Buy it on Amazon

Over the last few years, I’ve developed quite an enjoyment of reading.  After taking a great course (Managerial Leadership) at Kellogg taught by Edward Hughes, my back log of books has grown substantially.  As a part of this course, he did a great little thing called the “Book-O-Rama” where all of the students read a book and we basically shared them at the end of the course.

One of the boks read by my peers in this course was Last Man Standing, a biography of Jamie Dimon.  It piqued my interest, so I picked it up recently.  This was a great book, a quick read and really quite interesting.  This was also my first attempt at reading anything using the Kindle for iPad app -it is awesome.

The book chronicles the life and career of Jamie from his time at Harvard to his tumultuous relationship with Sandy Weil and his accent to the top of JP Morgan Chase.  This is a very favorable account of Jamie, so those looking for a deep critical view of his career may find this reads a bit like a puff piece on his career.

For me, the book got really interesting as it dove into the depths of the financial crisis and the events that led to the purchase of Bear Sterns and Washington Mutual.  While there are many other books that do a great job diving into the nuts and bolts of what happened, Last Man Standing focuses on a lot of the political issues and some of the core reasons that JP Morgan was such a key player in the Bear and WaMu dispositions.  I also enjoyed some of the accounts of Jamie and Sandy burning the candle on both ends as they worked though transforming Commercial Credit into Citigroup.

On the balance, this is a great read, and I’d highly recommend it to anyone who is looking for a great financial story or is simply interested in banking, Jamie or the political and power struggles in the financial crisis.

I decided to hedge off both the IWM and SPY condors today to ensure profitability should we get a substantial drop over the weekend.  Upside risk is negligible at this time, and quite frankly the hedge on IWM wasn’t really needed yet…- I’m simply playing it safe.

The trades are as follows:

• BOT 25 SPY 100 MAY 10 108 PUT @ 1.90
• BOT 50 IWM 100 MAY 10 59 PUT @ .59

The SPY hedge is a little late as my existing short strike on the SPY trade is 112, I should have hedged this off on Monday and Tuesday when I was working the rest of my real money accounts.  That was my mistake.  No worries though, these hedges will protect from downside risk, and worst case the SPY trade turns out to be a slight loser.  Also, the strike I used may have been a touch to close, a further OTM option would have provided possibly more protection due to a larger volume of contracts for the same outlay.

The IWM hedge is really to protect from a MAJOR market collapse in the next few days.  The short strikes are at 63 for this condor, so there isn’t a ton of risk here with the IWM currently at about 65.5 – however there is enough risk that I don’t want to be unprotected!  Time decay is going to start to pick up rapidly in the next week or so, so these hedges will be very short term.

My personal opinion is that we are going to see continued weakness in the market. There will likely be a rally in the next few trading days to consolidate the losses, however I would not be at all surprised to see the Dow, S&P and Nasdaq all down again next week and throughout the month. Greece is a power-keg that is ready to explode and the Euro zone is going to be in big trouble when/if that happens.  The old adage of sell in May and go away is really holding true!

From the WSJ:

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

After the carnage of Lehman and Bear is anyone surprised that major banks are doing everything in their power to manage their perceived risk?  This isn’t nearly as bad was what Lehman was doing, but 42% is a major shift, in fact that would be a material shift of risk in my mind.

Call me crazy, but wouldn’t it be prudent to actually manage the risk rather than attempt to hide it?

Yesterday we had the pleasure of enjoying a 200 point rally in the Dow driven by a headline GDP report of +3.5% in the third quarter.  The headline number looks great; however, when you pull back the covers it isn’t that pretty.  Today’s report of a .5% reduction in consumer spending for Sept further enforces that fact that GDP last quarter was a total joke, and very unsustainable.

Let’s take a quick run through the GDP numbers and de-stimulus them, much like Mr. Denninger did here.

First, lets get the facts:

• Headline GDP was +3.5%
• Motor vehicles added 1.66% (Cash for Clunkers)
• Government spending was up 7.9% (Stimulus package)
• Personal income decreased by .5% ($15.5 billion)
• Personal taxes increased by $4.8 billion
• Personal disposable income decreased by $20.4 billion

I like how Karl Denninger setup the math, so I’m going to do it the same way:

GDP – Cash for Clunkers – (Government Increases * Government % of GDP) = Adjusted GDP

3.5% – 1.66% – (7.9% * 30%) = -.053%

That looks a little more realistic.  Jobs are still falling off a cliff, incomes are falling, prices are starting to slip, taxes are up so one would expect that GDP would be very soft.  By removing the impact of a one time stimulus that simply pulled demand forward, we get a much better picture of things to come.  The recession appears to be far from over.

In his analysis, Karl also ran the real impact of personal disposable incomes and calculated it to be a Quarter over Quarter decrease of 7.2%.  That is HUGE.  Couple this with the fact that personal spending was up, we are again just kicking the can down the road.

