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Why Financials Really Are in Trouble


The Crisis of 2010

Wednesday, November 18th, 2009 - By Ian Cooper

An end to our woes is as premature as Jim Cramer calling an end to the depression fears. Unemployment will continue to climb. Consumer spending will suffer. And housing is only expected to worsen, as more resets rear their ugly heads.

Just ask Meredith Whitney. . .

She believes that financials still sizable headwinds, as the banking sector is "not adequately capitalized today." She's even calling for a double dip recession.

Cramer, of course, thinks she's dead wrong... writing at least three articles pointing out her errors. But if he spent more time doing research and less time criticizing, he'd realize she was right... (We wouldn't want to remind Cramer of his "brilliant" Bear Stearns call, would we? Too soon?)

Financials really are in trouble, especially this January 1, 2010.

That's when FAS 167, or the Federal Accounting Standards 167, effective January 1, 2010, will take effect. It'll basically force financials to bring bad, off-balance sheet asset back to the books... which could trigger substantial Street disasters, comparable to that of Lehman.

"In June 2009, the Financial Accounting Standards Board issued an amendment to the accounting standards for transfers of financial assets (SFAS 166) and an amendment to the accounting standards on consolidation of variable interest entities (SFAS 167). Both amendments are effective and will be applied prospectively by the company on January 1, 2010 ... Under these accounting standards, the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of September 30, 2009... While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth."

Worse, check out what Wells Fargo had to say recently on FAS:

This comes from Wells Fargo's Q3 report:

"I want to update you on our most recent analysis of the impact of the application of FAS 166 and 167, which is expected to result in the consolidation of certain off-balance sheet assets currently not included in our financial statements. We provided a preliminary analysis in our second-quarter 10-Q. Based on our continued refinement of this analysis, we now expect approximately $55 billion in incremental GAAP assets to be brought on balance sheet, representing approximately $28 billion in incremental risk-weighted assets."

And they're probably not the only ones with this hanging over their heads. 

Long story short, financials and our consumer cash-strapped society, are in trouble... big trouble.

We'll look to short some of the big names in Options Trading Pit as we near January 2010.


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A Trading System That Works...


A Taste of our Options System at Work

Tuesday, November 17th, 2009 - By Ian Cooper

The market is beyond rigged these days... Nothing makes sense. Up is down. Black is white...

It's terrifying... that is, unless you have a good system in place, which brings us to today's trading idea.

Starting today, and running about three to four times a month, we want to share some of the technical secrets that we've spoken about and use in Options Trading Pit.

Sometimes, it's just so easy to make money in this market... especially if you have a system that works. And if you want more "live" similar trades, we always welcome new readers to Options Trading Pit.

For starters, here are the technical set ups that we use.

Now let's apply it.

Take a look at Wynn Resorts (WYNN) with Bollinger Bands, W%R, and candlestick overlay on a six month chart.

 

wynnchart20091117

 

Notice that every time, WYNN hit the upper or lower Bollinger Band coupled with an oversold or overbought W%R read, the stock bounced.

So it was no surprise when the stock bounced from about $51 to about $70 after the stock bounced off the lower Bollinger Band, coupled with an extremely oversold W%R read and a doji reversal candlestick. It was also no shock when the stock began to sell off today. The stock ran to the upper Bollinger Band with an overbought W%R read and plunged.

And we literally have a list of 100 or more of these that we go through every day.

Here are more examples. These are plays that haven't sold off just yet... but are expected to based on the technicals that we use. Each has a gravestone doji parked at the upper Bollinger Band with an overbought read on Williams % Range.

If you buy any, don't risk the house. This is not a market that makes much sense these days.  This is just a sampling of what we look at daily for Options Trading Pit, which is accepting new readers.


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Profit Update: Hyatt IPO


We nailed it... absolutely nailed it.

Monday, November 9th, 2009 - By Ian Cooper

Despite the naysayers that advised against buying Hyatt (H) on the IPO, we bucked the trend and gave you three ways to profit on August 11.

And each paid off well... very well.

As we said:

First, you can buy Hyatt out of the gate. It should trade under "H" by fall.

And second, you can buy its competitors like Marriott (MAR), Intercontinental Hotels Group (IHG), and Starwood (HOT) . . . not for the long term, though. You simply want to buy these names as we get closer to a possible Hyatt IPO.

