Meredith Whitney Rock Star for a Day
The big story of Monday it seems was former banking doom and gloomer Meredith Whitney having nice things to say about banks with a focus on Goldman Sachs (NYSE:GS). There were angry screeds all over the place that were pointed attacks on Mrs. Whitney's call. I did not watch the CNBC piece until later in the day, but I thought she was being sincere with a call to embrace some banks due to a suspension of reality engineered by our Government.
It is important to understand the difference between making an "investment" type of call and making a "trading" type of call. An examination of Meredith's forecasts for unemployment and the further mortgage related losses make it clear she knows things are terrible and going to bite the system again. What she was saying, at least to my ears, was that the current atmosphere is one of willful ignorance and full faith in the government backstops causing a bid under the banks. I find it hard to argue that point.
The best take I saw of the Whitney interview was provided by the Housing Time Bomb. In a complete and balanced article the author makes some strong points as to why the GS upgrade makes sense when viewed through a certain lens:
Now I have no position on Goldman, but you need to ask yourself why wouldn't you be long Goldman as long as the game is rigged?
I have gained a different perspective on the market as I sit here and just accumulate cash versus trying to trade this ridiculous casino. The manipulation and fraud are on a scale that makes me simply not want to participate in any way at all in terms of adding new positions. All my current trading holdings are small and diversified so no matter which way the market moves I am not going to get hurt too much.
So as an observer, I think Meredith made some excellent points. Before I explain, let me say right here and now that Goldman Sachs makes me want to vomit. They are some of the most vile greedy scumbags on the planet. They lie cheat and steal in order to make money, but you have to admit they are pretty damn good at it.
They are also the best firm on Wall St at this point in the collapse because they are the most well connected to Washington. However, you also have to remember, they are also the best risk managers on the street. They are also one of the best at adapting and reinventing themselves as the conditions change in the economy.
Wall St. is very good at reinventing themselves as they look for the next game. They won't hesitate to shift resources and abandon the old game in order to look for the next one. I don't expect a new game for a generation or so, but I do believe there is money to be made in fixed income in the short term. It also sure as heck helps when the government is at your beckon call offering any assistance that's needed in order for you to succeed.
Let's not forget, Goldman still has housing bubble skeletons in the closet in the form of many worthless level 3 assets. However, as long as the government doesn't force them to mark to market, does it really matter?
The entire post is well worth a look.
Obscenity of Bailouts on Full Display
All the whispers are that GS is going to announce killer earnings today. I have no doubt they will. At a time when almost 95% of the population has forgotten the myriad of lending programs for the banks, the conversion of brokerages into bank holding companies to access free capital, and never ending backstops it seems about the right moment to switch gears and show off all the success of these programs.
This is of course obscene. It is disgusting to see a company like Goldman Sachs pay out record bonuses and flaunt "earnings" as they only exist in their current iteration because of outside influence. Sadly, this seems to be accepted as a way to do business. A company that is in fact busted can, through the miracle of free finance form the government, morph into a solid company in the space of a few hours. An example is required in real time.
The lender CIT Group (NYSE:CIT) is insolvent. They will be unable to roll over their debt unless they get the same kind of special FDIC backed debt so many others have attained. They are a zero. There is no way to debate this. But, should CIT be smiled upon by the powers that be, PRESTO!, now CIT is a winner.
An exchange from the Yahoo Message boards for CIT:
COULD CIT BE ANOTHER BAC IF TRUE...$2 to $15?? 13-Jul-09 06:04 pm
Does anyone remember what BAC did when the smoke cleared and investors realized that BAC was here to stay? BAC shot up like a rocket from the mid-$2's to around $15 in a short span. I wonder if CIT could do the same?
Re: wishful thinking but BAC did not loose $10/sh. But if CIT survive, it could get to $5
Re: From these extremely low levels (at least earlier today), even $5 would be an awesome short-term return. Good luck!
Re: I would say that is the most likely scenario.
Of course, one should never base anything on message boards, but I use them here to show the mindset. CIT is a failure and cannot survive. In a free market it would go down and other players would step in to take the business CIT had. Now we see players ready to gamble at the bailout casino should the FDIC/Fed/Treasury see fit to save CIT.
The Problem with the Stock Market
I had a line of thought Monday as I was seeing the indices rocket up while at the same time all the macro economic data I saw was terrible. The idea I want to discuss is assuming the stock market reflects reality. Now the markets do reflect a reality, but the problem right now is that reality is based on smoke and mirror tricks that were targeted to have a particular effect (stocks, especially bank stocks, go up) which would by inference mean things are getting better. Historically, we look at stock indices and make assumptions that they reflect the economic data. Most times that is true, but now the markets are no longer tethered to the real world as in times past.
This is a key point. I will try to explain.
You know the unemployment situation. You know all the discouraged workers, the loss of work hours, and the wage deflation. This graph lifted from EconomPic Data shows the massive red ink the US government is sporting as tax receipts collapse:
And on and on. Yet the stock market has rallied 50% from the lows. Surely this means that a recovery is on the way, yes?
Reread the CIT message board dialogue again. The underlying force in the markets right now is the idea that by changing the game to fix the outcome things will become a self fulfilling prophecy.
If the banks do not collapse because the US government guarantees their operations, then the banking sector is healthy because their stocks are up, right?
If banking led us into a recession, when their earnings come back, they will lead us out, right?
If banks are making money right now it is due to absurdly low price of capital that they then turn around and gouge the public dearly to borrow from them. If the banks are making money, it is through program trading to each other of late day futures. If banks are raking in cash it is through fees of fixed income trading and ginormous bond issuance by the government. By refusing to mark a multitude of assets (residential, commercial real estate loans) to reality they are allowed to present a face that has no bearing on their status.
As a metaphor I offer the following example:
-A gunshot victim enters the ER with massive blood loss from the gaping hole in their abdomen from a bullet. They present with extremely low blood pressure (due to blood loss and weak heartbeat from trauma). The bullet wound in the abdomen has now made septic shock a real possibility as well
-Doctors work feverishly to stem the bleeding at the source (cauterization, clotting factors) and try an minimize the septic possibilities through antibiotics
-After several units of blood are transfused, the patient is still not responding and the low blood pressure threatens to cause renal failure and brain damage
-The doctors go to blood expanders to create volume and hence raise blood pressure
-The blood pressure rises.
At this point the central marker, blood pressure, has been resolved. How is the patient? Beyond internal bleeding, risk of sepsis, and possible clotting issues (pulmonary embolism) the primary metric has been successfully targeted. This is a far cry form "healthy" however.
In a similar fashion the banking system is the patient. While their stocks have not gone to zero, the intervention has only addressed one symptom of the case. While stock prices have gone parabolic, nothing that threatens the banks has been resolved.
Such stop gap measures only mask the trauma. It is a waiting game. We will see how it works out over the coming months.