Alert: (Plunger Alert) XLF

The fix is in the plungers are running the market, maybe right into the election. we are short the financials so buy 1/4 XLF, then wait and see how much to add.

Buy 25 shares XLF @ 21.87 Stop @0.44

Plunger Alert:

This market was getting crushed with financials leading the way. The the plungers just caught the fins and stalled the market. Just honor your stops

Alert: WFC

the criminally directed short squeeze is failing. the market is going up as the volume dwindles and the VIX is at 20. add 1/4 tp the WFC position

short 25 shares @ 30.29 Stop @ 32.91

Merrill Lynch is Burning

Merrill Lynch shocked analysts and investors by reporting that it lost $4.6B and took mortgage-related write-downs of $9.8B in the second quarter of 2008. The results bring net losses to $18.65B and write-downs of an unimaginable $47.25B since the housing crisis hit last summer.

The negative revenue resulted from $3.5 billion in write-downs on collateralized debt obligations, a $2.9 billion loss related to hedges bought from bond insurers, a $1.7 billion write-down on the investment portfolio of Merrill Lynch’s U.S. banks, a $1.3 billion write-down related to residential mortgage exposures and a $348 million write-down related to leveraged finance commitments.

Merrill’s loss would have been deeper had it not been for a $91 million gain booked on the declining value of the bank’s own debt. The move, while counterintuitive, is a legitimate quirk of mark-to-market accounting.

In response, the bank began selling off huge chunks of itself in an attempt to sell what remains while it still remains. Among the departing assets is Merrill’s 20 percent stake in Bloomberg. Ironically, the bank has raised $34.4B so far, although its CEO said there would be no need to raise capital.

Subsequent to the end of the second quarter, Merrill Lynch continues to enhance its capital position. Earlier today, Merrill Lynch completed the sale of its 20% ownership stake in Bloomberg, L.P. to Bloomberg Inc., for $4.425 billion, and as part of this transaction has entered into a long-term service agreement. Merrill Lynch is also in negotiations and has signed a non-binding letter of intent to sell a controlling interest in Financial Data Services, Inc. (FDS), based on an enterprise value for FDS in excess of $3.5 billion. FDS is currently a wholly-owned subsidiary of Merrill Lynch and is a provider of administrative functions for mutual funds, retail banking products and other services within Global Wealth Management (GWM). Merrill Lynch has provided Bloomberg Inc. with debt financing and intends to provide debt financing for the FDS transaction on a commercially reasonable basis.

For a brokerage company in the credit crisis there really are no other options. Earnings of any type, let alone those in the credit bubble, will not be seen in our lifetimes, and funds raised in the capital markets are all underwater. Merrill did find itself on the sainted list of not-to-be-naked-short-sold, pointing toward the final deal for the well-connected one. So, until then, Merrill Lynch will continue tearing itself down like the House of Usher just to prop itself up another year, another quarter, one more day if it can be had.

Can Thain & Cabal buy the necessary time with a $1T balance sheet? We just have to wait and see. $1T is a fortress among balance sheets, but at a white hot temperature, the burn rate might be too fast.

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HBOS gets Buried

As a harbinger of what has come to be HBOS was stung be the disdain of investors for it’s rights price issue go unwanted. The emergency cash raising efforts crashed and burned able to push off just over 8% of the shares arleady in the red.

Morgan Stanley and Dresdner Kleinwort Ltd. lead underwriters left with about 2.5 billion pounds ($5 billion) of HBOS Plc stock after the biggest shareholder rejection of a European rights offer this decade.

Yea the biggest flopper of this decade, who is surprised. What’s surprising is that they were able to move 8% of the banks stock in a credit crisis.

This signals that the grave train has run crashing into the credit crunch and one more scam is taken out of play. The bank got it’s money this time, but the stakers got stuck and they won’t be so ready to get buried under the stock they can’t move next time around.

“The message is loud and clear. People still don’t really want to buy banking stocks,” said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers, in an interview today. He helps manage $21 billion including HBOS stock.

