Quantitative easing, everyone is doing it!

I'm not bullish on US stocks for a major reason, I think growth will slow. The only avenue of growth for companies is through exporting (i.e. Weak dollar) which is what James Altucher of Formula Capital is arguing for a bull market. I agree with him in a perfect world where the world's interest is the US' interest...... however,

James Altucher of Formula Capital is a moron. I watched some of his videos on CNBC. His whole bullishness is predicated on what is going to drive stock market profits is the low dollar. He fails to consider one huge monkey in the room, China. China is NOT going to sit by idly while US and Europe trash their own currency. China will devalue their yuan and join in the race to the bottom.

So, until China decides to devalue the yuan, the markets will do alright. But, once the devaluation happens, the stock markets sell off. The US dollar will appreciate, and guess what, the profits of US companies will go with it. That is why I'm not bullish on US stocks. In this case, there is nothing the FED can do. They can ease even more, but I think they won't once China shows the US they have the gonads to wreck their own currency and go toe to toe with US in the trashing of their own currency.

In simple terms, the Yuan will not go up against the US dollar, stock investors will see this (they don't now) and slash their growth estimates for stocks, thus sending markets back down into correction or a bear market.

Honestly, I don't even think central governments care about gold. So what if it goes to ten or twenty thousand an ounce? Honestly, they will care more about what is happening with their economic well being and whether people are working than what happens if some shiny metal is worth ten or twenty thousand bucks an ounce.

Why housing defaults matter

The US has a problem in over-leverage. The banks are leveraged on a capital ratio of 1:12.5, in other words, they keep some 8% in reserves. If a bank has 10% reserves, housing defaults that would decrease their reserves by 3% would put the bank in seizure territory. If the company is public, the stocks will go to zero when seized.

Looking at the following graph, we can see how quickly the default rate has jumped 2% in over a year. Say, 2% defaults result in decrease of reserves by .75% on average, then it only takes 6% of homes defaulting to get the 3% decrease in reserves. We have some major problems.

Housing default (source: calculated risk)

Bank problem list is at 767, up from 653 in March. This problem list has NEVER decreased. More banks seem to be eligible every time I see the FDIC's press release. They are slow-walking the bank seizure process.

If by now the banks can't get their housing delinquencies under control, this year, another wave of foreclosures is going to happen due to the second wave of housing interest rate resets. I doubt anyone believes with another wave of resets happening that the default rate will get lower.


As you can see, the loans which will experience payshocks start increasing around now, through June and July, then pretty much into next year and into 2012. Option Arms default rates are just as bad as subprime.

Banks will write these assets off..and when they do, rest assured their reserves will decrease, and stock prices will go down. Either that or we will have another 5 trillion of QE by the Fed.

To buy or not to buy, Malaysian stocks

The market is around 1250 right now. I'm not a buyer at this time. Lets see where the next month goes. My feeling is three part-

ONE. Liquidity is still there, so eventually prices will run up in the longer run. Bailouts will keep coming, the second wave of housing problems are starting to hit (hence second round of Quantitative easing), the Euro is facing just the beginning of their member states' problems, and the US will likely need to bailout their states that overspent.

TWO. We will have had only the first negative month. Perhaps it will subside to the upside the next month, but maybe not if momentum players have anything to say about it.

THREE. Equities may not go up forever. They are capped by economic growth, dividends payouts, and input costs. The things that can go up, however are bond yields as investor concerns over the "stealth default" through inflation, and commodities as more money chases fewer goods.

Wow...KLCI down 22 points this morning

The KLCI is down 22 points to 1281. 22 points isn't much compared to the heydays of 2008, but the market thinks it's time for people's memories to refreshed on what volatility is.

75000 S&P futures seller found

Looks like they found the culprit. If you can't find it here, try zerohedge. A trader selling 75000 E mini futures. 75000 *50 *1150 = $ 4,312,500,000. It appears they found some counter party to then take the other side and sell short sell 4.3 billion dollars of S&P stock. That may be enough to do it.

It's a bit ridiculous. Anyways, you heard it here first how leverage can absolutely wreck the market. The truth is, if someone wants to sell the futures, how can it be manipulation? There's no limit on how many futures one can sell in one go, although the authorities maybe should put limits. Remember though, that if there is a huge unwinding of leverage from liquidity being drained, there's not much one can do.

A reluctant gold bull

With the ridiculous money printing and moral hazard going on in almost every industrialized nation, I'm now a gold bull.

It's tough to love such a metal which has value only as people give it. It doesn't have much use besides jewelry, but I have to be alarmed by what in the world is going on with trillion dollar bailouts of countries, banks, and other corporations.

I doubt many of the gold pundits could have predicted how ridiculous countries have gotten with fiscal irresponsibility, but it seems everyone is pulling the nuclear option and monetizing debt these days, Euro, UK, and US. With this, I'm not surprised gold isn't even higher.

With this much money running around, metals, gold, etc seem to be the biggest no brain trade of a lifetime. I foresee the UK getting the shaft next as people tire of giving the Euro a beat down, that is until Spain, Italy, and the rest of the PIIGS fall under the same situation as Greece. Then we might see capitulation and the end of a currency.

The US has now reopened SWAP lines with other currencies in effect, also torpedoing the US dollar by helping bailout the Euro. Will the treasury recognize the losses when a Euro is gone?

disclosure: long gold.

Dow Crash of 10%

While it is interesting how the media try to spin 10% drop in the DOW on Friday as an error or mistake, the truth is that it doesn't take much for the market to do that. The 1987 crash didn't really have many events causing the 20% drop.

The latest reason seems to be a huge amount of options were bought causing a major bank to sell a lot of stock when they wrote the option. This is one of the more likely reasons.

Another possible reason is the selling of futures which equates to the counter party hedging their futures position with stock. The counter party needs only put up some margin, while the seller buys the stock to hedge. A 20% margin would equate to 5 times the margin amount of selling power. This is another way to create some massive selling power.

I mentioned earlier that the buying of futures could cause a massive rally. I also mentioned what could happen if the futures weren't rolled over, massive selling power. Options buying and selling have the same dynamic. Writers buy or sell the underlying position to hedge against the buyers.

I would think the real reason behind the crash would probably be a dynamic of either futures or options. All this talk about high frequency trading, mistaken orders, failed circuit breakers probably are not the root cause despite what is mentioned in the media.