And third, you can buy the U.S. IPOX-100 index, which includes the 100 largest, typically best-performing, and most liquid IPOs in the United States. It measures the average performance of U.S. IPOs during the first 1,000 trading days. We've already seen it race from $18 to $26 on the heels of MasterCard (stock ran from $43 to $200) and First Solar (stock ran from $24 to more than $220). We saw it run on Visa's IPO (from $21 to $26) and we could see it run up again on a successful Hyatt offering.

Those that bought the Hyatt (H) IPO watched the stock soar more than $3 on day one.

Those that bought Marriott (MAR), Intercontinental Hotels (IHG) and Starwood (HOT) on the Monday ahead of the IPO and held until today would have seen the following gains.

And had you bought call options on each, you stood to rake in some fat, impressive gains in less than a week.

As for the U.S. IPO-100 Index (FPX), which we used when Visa (V) went public, it ran from $18.50 to $19.10.

Besides using our technical indicators and thematic trading opportunities in Options Trading Pit, profiting from IPOs is yet another way to find profit opportunities in any market.

Congratulations on the quick and easy gains if you took the advice.


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Soros and Ross -- Where Have You Been?


And please ignore Geithner... He Doesn't Have a Clue

Tuesday, November 3rd, 2009 - By Ian Cooper

For months, we've pounded the table over the risks of commercial real estate... and for good reason. It's a trillion dollar time bomb... And it's exploding as we speak.

But it seems Ross and Soros are just realizing this.

Ross sees a "huge crash in commercial real estate coming" and Soros spoke of a "bloodletting yet to come." Makes you wonder how these guys became so filthy rich when they can't see what's happening.

"In commercial real estate and leveraged buyouts, the bloodletting is yet to come," Soros said. "These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy."

That's interesting, Soros... because the bloodletting started a long time ago.

There have been bankruptcies, bank failures, foreclosures, destroyed property values, and so on and so forth. And there's more pain to come for commercial real estate and the greater economy. I don't care what Geithner would have you believe about the economy's ability to handle any CRE hits it takes.

But I digress...

Here's what we reiterated in early September, months after the collapse already began:

Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks, which hold more than $1 trillion of mortgages backed by CRE that is quickly losing value).

The sector will suffer from two things, one of which is bad underwriting. CMBS owners were lent money on the assumption that occupancy and rents would keep rising. But that never happened. The opposite did. "The result is that a growing number of properties aren't generating enough cash to make principal and interest payments."

And with values sinking, vacancies soaring, and a recession making it unlikely for us to see demand pick up, banks aren't exactly jumping up to refinance deals.

Even Steve Christ will tell you that all of this is a recipe for disaster. . . and that industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will close their doors over the next year.

That means that we're maybe only in the second inning here as this crisis unfolds.

So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will fail to qualify for refinancing, you have to wonder how it will all get done, says Steve.

The brutal answer: it won't.

"Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat," said a recent Wall Street Journal article. But "their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds."

And, according to Deutsche Bank AG, "as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks' $1 trillion "core" commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion."

"So far, banks in general have been reluctant to take losses on their commercial books," says the Wall Street Journal. "This "delay and pray" strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses..."

It's bad... real bad. But there are ways to profit from the coming disaster... which you can check out in Options Trading Pit.


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Even Insiders Think Market is Overvalued


Not exactly the kind of "confidence" you'd expect in a recovery...

Wednesday, October 28th, 2009 - By Ian Cooper

Tough week, huh?

Any one would think the markets were suffering from the onset of schizophrenia the way they've been acting this week. One second, all is well. Buyers line up to chase the recovery. The next - buyers are swimming for the exits in a sea of red ink.

It didn't help that consumer confidence fell unexpectedly to 47.7 in October from 53.4 in September thanks to worsening unemployment numbers... or that new home sales plunged 3.6%, as the effects of the temporary tax credits begin to die off.

Not exactly the kind of "confidence" you'd expect in a recovery, is it?

But don't tell that to those buying anything that confirms the delusion of a "jobless" or "consumer-less" recovery...

Even corporate insiders know better than to chase this rally higher.