The message really is no one wants this toxic crap and were not going to take it anymore.

Alert: DB HBC

Short 50 shares DB @ 89.94: Stop @ 92.93

Alert: SKF

Add to the SKF position, add another 1/4

Buy 25 shares SKF 135.62 ; Stop at 127.91

Wachovia is Busted

After warning of a second quarter loss of $2.6 billion to $2.8 billion due to mortgage and pre-existing legal problems and being thrown to the wolves, by the SEC, Wachovia outdid itself: getting raided in Missouri.

Securities regulators from several U.S. states on Thursday inspected the St. Louis headquarters of Wachovia Securities, seeking documents and records on the company’s sales practices.

The move is part of a broad investigation into questionable practices involving auction-rate securities, Missouri officials said.

There are many deadly sins of Wachovia each of which could bring the bank down, and if the pay option ARMs fallout doesn’t get them sooner or latter the legal back lash will. The bank has just gotten too accustom to doing what it wants with other peoples money.

“Hundreds of Missouri investors have called my office because of inability to access their money,” Carnahan said in a statement. She added that she aims to take actions to “to make these investors whole.”

Inability to access their money, Wachovia is confused, do they think they’re a hedge fund? The action is a full scale investigation, but one is left to wonder why the bank is non non compliant.

The action, which also sought information on internal evaluations and marketing strategies, comes after more than 70 formal complaints were filed with the Missouri Securities Division over the last four months, representing more than $40 million of frozen investments.

Wachovia Securities has not fully complied with these requests, prompting Thursday’s onsite inspection, Missouri officials said.

With all that’s gone wrong lately, if the bank has nothing to hide you’d think the bank would want to get this over with as soon as possible and cooperate. If the bank has nothing to hide.

IndyMac Bancorp Inc.

In act eerily reminiscently of the great depression the FDIC seized IndyMac Bancorp today recording the third-largest bank failure in U.S. history.

After months of trouble and turmoil IndyMac finally broke under the weight of tighter credit, tumbling home prices and avalanching defaults. The bank’s final maneuver was one of double down desperation, offering unbeatable rates on taxpayer-insured deposits, rates it could not really afford, but in a credit crisis where all the choices are bad ones it was simply the only one left.

Having lost the ability to accept brokered deposits earlier this week, the bank desperately needed other sources of funding to keep its operations going. It had nothing to lose by offering the best rates on taxpayer-insured deposits, significantly higher than any other bank in the nation.

As word of the danger got out depositors rushed the bank and finally regulators moved in. Coinciding as it did with the anger and angst of financial markets recognization that their toxic mortgage dumping grounds Fannie Mae and Freddie Mac were in imminatate danger of implosion as well (without government intervention) brought out the blame gamers and finger pointers.

The director of the Office of Thrift Supervision, John Reich, blamed IndyMac’s failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank’s solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a “heart attack.”

Might as well blame the earth quake in China on the good Senators comments while you’re at it. The director of the Office of Thrift Supervision, John Reich, should have blamed IndyMac’s failure on it’s fees up front deal with the devil “Liar Loans” made to ever-less credit worthy borrowers that sent the banks profits skyward.

“Would the institution have failed without the deposit run?” Mr. Reich asked reporters. “We’ll never know the answer to that question.”

Sure we do.

Definitely YES!

The real question is “Would the institution have failed if federal regulators had done their job”? Well given that purpose of regulators is to regulate the very alt - A loans IndyMac got crushed on the answer to that question director of the Office of Thrift Supervision, John Reich is Definitely NO!

Cloak and Cover Up at JP Morgan

The covert bailout of JP Morgan continues unabated along with those of Fannie Mae, Freddie Mac and the rest of the financial sector. Naturally, this is all cloaked under the fog of Morgan’s second quarter 2008 earnings report.
After carefully releasing estimates to analysts, the bank easily outpaced those expectations this morning. The financial media would have investors believe this is responsible for today’s rise in the stock and the overall sector.

