seasonality, I still expect short sellers to stand aside to avoid what might turn out to be a freight train of equity money wanting to salvage portfolios in the next few days. January 6th, however, all bets are off the table…

The intermediate good news for homeowners is that they can expect mortgage rates to come down to the 4.5% range in the next few months. I continue to maintain that is took the Fed way too long to recognize the severity of the problem. Worried about inflation when deflation was  the concern, they eased too slowly, resulting in the fact they now had to take rates to 0. Standing against the wall, classic capitulation.

To understand the current economic woes it helps to get a longer term perspective on how leverage has infiltrated the system. Leverage can also be defined as spending money one doesn’t have, but gets to “play” with through easy access of credit. This works well on the upside, but is disastrous on the way down:

The house as a piggy bank concept is long gone. News hits the wires today that home values have dropped a staggering $2 trillion in 2008. Since housing does not yet have seemed to bottomed we are likely to see this number increase when all is said and done. With high debt levels and lower values in 401Ks and homes, combine with pressures on the job market, it is no wonder that consumers don’t feel like shopping.

The best hope for homeowners right now is that interest rates will continue to drop which will give many an opportunity to refinance at lower rates.

For some that is little comfort, however:

Some 11.7 million Americans are now “underwater,” owing more on their mortgage balances than their homes are worth.

Free Mercedes anyone?

The market did not sell off last week. It tried, but it didn’t. It had every excuse in the world to do so as the news flow was just atrocious. AND on top we were totally overbought, but it didn’t sell. Bears take note, this week may surprise many on both sides of the equation. While the news flow will continue to be poor here are several key considerations arguing for a massive rally:

1. The 50 day SMA on the S&P 500 has dropped to 908, and will be even lower this week. This means the market as an excellent opportunity to rally through it. The last test of the 50 SMA was in September. I fully expect any initial push through to ultimately retreat back to the 50 SMA , however, the first attempt through may go a lot higher than people expect. The short covering will be brutal. The upper Bollinger band is not until 931 and the early November high was a tad over 1,000. After a 3 month consolidation pattern the market just begs to test these areas.

2. The VIX broke its recent trendline to the downside on Friday. This means volatility is coming out of the market, this will embolden funds to return money to the market

3. It is, for all intents and purposes, the last full week before Christmas. Seasonality plays a role, although the biggest upside typically are the last few days between the holidays. With thin trading stocks are easily moved upward.

4. Option expiration on Friday, Fed cut this week, OPEC cutting production, banks reporting and further bad news removed from the system.

5. Funds are underinvested with a serious sense of performance anxiety.

Seriously, this is a dangerous time to be short. There is a reason why Bill Fleckenstein has shut down his exclusively bearish short fund.

If anything, it might be much wiser to short once the S&P 500  does test the 1,000 range. The time to trade more safely long would be once the 50 day SMA has been successfully retested on the way down.

So increasingly, the battlelines are becoming clear. Traders, take note.

I would expect one solid down day this week, but a strong bias to the upside.

Some people are downright giddy about bad economic times. Their business model thrives on it:

Bad times are good for evangelical churches.

“It’s a wonderful time, a great evangelistic opportunity for us,” said the Reverend A.R. Bernard, founder and senior pastor of the Christian Cultural Center in Brooklyn, New York’s largest evangelical congregation, where regulars are arriving earlier to get a seat. “When people are shaken to the core, it can open doors.”

Nice. Keep in mind that this is the same crowd that also can’t wait for the world to end…

But why the evangelical churches seem to thrive especially in hard times is a Rorschach test of perspective.

For some evangelicals, the answer is obvious. “We have the greatest product on earth,” said the Reverend Steve Tomlinson, senior pastor of the Shelter Rock Church.

Indeed, they do…it can’t be seen, can’t be inspected, is not subject to scrutiny, is tax exempt, has a no return policy and can be sold in perpetuity. Brilliant!

Man, just scanning the headlines these days it’s hard not to get the sense that everything is rigged, corruption is rampant and the world is filled with hustlers. A quick scan:

Siemens to settle corruption charges

Hospital CEO pleads guilty in fraud

The Madoff scandal

The Blagojevich scandal

And now even chess players are doping!

But hey, at least we always have Michael Jackson!

Another non-confidence inspiring development: The Fed refuses to identify the recipients and the terms of conditions under which $2 trillion dollars in emergency loans were handed out. Government for the people and by the people…not so much:

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

This doesn’t sound good does it? Since when does the national financial system get the same treatment as CIA black ops sites in foreign countries?

As we predicted the fall-out from the Madoff news would not be pretty. Turns out Madoff was turned in by his own sons.

Earlier this month, the criminal complaint says, Mr. Madoff told one of his sons that “clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations.” On Tuesday, the complaint alleges, Mr. Madoff added that he wanted to pay bonuses to employees this month, which was earlier than usual.

The next day, the sons met with Mr. Madoff at his office to ask about the bonus situation because he had appeared to be under “great stress” in prior weeks, they told the FBI. Mr. Madoff refused to answer their questions and arranged to meet them at his Manhattan apartment, the complaint says.

