Thursday, October 14, 2010

Mortgage Mess

Lots of news while I was away regarding the mortgage fiasco that appears to be now getting the attention of even the dimmest from the mainstream media. Of course, it will all all be okay they assure us, Cramer of CNBC has even suggested it is bullish. How quaint, isn't everything bullish? 

I find it unfathomable that as of yet no one is behind bars for any of this. The heist of a lifetime and no one is in leg irons, no one is held to account. Nope everyone is sitting around most probably all prozac'd up waiting anxiously on the new fall television season lineup, but I digress. 

I caught James Howard Kunstlers comments from his most recent commentary and they were very succinct and to the point. In his most recent post entitled Bank Shot, he minced no words having this to say regarding the situation:

"Is it indelicate to say that the USA as an enterprise has its head so deeply and firmly up its ass that the all the proctologists alive on planet Earth could not extract the collective cranium from the collective cloacal chamber even with the aid of a Bucyrus-Erie 1060-WX bucket-wheel excavator? Like, where were we the past ten years? Surely not everybody in the nation was doing bong hits while playing Grand Theft Auto, or watching The Real Housewives of New Jersey, or downing tequila shots and Percocets in the parking lot of the Talladega Superspeedway, or cooking meth in the family room, or whacking it to Internet porn, or searching for "excitement" in one of America's 450 commercial gambling casinos."

Kunstler goes on to say;

"Did nobody, for instance at Fannie Mae or Freddie Mac, review any of the paperwork fluttering in from places like Countrywide or Ditech and scores of other boiler rooms where mortgages were hatched like Peking ducklings?  There was an awful lot of it, I'm sure, but aren't there a lot of seat-warmers at Fannie and Freddie who collect their salaries for the express purpose of reading mortgage documents? Was nobody the least bit suspicious about the mysterious flurry of "restaurant employees" and "lawn-care technicians" buying million-dollar condominiums with no money down at terms that would make a three-card monte dealer weep with laughter? After all, they had to sort and bundle all these contracts for the likes of Goldman Sachs and JP Morgan and Citibank - the list isn't that long, but you get the picture...."

This collective refusal to acknowledge the obvious got to me to thinking about a certain quote. I believe that it was Charles Mackay famous author of the must read and timeless classic Extraordinary Popular Delusions and the Madness of Crowds who said:

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

If Charles were around today I think he might want to reconsider this quote in particular the order. That being that today it seems the crowd go mad slowly one by one, while they recover their senses quickly, all at once. 

I offer this simply because between the high frequency algos, the quants, the hedgies, the herd trades in unison chasing performance.  

Equinix (EQIX), Apollo (APOL), are just a couple examples of this phenomena of recent note.

There is going to be a point - just like there was in the uranium bubble in the 60's, the gold bubble of the 70's, the tech/internet bubble of the 90's, the housing bubble of late - where market participants awaken to the facts of the matter, currently that the cancer our system faces is not only still there it is getting worse the longer we pretend it is not. My guess is it ends when it ends and it won't end with the herd realizing it one by one but rather all at once in a stampede. It made me recall the Glass Theatre Analogy piece from a reader of Rick Ackerman's great blog Rick's Picks. In case you missed it here it is again:

“The biggest problem, getting back to Galbraith, is that in the process of facilitating sellers, all the new technology does not produce any buyers. I know most will disagree with that, but keep in mind that demand is a state of mind. It runs away at the first sign of trouble. Put another way, the same emotions that motivate sellers cause potential buyers to hold off. Sell is preordained, but buying requires a complex greed analysis. Which leads me to my “glass theater analogy.” We are all familiar with the most common analogy for panic: when someone yells “Fire!” in a crowded theater. The problem, of course, is that there are 50 rows of seats, but just two aisles leading back to two doors on the back wall. Grown men and women may trample small children to escape getting fried.

There are a couple of problems extending that analogy to the stock market, so I made some changes in my “glass theater analogy”. The biggest problem in the market is that, even if you choose the aisle seat, last row, you can’t escape unless you can find someone to take your seat. As Galbraith pointed out so many years ago, you can’t be a seller unless someone else will buy. (What a dirty little secret!). Another big problem, considering the speed of the technology today, is the basic transparency. It’s as though the back wall of the theater were made of glass, and all the potential patrons can see what’s happening inside. It’s right there on their screen! Who is going to take your seat when they can see the carnage going on in there? Which leads me back to last week’s mysterious plunge. First of all, remember that reading Alan Abelson the Saturday before the 1987 Crash, he indicated we had already had it with the 230-point drop the week before. The newspapers last weekend sounded a bit like a post mortem too. “The SEC is trying to get to the bottom of it.” I can save them the trouble. What do you expect when your weapon has a seven cartridge magazine in the butt compared to a single load, wad and ball. You get 1000 points in 15 minutes. Wait until the human nature kicks in again someday, in a big way. It might become 5000 points. You could retrace this bear market rally in a hurry."

Caveat emptor. 

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $19.34
Long 2 units Direxion Small Cap 3X Bear ticker TZA @ $60.30
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $60.50
Long 2 units Direxion Financial 3X Bear ticker FAZ @ $19.65
Long 2 units Ultrashort Xinhua China ticker FXP @ $42.45
Long 1 unit Ultrashort Real Estate ticker SRS @ $49.10
Long 2 units Direxion Tech 3X Bear ticker TYP @ $52.60
Long 1 unit ishares Barclays 20yr Treas ticker TLT @ 92.15 stop @ $92.15
Long 1 unit ishares Barclays 20yr Treas ticker TLT @ 93.48 stop @ $93.48
Short 1 unit Amazon ticker AMZN @ $160.00 stop @ $162.11
Short 1 unit Baidu ticker BIDU @ $103.45 stop @ $105.11
Short 1 unit American Express ticker AXP @ $39.45 stop @ $40.51

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