JPMorgan posted a 53% plunge in second-quarter net income Thursday morning. Credit-loss provisions more than doubled, and its investment bank cut the value of leveraged-loan and mortgage-related securities by an additional $1.1 billion.

However, JPMorgan’s earnings per share, at 54 cents, beat analysts’ average expectations of 44 cents, as calculated by Thomson Reuters. Revenue of $18.4 billion for the quarter exceeded expectations of $16.55 billion. JPMorgan’s stock was up 10% in morning trading.

The jump in the share prices of JPMorgan Chase and other bank stocks was likely a reaction to “the lack of doomsday outcomes,” David Trone, an analyst with Fox-Pitt Kelton Cochran Caronia Waller wrote in a research report. But he warned, “we remain somewhat cautious about calms before storms, as consumer and commercial losses will likely increase into early 2009, if not longer.”

Not likely at all David! The jump in the share prices of JPMorgan Chase and other bank stocks was likely a reaction to the SEC’s restrictions of short selling on all but two stocks in the sector and the socialization of Fannie Mae and Freddie Mac, the sector’s favorite toxic mortgage dumping grounds.

I have news for Bernanke and the SEC. This won’t work. China had short sale restrictions on and it did not stop the Shanghai index from falling over 50%. Insolvency cannot be cured by short sale restrictions and many of those companies are insolvent.

If you really think Morgan has turned the corner, just consider the things that have to happen before the bottom can be called. These things are begging to happen, to JPMorgan.

J.P. Morgan Chase said on Thursday that losses on its $47 billion portfolio of prime mortgages could triple in coming quarters because of the slump in house prices in previously hot markets such as California, Florida and Arizona.

A complete freeze on short sales won’t save The House of Morgan when those PRIME loans begin to default. Todays stock spike was pure short covering. Once the market sees the implosions in Morgan’s prime mortgage, commercial real estate and credit card portfolios, it will take more than an act of Congress to stop the sacrifices of first-born sons that it will take to bring new longs into the stock.

When all the hype is finally spun, the only thing share holders will have is a precious 53 percent cliff dive in second-quarter net income; loan loss provisions of $3.5B that have more than doubled over the last year; a return on equity crashing to 6 percent from 14 percent a year ago; and the certain knowledge that a lot more went wrong in the quarter than went right.

Don’t get your hopes up. The company can’t rely on the broader economy to save it either:

• Investment banking swung to a $785 million loss, dropping 67 percent after it wrote down $1.1 billion in unsold buyout loans and complex mortgage related securities. Trading revenue was weak in both the equities and fixed-income divisions.
• Chase Card Services, the bank’s big credit card arm, saw second-quarter profit fall 67 percent, to a $509 million loss as charge-offs continued rising. Its loss rate climbed to about 5 percent in the second quarter.
• Chase Retail Services, the bank’s consumer unit, reported a $179 million loss after a 23 percent drop in profit. The division was mired by losses on home equity loans as well as mortgages as more borrowers stopped making their monthly payments.
• The asset management division booked a $395 million profit, down 20 percent from last year, despite a influx of new money. Revenue of $2.1 billion was down 3 percent because of lower performance fees.

and let’s not overlook this:

Chase’s auto finance arm also had higher loan losses, as more consumers find their budgets stretched by higher gas and food prices.

The reality is that JPMorgan would not exist today if not for the fraudulent Federal Reserve-engineered bail out of Morgan last March by guaranteeing $29B disguised as a loan to facilitate the buyout of Bear Stearns. The fact that the bank was bailed out once and its CEO is a FED board member are the only points insuring the company’s future.

Alert: DB HBC

Finicials turning ! Short 1/4 position DB and HBC each.

Short 25 shares DB @ 92.56 Stop @ 96.25
Short 25 shares HBC @ 82.67 Stop @ 86.25

Alert: SKF WFC

We are long 1/4 position on SKF from 117.51. Put in a stop @ 116.12 for those 25 shares.