Mr. Madoff “wasn’t sure he would be able to hold it together” if they continued to discuss the issue at the office, the complaint quotes one of the sons as saying. At the apartment, Mr. Madoff confessed that his business was a fraud and that he was “finished.” He said he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” He told them the firm was insolvent, according to the complaint.

Mr. Madoff told them he planned to surrender to authorities, but first, he wanted to pay certain employees portions of the $200 million to $300 million dollars that was left.

According to a person familiar with the firm, the sons brought the matter to the attention of their attorney, who notified federal officials Wednesday night.

I have a sense that self preservation was part of the motivation. The $7 billion in redemptions, forced by a terrible equity market, is what unraveled the scheme. In a world filled with leverage, the great debt unwind is showing us what is real and what is not. Unfortunately, a lot of it is not, and has not been real. How much of our economy was built on a mirage of leverage we have yet to come to understand.

If we are lucky, the worst is behind us, but the truth will only become apparent after the fact. And if the last 6 months have taught us anything at all, it is that nobody really knows the full extent. Not the bankers, not the politicians, not the analysts (save maybe Meredith Whitney and Peter Schiff, and a very few handful of others who had a sense) And those who do hold bad apples, will not show their cards until they are forced to (see Madoff, Lehman, Bear Stearns, etc).

Sentiment: Cautious and concerned. What else don’t we know?

Following to last night’s article, we wanted to see whether the trend continues and large block trading would occur in Yahoo right at the close. We were not disappointed. The chart below tells the picture. Look at the volume all day and the relative money flow. The big spike came right at the end. Will something happen this weekend? Can’t tell, but someone is buying, and they are spending a lot of money:

As I described on Monday the automaker compromise would likely fail in the Senate. Tonight comes the news:

Senate negotiations for a U.S. automaker bailout plan collapsed, in a blow to General Motors Corp. and Chrysler LLC, which may run out of cash early next year.

“It’s over with,” Majority Leader Harry Reid said on the Senate floor in Washington. “I dread looking at Wall Street tomorrow. It’s not going to be a pleasant sight.”

Tomorrow will a big test for the market. I expect GM to file for bankruptcy before Christmas unless there is a compromise emerging. It does not look like it. The supposed big problem:

Sen. Christopher Dodd, a Connecticut Democrat, said the main issue of disagreement was the date to require the Detroit autoworkers’ pay parity with foreign auto manufacturers.

Both parties were willing to risk a market meltdown because of this? Well, expect the automakers stocks to collapse tomorrow. The Dow will be hard hit.

More evidence of a banana republic , a total shocker with broad implications. One of the cornerstones of Wall Street, a man ,who for decades worked the nuts and bolts of the system, has just been charged with fraud. $50 billion worth:

Bernard Madoff, president of market- maker Bernard Madoff Investment Securities and a former chairman of the Nasdaq Stock Market, was charged by U.S. prosecutors in a $50 billion securities fraud at his investment advisory business.

Madoff, 70, was arrested today at 8:30 a.m. by the FBI and appeared this afternoon before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged with a single count of securities fraud, he is to be released tonight on $10 million bond guaranteed by his wife and two others, Eaton said. Madoff’s wife was present in the courtroom.

“He’s one of the pioneers of modern Wall Street,” said James Angel, an associate business professor at Georgetown University in Washington. Madoff’s firm was among the first to automate market-making, in which a dealer continually buys and sells stock. The company was among the largest to offer “payment for order flow,” or paying to handle customer orders. “The exchanges didn’t like the practice and questioned whether customers got the best price,” Angel said.

Madoff’s New York-based firm serves hedge funds, banks and wealthy individuals. It was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

Confidence continues to be eroded. The details will likely not be pretty.

Update: The repercussions will be dramatic. Many hedge funds were invested here and will show total losses on these positions. This will result in further forced liquidations on other positions. Furthermore, this may result in further redemptions as people’s confidence will be further eroded. This was one of the largest hedge funds. If it happened here, could it happen elsewhere.

Just ugly.

New revelations here

The Germans are out. As I wrote before, Merkel has been the odd European leader out. I had speculated that her beahvior reflected the divisions within her ruling coalition. Now the happy pretending is over. Germany is done with rescue efforts:

Germany’s finance minister accused other European Union states of “tossing around billions” before a summit on Thursday, deepening a rift over Berlin’s resistance to demands to spend more to revive the EU’s economy.

Leaders of the 27-nation bloc want to agree at a two-day summit on a €200-billion, or $260-billion, stimulus package to wrench the bloc out of recession, but Germany - the largest economy in Europe - says it will not contribute more.

Like Republicans in the US, Germany is now becoming the voice of “no more”. I understand the concerns. The reality is most of these people do not understand the details behind the complex rescue packages and are becoming squeamish about them. However, I’m not sure that they understand the consequence of inaction either. Let’s hope all of us don’t have to find out….

No doubt this stock is in play. The public rumor mill is in high gear with plenty of action to be had. The CEO is stepping down, a new CEO is being recruited. There is a lot of talk about Arun Sarin, the former head of Vodafone, as a potential new CEO. Why is he being talked about about almost exclusively? Did he hire a PR firm?