The WSJ backs up this analysis as well:

The 0.5% drop in spending was the largest since December 2008, when the recession was at its worst. Most of the drop was in durable goods, which include autos. Outlays on nondurable goods and services posted a gain from last month. Spending rose 1.4% in August, revised up from a previously estimated 1.3% increase. That gain was driven by “cash for clunkers,” which let motorists swap gas guzzlers for newer models. The car-rebate program started in July and ended in late August.

The subsidy helped push the economy to what the government reported this week was a 3.5% increase during the third quarter, seen as an end to the recession. But the recovery is expected to be slow, and questions abound to its sustainability once government stimuli fade. Another popular incentive, the first-time homebuyer tax credit, lapses in November, although the housing industry is trying to push an extension through Congress.

[snip]

With nearly 10% of the U.S. labor force out of work, incomes aren’t going up much. September’s flat reading followed a 0.1% August gain, revised from an originally reported 0.2% increase.

Personal saving as a percentage of disposable personal income was 3.3%, compared to 2.8% in August.

This one time temporary boost might have been enough for the NBER to declare the recession over – for now.  Just don’t get your hopes up that we have truly turned the corner.  When you get to pick and choose the numbers to report, while ignoring the long term effects of your policies, it isn’t hard to generate one time pops.  Just remember as Dave Rosenberg points out in this mornings Breakfast with Dave:

While it seems very flashy, 3.5% growth is far from a trend-setter. Let’s go back to Japan. Since 1990, it has enjoyed no fewer than 19 of these 3.5%-or-better GDP growth quarters. That is almost 25% of the time, by the way. And we know with hindsight that this was noise around the fundamental downtrend because the Japanese economy has experienced four recessions and the equity market is down more than 70% from the peak. What is important for the future is whether the U.S. economy can manage to sustain that 3.5% growth performance in the absence of ongoing massive government stimulus. In other words, it may be a little early to uncork the champagne.

Well said Dave… Well said.

I cannot begin to explain how angry this makes me, I’m not kidding when I say that I can feel the anger building up after reading this.  The FDIC, on a Friday afternoon with no vote, no say, no representation, from the people is socializing mortgages and making you and me pay for it.  I still live in America right?  It’s really beginning to feel like another country around here.

From the FDIC via Zerohedge:

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed. This program will provide additional foreclosure prevention alternatives to these borrowers through forbearance agreements that will give them an opportunity to regain full employment and avoid an unnecessary foreclosure.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job, and the acquiring institution, which continues to receive payments on the loan. Ultimately, by reducing losses under our loss-share agreements, this approach helps reduce losses to the FDIC as well.”

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses. The reductions in mortgage payments during a temporary forbearance period are not covered losses under the loss-share agreement with the FDIC, though losses incurred from subsequent permanent loan modifications are covered. If the home preservation efforts are ultimately unsuccessful, losses incurred in subsequent foreclosures or short sales also are covered losses.

Acquirers of failed insured institutions who agree to a loss-share arrangement with the FDIC must abide by the FDIC Mortgage Loan Modification program for assets purchased from the failed institution. The program’s objective is to modify the terms of certain residential mortgage loans to improve affordability, increase the probability of performance, allow borrowers to remain in their homes and increase the value of the loans to the FDIC and assignees. The program provides for the modification of “qualifying loans” – those that meet certain criteria – by reducing the borrower’s monthly housing debt to income ratio (DTI ratio) to no more than 31 percent at the time of the modification and eliminating adjustable interest rate and negative amortization features.

Zerohedge says it best:

o there you have it – yet another wealth redistribution program courtesy of a late Friday release by the administration. Money flowing from taxpayers, stupid enough to be responsible with their money (and, heaven forbid, to have dollar denominated savings that Chairman Ben wants to see dead not alive) end up funneling their money to the FDIC on three occasions: i) first to eat the bulk of the cost associated with any bank failure, while the good assets are covertly shifted over to “loss-share partners”, ii) to have these same loss-share partners not charge full mortgages of those individuals who, following the American dream, and the American max the credit card plan, are unable to afford living in a house, yet who find themselves in that 16.8% of unemployed or underemployed category, and iii) to foot the final bill when inevitably, after 6 months, these same individuals redefault once again.

[snip]

In a nutshell – socialism – FDIC style.

Exactly, socialism FDIC style.  Unbelievable.

I’ve just added a whole slew of option positions into the order queue for my papermoney portfolio.  These are almost all October/November expiration positions that include long put butterflies, short call verticals, long put verticals etc…  I’ll post all of the details depending on the fills that I get.  Basically, I’m winding it up and going for it on the short side.  If I’m really, really wrong on this, it will hurt a lot and it’ll be a huge grind to work the capital back up.  My personal portfolio has a very similar bent with lots of puts, lots of spreads and getting more and more bearish as the days go by.  I’ve been making my money trading /ZC futures, and rolling the profits straight away into bearish SPY(134.54 +1.86) positions.