Buy 25 shares SKF @ 124.56 Stop @ 119.89
Short 25 shares WFC @ 29.56 Stop @ 34.59

Alert : DUG

Move stops up to 36.25

Alert: DUG

We have a full position in DUG, 1/2 @ 30.13 and 1/2 @ 34.72. This is from a link in the very next post below.

Apart from easing the mortgage crisis and protecting against such short- selling, the team worked on maintaining the oil price, and that responsibility fell to Lukken.

I don't like the action of this ETF right now but I think a fix is in in oil, so put stops in DUG just below todays low of 34.85.

Sell 100 shares DUG @ 34.75.

Alert:SKF

Open a 1/4 position in SKF Ultra Short Finicals

Buy 25 shares SKF @ 117.51

Plunger Alert

How does a $5 per share mortgage company with $5 billion worth of unsaleable homes raise $10 billion big on a rights issue? Moreover Who For? The answer to the first question is, easy if you have the keys to the money printing press.

Paulson will get power to make unlimited equity purchases in and lend to Fannie Mae and Freddie Mac to prevent a collapse in the firms that account for 70 percent of new U.S. mortgages. The bill also provides for a federal agency to insure up to $300 billion of refinanced mortgages for struggling homeowners. Stocks rallied.

The answer to the second question is China for the most part who holds extreme piles of US mortgage trash (about $400 billion) along with well connected US insiders holding shares of Freddie and Fannie. See a $10 billion distribution at of Freddie at $5 is not just dilutive, it's disastrous, so the solution is to turn on the printing press and ramp up the shares.

As Hong Kong's financial situation is closely tied to that of the United States', the PPT appears not only to have eased the financial situation in the West, but also here.

This seems a far cry from earlier this month when, with the crisis in the US housing market sending shares of Fannie Mae and Freddie Mac tumbling, the PPT was called in.

Paulson, as leader of the team, quickly drafted plans to help them. He sought approval from Congress to extend the Treasury's credit lines for the pair, with the option to buy their shares if necessary.

I sure am glad that someone reminded Paulson to ask congress just to make it look good, aren't you.

Wells Fargo Just Smells like Crap

Wall Street put on the party hats today as Wells Fargo’s stock shot up 23 percent after the company reported second quarter 2008 earnings that were down 22 percent year-on-year. Yippie! Let’s take a look:

• Revenue soared 16% to a record $11.5 billion, on strength in the bank’s deposits, mortgage banking, credit card, and wealth management businesses.
• Wells Fargo & Co. earned $1.75 billion, or 53 cents per share, in the April to June period, down from $2.28 billion, or 67 cents per share, in the same time frame last year. Analysts polled by Thomson Financial had predicted, on average, a profit of 50 cents per share on revenue of $10.65 billion.
• The bank increased its quarterly dividend by 10%.

Thats mighty impressive to city folk, just listen.

“This is the first fairly positive data point that we’ve had for the banking industry - we haven’t seen any really strong results in the first half,” said Byron MacLeod of Gradient Analytics. “This is where you’re going to begin to see some stratification between those that are conservatively positioned, and those that aren’t.”

Well, now hold on there pardner. That’s sure a lotta city breed fancy speak, but we’ve seen this kinda cow poop from Fargo before. First, things are so screwed that you call three straight quarters of profit declines a “fairly positive data point.” I don’t. And “stratification between those that are conservatively positioned, and those that aren’t” - that just means some will fail before others do. I just don’t get these city folk, but let’s move along.

• Mortgage banking and wealth management businesses, are both deader than a door nail now and folks ran up their credit cards to pay bills, those defaults will be coming home soon.
• Wells Fargo & Co. earned 53 cents per share vs the 50 cents per share they told analysts to estimate
• Just laugh

Oh yeah, before I forget - remember back in last April when the bank changed the way it reported defaulted loans by stretching the period a feller had to wait to be declared in default. They took the default time up to 180 days from 120 days. Now I know stuff like that impresses the hell outa city folk, but out here it smells like a bunch crap.