1, 500 employees lost their jobs yesterday and the company retracted its severance policy poison pill, originally adopted to make a potential take-over by Microsoft too expensive.

Various board members and funds have been vocal in recent days that they want a search deal be done with Microsoft. One wonders then the sudden silence from Microsoft. Steve Ballmer has been quick and vocal as of late shooting down any hopes of Yahoo shareholders, but he is not being heard from.

So rumors and speculation aside what can we actually factually observe? Well, we can see that for the past four days someone has been buying millions of shares at the very end of each trading day. If you look at the chart below you see the buys as very large spikes in the volume section. We know they are buys because how they reflect in the money flow section.

Bottomline, someone is buying, big, and consistently, at least for the past 4 days in a row. Chances are discussions are going on as we speak and news could be coming before the end of the year or sooner.

Why the urgency? Google is killing both Yahoo and Microsoft (and AOL for that matter). For November, Google has almost 72% market share in search with Yahoo and Microsoft coming in at 17.7% and 5.45% respectively.

If Microsoft wants any scale, ever, in search they need to act now. Yes, they may save a couple of billion dollars if they wait, but what do they want to wait for? Google to have 80% market share? That sounds penny wise and pound foolish to me.

A deal will happen.

Equity markets have had a good run over the past few days. The bullish case I outlined last week has clearly come to pass and it could feasibly continue for the remainder of the year. But one has to be weary for several reasons.

1. The news cycle continues to be plain awful, layoffs, earnings warnings, economic growth, all terrible.

2. We are short term overbought, and a pullback here would be healthy.

3. As bad as the sell-off has been in 2008, do we really understand the bigger picture? Let’s look at a longer time horizon:

Based on this long term chart, one could clearly make the case that a long term bull market has been destroyed and that we are only at the beginning of a longer bear market cycle (10-20 years). Looking at the regression to the mean it appears we might be destined to break below the line, substantially. S&P 300-500? I would like not to believe it. While I see substantial rallies in the future, I also see that this scenario is a distinct possibility. It might take a year, or 2 years, but it could happen.

For this scenario not to take place we need to see definitive evidence of a bottom in housing, a thawing of credit and expansion in business activity. No such evidence exists as of yet. In fact I’m pretty sure interest rates will go to 0 globally. Treasuries already hit 0% in the past few days.

Strange times.

Why am I getting the feeling that the recent market rally has been bought?

The federal government registered a record budget deficit for the month of November, reflecting the impact of a recession on tax receipts and the mounting costs of the $700 billion financial rescue program.The Treasury Department says the gap between the government’s revenue collections and what it paid out last month totaled $164.4 billion, the largest deficit ever recorded for the month of November.

In just the first two months of this budget year, the deficit now totals more than $401 billion, putting the country on track to hit a record $1 trillion deficit for the entire year, more than double the previous all-time high.

The Daily Show sums it up pretty well:

Cute commercial from Budweiser on the many uses of the word “dude”:

No silver lining in this report at all:

The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries forecast to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy prognostications for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.

Even more troubling, several economists said, there is no obvious locomotive to propel a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side-effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

“The financial crisis is likely to result in the most serious recession since the Great Depression,” said Justin Lin, the chief economist of the World Bank, summarizing the projections.

Looks like we are heading toward a bailout of the auto industry with the US government receiving warrants for stock. So what will the US government own next?

Congress and the White House inched toward agreement on legislation that would throw a financial lifeline to the Big Three auto makers, giving the government a substantial ownership stake in the industry and a central role in its restructuring.

Under the terms of the draft legislation, which continued to evolve Monday evening, the government would receive warrants for stock equivalent to at least 20% of the loans any company receives. The company also would have to agree to limits on executive compensation and dividend payments, much like those contained in the government’s $700 billion rescue of the financial industry.

The $15 billion in bridge loans will only last till March of 2009. I suppose they will not make better cars by then. So unless something more dramatically changes there will be more money thrown in that direction. I understand why they are doing it (see chart to the right), but I don’t get a sense that anyone has a clearer long term answer here other than “let’s not let these guys blow up now”. This deal is far from done, so we shall see, but the clock is running:

Any deal would have to be ratified by Congress. Support there remains tepid and opposition remains high, especially among Republicans in the Senate, who can block the bill through a filibuster.

A handful of Republican senators have said they are willing to help the industry, but it isn’t clear how many will swing behind legislation this week. Senate Minority Leader Mitch McConnell (R., Ky.) said the rescue must be financed out of existing funds and include strong taxpayer protections. Mr. McConnell stopped short of endorsing the bill Monday, but did note the auto industry is “an important source of jobs throughout America, including my own state of Kentucky.”

Democratic leaders have hopes of pushing a bill through Congress this week, with the Senate likely moving first. “Congress is trying to save Detroit,” said Senate Majority Leader Harry Reid (D., Nev.). “If senators are willing to work together…we can pass legislation.”

Don’t hold your breath.