Anyhow, that is the plan.  The fundamentals of the economy right now appear very, very weak in my eye.  The green shoots are beginning to flake off the green Krylon revealing their underlying brown natural color.  Anyhow, that is just one persons opinion.  It doesn’t look good, and I’m planning to profit from it.

I’ve recently been turned onto the Business Insider.  So far, I’ve been fairly impressed with the content, this is a great article from their site:

Paul Krugman is trying to have it both ways when it comes to the deficit. On the one hand, he says it isn’t a big problem, and that we can afford a lot more spending. On the other hand, he says if there is a problem it’s all Bush’s fault — which may be true, but that doesn’t change the current reality.

Either way, some are finding his reasoning to be lacking. James Hamilton at Econbrowser points to Political Math, which debunks the claim that the $9 trillion debt is okay because it’s on par with where we were post WWII.

…implicit in his observation is the concept that since we did fine after WWII, we’ll do fine now. But the years after WWII saw drastic reductions in the inflation-adjusted debt driven by drastic reductions in spending. Mr. Krugman points to no similar possibility in the post-Obama world…. Back in 1945, at the height of the spending that saw our national debt rise so dramatically, entitlement spending and interest on the national debt made up a meager 5% of our total budget.

Just look at the composition of our spending, then vs. now:

Without painful adjustments to entitlements (mandatory) there’s just no way spending will shrink the way it did after 1945. What’s more, it seems far fetched to believe that America will enjoy the same kind of growth it did after WWII, when we stood alone in the world as an economic giant, and rode the wave of booming families, highways, cars and the suburbs.

This is one of the most concise pictures of why we are absolutely screwed if we don’t get off of the government feeding tube.  The gigantic Mandatory piece of the pie has to be cut down rapidly.

We must find a way to reform Social Security, Medicare and Medicaid.  We must cut excessive programs and practice fiscal discipline.  No longer can this country spend as though it is going out of style, it will be the undoing of what made America great.  Sadly, we don’t seem to have the political will or leadership to do this.

From the WSJ:

GM sales were off 20% in August, Chrysler was off 15%.  Of course that non-government owned company you may have hear of Ford, well its sales were up 17%.

I don’t wish any ill will on the employees of GM or Chrysler, but you have to wonder how on earth these companies are going to survive when they can’t even sell cars during a 3 billion dollar government giveaway.

Here is the basic data:

Ford Motor Co. said its August light-vehicles sales in the U.S. rose 17% from August of 2008 as the car maker benefited from the government’s “cash for clunkers” rebate program.

Hyundai Motor Co. said its U.S. results set a record in the month, with sales up 47% from a year earlier to 60,467. The Korean maker has been on a tear in the American market and was a big beneficiary of the clunker rebates.

Chrysler Group LLC, meantime, reported a 15% drop in its year-over-year August U.S. sales as the lack of inventory hindered potential purchases.

And Nissan Motor Co. reported its North American sales fell 2.9% in August from a year ago to 105,312 vehicles, though it said it also saw a boost from clunkers customers.

Later in the day from WSJ Breaking News:

GM reports U.S. light-vehicle sales fell 20% in August. Nissan sales dropped 2.9% while Hyundai sales surged 47%.

Via Calculated Risk:

From the FDIC: Pacific Western Bank, San Diego, California, Assumes All of the Deposits of Affinity Bank, Ventura, California

Affinity Bank, Ventura, California, was closed today by the California Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. …

As of July 10, 2009, Affinity Bank had total assets of $1 billion and total deposits of approximately $922 million. …

The FDIC and Pacific Western Bank entered into a loss-share transaction on approximately $934 million of Affinity Bank’s assets. …

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $254 million. … Affinity Bank is the 84th FDIC-insured institution to fail in the nation this year, and the ninth in California. The last FDIC-insured institution closed in the state was Vineyard Bank, National Association, Rancho Cucamonga, on July 17, 2009.A quarter of billion here, a quarter of a billion there …

The FDIC is already running out of cash, they have raised rates time and time again, and are quickly going to have to go back to the well for another special assessment.  The most frightening thing about this to me is simply that we are nowhere close to the volume of failures that happened during the S&L crisis.  We are almost out of funding to insure deposits and these costs keep mounting.

How is it that the FDIC can say that a bank is well capitalized one day, and shut it down the next – with hundreds of millions in losses? I find it very hard to believe that the bank suddenly lost 254 million overnight.  I mean really, lets be realistic – did the market collapse again while I was sleeping?

This was on my mailbox today:

You cannot legislate the poor into freedom by legislating the wealthy out of freedom.  What one person receives without working for, another person must work for without receiving.  The government cannot give to anybody anything that the government does not first take from somebody else.

When half the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation.  You cannot multiply wealth by dividing it.

… Join the upcoming Boston Tea in Chicago’s Loop at noon sharp, April 15th! ( TeaPartyDay.com)

I guess I’ll be heading downtown on the 15th. I’m not really the protesting type, but this is getting totally out of hand.