Ya see boyz and girls, loan loss reserves are a direct measure of management’s best estimate of future losses, or in other words loans the bank doesn’t expect to be repaid. Witness:

The bank took a provision for credit losses of $3 billion. That provision included total charge-offs of $1.5 billion, and an increase in reserves for future losses of $1.5 billion. Wells Fargo’s total allowance for credit losses now stands at $7.52 billion, up from $6.01 billion at the end of the first quarter.

Out here we don’t know and we’re not sayin‘, but back when the credit bubble was blowin’ on up, Fargo let folks use their living room like a ATM. Now the big water balloon has burst all over their tuxedos:

As the economy has turned sour and more borrowers have fallen behind, lenders have apparently stepped up their use of offsets to collect overdue loans. Consumer complaints and inquiries about offsets filed with the Office of the Comptroller of the Currency, the agency that regulates nationally chartered banks such as Bank of America and Wells Fargo, ballooned to 576 in the first half of 2008 from 151 such cases in the first half of 2007, according to spokesman Kevin Mukri.

Somebody ain’t gonna be payin’ and $3B is a big egg to lay aside per quarter.

You know, it’s gonna take a lot more than 3 cents a share and fancy speak to fix all this mess, but I don’t think them city folk quite get the message yet.

Trade Alert: BKX

Take a look at the daily chart of the banking index BKX. You can see that this phony rally based on nationalization of 19 finical company s has pushed the index into oversold territory. We will look for a pullback, then either new money comes in pushing the index up again and forming the bullish W, or it fails and falls back under 45. Based on the decreasing volume I bet the latter, but the market is my master.

US Bancorp Gets Hit

In a most blatant example of the pot calling the kettle black, Deutsche Bank downgraded U.S. Bancorp today, issuing the death sentence of “sell.” The recommendation would have served investors much better if it had it been issued on May 1, when the shares closed at nearly $35; today they sold for $22.
This is an old Wall Street dance in which the analysts issue downgrades following cliff dives of 50% or more, just before the last few sellers have sold. The desired effect is to scare the weak holders into selling their shares, creating a temporary bottom for the stock just before institutions intend to buy it up.

The step is good for the stock, but it does nothing to help the bank, which is seemingly getting worse in every category.

U.S. Bancorp set aside $596 million for credit losses, triple the year-earlier level, citing the impact of falling housing prices on homeowners, homebuilders and suppliers, as well as on commercial and consumer lending.

Net charge-offs, or loans the bank doesn’t expect to be repaid, doubled to $396 million, and nonperforming assets doubled to $1.14 billion. The latter increased 34 percent from $845 million as of March 31

Oddly enough, in the fog of the credit burst, Minnesota’s biggest bank enjoys a safe haven status as a result of its non-interest income.

The lender has been building its fee-based businesses as lending became less profitable and the bank said credit costs ate into higher revenue from those operations. The lender got more than 26 percent of its revenue from its payment processing unit in 2007. U.S. consumer borrowing in the first quarter rose by $34 billion, the most since 2001, when the economy was headed into a recession.

U.S. Bancorp has some sort of “safe haven status, that kind of leaves them a little less room for any uncertainty or weakness,”

A little less uncertainty is comforting, but a tripling of loan loss reserves is a harbinger of ill. Banks are designed to profit from interest, but in the aftermath of the credit pop and the resulting credit deterioration, interest is crushing them. If lines form in front of any of US Bancorp’s 2,542 branches it most likely will not be customers applying for loans, but depositors clamoring for their savings, i.e. a run on the bank.

Unfortunatly it is going to take a take a lot more than a cheery “little less uncertainty” and dead cat bounce in the stock price to change that.