Insider selling just about tripled last week to $846 million, as insider buying came in at a pathetic $14.7 million from $32 million. That's a clear message. Even insiders believe their company share prices are overvalued... and they're cashing in before the next leg down that we have been calling for.


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FHA on the Brink of Disaster


What Have we Learned?

Monday, October 12th, 2009 - By Ian Cooper

More than a year after the government took control of Fannie Mae and Freddie Mac, both of which were on the brink of disaster, what have we learned?

Absolutely nothing.

According to a congressional hearing, the Federal Housing Administration "appears destined for a taxpayer bailout in the next 24 - 36 months."

And believe me - this should go over really well with taxpayers.

But it didn't take a genius to see this one coming. A year after bailing out the over-leveraged Fannie and Freddie, the FHA has managed to put itself in the same predicament.

You see, when our market stopped issuing easy money last year, the "geniuses" at the FHA stepped in and became the big player in the mortgage loan business. So, FHA went from insuring 6% of new mortgages to 21% in 2008... .and even more in 2009.

Genius.

Nowadays, the FHA insures 5.4 million mortgages - most of which only required 3.5% down payment at a value of "only" $675 billion. Unfortunately, the FHA forgot to beef up its cash position, which sits at just $30 billion. That's about a 20:1 leverage... and should end well, as insured loans only begin to deteriorate.

 

FHATroubles

 

So what happens when the FHA goes down the drain? Unfortunately, we can't let that happen because there'd be no mortgage market.

Dig deep in your pockets, folks. We'll be paying for another failure.

None of this should come as a shock, though. We first brought this to your attention in late September:

Be prepared to fork over more of your hard earned dollars to Uncle Sam, who continues to guarantee and insure loans to just about any one who wanted a house. The financial decay continues... and this time, it isn't Fannie or Freddie on the chop block, it's the Federal Housing Administration.

The Federal Housing Administration has said its cash cushion will dip below mandated levels for the first time... but insists that it won't need a taxpayer rescue (where have I heard this before?).

The agency, a source of income for first-time home buyers is facing mounting concerns that it will need a taxpayer bailout, despite what it's telling the public. As of this summer, 17% of FHA borrowers were at least a month behind or in foreclosure, as compared with 13% for all loans.

Those rising defaults mean FHA reserves could sink below the 2% mark required by federal law. And a study being sent to Congress this November is expected to show that percentage dipping below required levels for the first time.

According to the Wall Street Journal:

It isn't clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don't have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. "They're probably going to need a bailout at some point because they're making loans in a riskier environment," says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. "...I've never seen an entity successfully outrun a situation like this."

But hey, it's only money, right?

When you have trillions in debt, what's a few billion dollars more?


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Tax Nightmare: A National Sales Tax may be Coming


As long as it stimulates growth... oh wait.

Monday, October 5th, 2009 - By Ian Cooper

President Obama, who wants to stimulate consumer spending and revive the economy, may consider a consumption tax with a national sales tax...

That's absolutely brilliant...

It should do wonders for his approval ratings if he takes it seriously... not to mention how well it'll impact our wallets.

This Wednesday the Center for American Progress, led by John Podesta (an Obama adviser), will recommend that:

The Administration should consider a tax on consumption, such as a value-added tax [VAT] system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.

With the federal budget deficit ballooning, the Obama administration and congressional leaders could look to tax-code changes to generate more revenues for the government.

But hey, as long as it stimulates the economy and consumer spending... oh wait.


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Recovery? What Recovery?


Credit Card Defaults are Skyrocketing

Monday, September 21st, 2009 - By Ian Cooper

Just where is this recovery that every one's talking about?

Because it doesn't exist.

Bank of America and Citigroup - which make up 35% of the credit card industry - just announced that consumers are defaulting on credit cards at rates no seen since the recession began. Bank of America's charge off rate was 14.5%.

Other banks like JP Morgan, and creditors like Discover and American Express have recently revealed similar August numbers. This is reality. And we're not surprised... just shocked at the naivety of Wall Street bulls that think the worst is over.

Credit card defaults typically track unemployment, which just rose to a 26 year high of 9.7% (really 16%) in August. The jobless rate isn't expected to peak soon.

Consumers are in trouble.  There is no recovery.


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