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Citi’s Dark Profits

Off balance and running out of options, Citigroup sits alone, imploding in the shadows. It hunkers there in the dark, trying to hold on for one more earnings season, pull in one more central bank or Sovereign wealth fund, or buy one more analyst upgrade.

The clowns are smiling about the dark profits in assets parked off balance sheet:

At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank’s $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan.

Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that New York-based Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds.

Now, as Citigroup prepares to announce second-quarter results July 18, those off-balance-sheet assets, used by U.S. banks to expand lending without tying up capital, are casting a shadow over earnings. Since last September, at least $100 billion of assets have flooded back onto Citigroup’s balance sheet, accompanied by more than $7 billion of losses.

$1.1T with a t,te, teeee hiding in the dark. That doesn’t put a shadow over earnings; it blackens them out completely.

Citigroup has nothing but negative earnings to begin with, and the dark profits associated with nefarious credit-related instruments are mostly worthless in the bright light of day. So, what it’s really saying is that the bank’s balance sheet is closer to $3.3T, with a big T:

Citigroup has had to bail out at least nine investment funds in the past year, including seven structured investment vehicles, or SIVs, whose funding withered. The bank had to assume $45 billion of securities from those SIVs, which are now included in the $400 billion of on-balance-sheet assets Pandit says he’s trying to unload in the next three years.

The next three years, are you kidding me? You won’t be around in three years:

$400 billion down and $1.1 Trillion to go. I have said this summer of 2007 but it’s worth repeating again: Citigroup will not survive in one piece. If Citigroup survives at all it will be a mere shadow of its former self.

Mike “Mish” Shedlock

Denial at WaMu and National City

A cold wind blows across eighty years of time, from the Great Depression to the credit crisis in this new century, where the new like the old watched the bubble in denial or years. Then in a matter of days, that denial was blasted away when the bubble finally burst.
Today, in the fatal tradition of Northern Rock, Bear Stearns and Indymac Bancorp, Wa Mu and National City both denied that they are faced with a liquidity crisis and claimed they were “well-capitalized.” Washington Mutual should be very “well-capitalized,” considering that the bank has already raised over $7B. But in the fog that is the credit crisis, no balance sheet is clear; what is off balance matters more than what the bank reports:

Washington Mutual Inc., responding to uncertainty in the marketplace, said it significantly exceeds all regulatory “well-capitalized” minimums for depository institutions and has excess liquidity of more than $40 billion.

The disclosure came hours after regional bank National City Corp. issued a similar missive after being forced to assert it is still credit-worthy.

National City chimed the same bell and rang the same hallow note:

In a bid to ease investor nerves, the Cleveland-based bank and mortgage lender issued a statement regarding their financial health , though it hasn’t seemed to quell the tension.

“National City is experiencing no unusual depositor or creditor activity,” the bank said in a statement posted on its website. “As of the close of Friday’s business, the bank maintained more than $12 billion of excess short-term liquidity.”

“Further, as a result of our recent $7 billion capital raise, National City maintains one of the highest Tier I regulatory capital ratios among large banks.”

We have already seen a parade of banks who lied and died; even Paulson and Helicopter (Bernanke) denied that the existence of a housing bubble until last summer, when they could deny it no longer. That Wa Mu and National City deny their obvious insolvency only seems to make it more true.

The runs will begin soon and don’t believe the lies coming from the media about the FDIC $100,000 limit:

Let’s get this out of the way right now: Your money is safe if it’s in an institution insured by the FDIC. The Federal Deposit Insurance Corp. covers up to $100,000 per institution, and even may provide additional coverage for IRAs in those banks. So, don’t head for the mattress store.

Let’s get this straight Jon, the FDIC was intended to save “a” bank, not THE banking system. Last weekend the takeover of Indymac Bancorp chewed up $4-8B of the $53B insurance reserves. That burn rate is unsustainable in the face of the certain upcoming new failures of some big banks and thousands of smaller ones:

Chris Thornberg at Beacon Economics says, “IndyMac was the first major institution that wasn’t too big to fail.” He says as the Feds are busy worrying about “the big boys”—Fannie and Freddie—hundreds, maybe thousands, of smaller, regional banks will now realize they have no savior. Thornberg says investors in those banks have to ask themselves, “Is this institution fundamentally safe?” Depositors with accounts insured by the FDIC don’t have to worry…unless the FDIC starts to run low on funds. That looks unlikely at the moment. It has $53 billion, and says IndyMac—by far the largest bank takeover this year—will cost it between $4 billion and $8 billion.

Right now the only thing that might be safe in Wa Mu or National City is what Aunt Milly keeps in her safe deposit box, unless it’s Wa Mu or National City stock certificates.

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Trade Alert: DUG

After DUG broke 30 it took up residence in the 30 to 34 zone forming an ill formed wedge, but any wedge is a good wedge after it breaks which is exactly what DUG has done. We added another 1/2 position yesterday which should have been added the day before, but have broken the wedge and a stochastic with the short line crossing the long line so, I do expect DUG to run for awhile.

On the fundamental front you just knew when Iran fired that missile over the weekend that it was their last ditched attempt to scare prices up. Sooner or latter the professional traders have to take profits to pay bills and continue the ponzi scam in another sector. The collateral damage could be bloody for the bulls in the short term.

We were stopped out of the other side of this trade (hedge) DIG at 109.10. I will update the Open Positions.

For stops on DUG I am going to say 31.5 based on the 15 minute chart.

Alert: DUG

DUG is finally breaking out add 1/2 position

Buy 50 shares DUG @ 34.42

JP Morgan to buy Wachovia in Bailout Scam

For Wachovia, it’s SURVIVAL. The bank’s appointment of Paulson’s right hand man, Robert K. Steel, demonstrates the bank’s acute awareness that survival depends on playing by the Streets rules. The gutting of Bear Stearns showed everybody that the only way out is the Street’s way: bribery, kickbacks and connections.

The choice of Steel strikes some analysts as interesting, given that Wachovia had hired Goldman to analyze its loan portfolio and “evaluate various alternatives.”

Steel talked up a good game. Like a newly-acquired superstar quarterback at a press conference he spat off at the yap about changes:

Introducing himself to investors in a conference call Thursday, Steel, 56, says he plans to focus on the residential mortgage portfolio at the nation’s fourth-largest bank. The portfolio contains $120 billion in option-arm adjustable-rate mortgages, or pick-a-payment loans, which the bank has said it will discontinue. Steel says he also plans to look carefully at the bank’s exposure to commercial real estate, where Wachovia is a big player.

There is absolutely nothing Robert K. Steel can do about that portfolio, the expected after-tax loss of $2.8B, or the massive write-downs and losses beyond second quarter. And if anyone could do anything about them, it would definitely not be Steel:

During much of his time there, Steel was involved in capital-markets work, and he says questions about his lack of retail- or commercial-banking experience are fair. The depth of retail-banking experience that already exists at Wachovia will more than make up for those deficiencies, …

Dick Bove, a bank analyst with Ladenburg Thalman & Co. Inc., says he is also surprised Wachovia would name a CEO with no retail-banking experience. He believes Steel needs to take at least six months to learn the business before making any big strategic changes at Wachovia, which has $809 billion in assets.

“What he’s got to do is take the visibility of this company way down, and he’s got to learn it and learn the business,” he says.

With the depth of retail-banking experience that already exists at Wachovia what need have they of you, Mr Steel? There is nothing anyone can do; the bank sealed it’s fate with the purchase of Golden West Financial for $24B at the height of the housing bubble. The blunder led to the firing of former Wachovia CEO Ken Thompson. Current chairman Lanty Smith declined to say whether heads would roll on high at the bank’s board of directors, which approved the deal, but the fact that the board decision to get Steel was unanimous makes it a safe bet that no one will feel any consequences.

So we have an under-qualified, yet well-connected retail-banking ignoramus taking over a sinking ship that can’t be righted save for an outright sale. Street has it’s own rules, and no one rules the Street like Goldman Sachs:

Analysts have suggested JPMorgan Chase & Co. might be one potential buyer of the Charlotte-based bank. JPMorgan CEO Jamie Dimon has made no secret of his desire for a retail-banking network in the Southeast.

“From that standpoint, the Goldman Sachs connection might make a lot of sense,”

Another fact making sense is that,

Among his recent accomplishments, Steel is credited with helping to engineer JPMorgan Chase & Co.’s recent purchase of Bear Stearns Co.

The Golden West option ARMs program is gone , but the reseting ARMs are still coming, and another bailout of JP Morgan via Wachovia ala Bear Stearns certainly adheres to Street rules.

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Alert: DB

The VIX finally broke 30, it looks like a short covering rally is going on, but the VIX may have a lot higher to go before a true rally can kick in. In line with our Blind Short we will short Deutche Bank DB, which has just broken support of 80. The broad market may turn around so put the stop at yesterdays close/low 81.50

Sell short 50 shares DB @ 79.59 DB: stop at 81.55

Alert: MER HBC

As the previous post said we will do a Blind Eye Short look at the charts less and go on the fundamental reasoning that it's all going to crap.

Short 25 shares MER @ 25.77; Stop 28.00:
Short 25 shares HBC @ 73.07; Stop 76.56

Blind Eye Short

If the Plunger Protection Team intended to hold this market up going into earnings this week, why then did they let the Dow and SPX break down below strong support at 11500 and 1250 respectively? I can only think of two possible reasons, i) they cannot hold it here or ii) they they will take the market down themselves right here right now, panic everyone out, then buy it back up cheap. Now it occurs to Russ Winter that there may be a third reason and I like his reasoning.

....the last six months of the Bush administration will mark one of the greatest periods of systematic looting in American history. Never again will so many assets be handed off to regulators and corrupt apparatcheks for “distribution” to the privileged.

To facilitate this looting will require taking the banks all the way down to ultimate support to grab the lowest hanging fruit.

In asking the question of who gets looted and who gets the distressed pickings, I think it is important to consider who is most exposed. The answer is the investment banks who have thin capital bases relative to their fictitious capital holdings and obligations. The biggest plum of all are the assets of GSE’s Fannie Mae and Freddie Mac. Therefore I think we are going to see them dropping one by one like flies. And it really does look like the next crisis is Lehman Brothers. It is not that LEH is terribly more exposed than the others, it’s just that they apparently drew the wrong straw.

The wrong straw is the long straw, we want to be short the financials on this fundamental basis. We will trade the sectors technically, but the reason for the trade id a fundamental one. So, the stops will be very lose and the position sizes will be bigger to begin with and will accumulate faster as the trade progresses. I call this a blind short. If and when profits are made they will be taken, but we will stay in with puts to be safe and still in a position.

We will start with the usual suspects Merill Lynch (MER) and Lehman Brothers (LEH).

Citi Scales Down and Screws Up

The analyst who made her stardom on downgrades of Citigroup is polishing that star on the beleaguered banks crusty facde. Oppenheimer & Co.’s Meredith Whitney lowered her call for Citigroups Q2 earnings in Wall Street’s quarterly game of “beat the estimates”.

Citigroup will probably lose $1.25, compared with her prior estimate for a gain of 21 cents. She forecast Citigroup’s writedown at $12.2 billion.

The estimate of profit reverse comes with the entire industries failed earlier attempt to prop itself up following Goldman Sachs mea culpa. The cascade of worthless stock market news from Street owned outlets like Bloomberg that continues promo-gating the quarterly game of “we beat our own drastically lowered estimates”, is beginning to show signs of fray. Not even mighty Goldman Sachs propaganda machine could wipe away the reality of hundreds of billions in losses and write downs.

Analysts and investors are reversing their predictions that the worst of the credit-market contraction is over after more than $400 billion of writedowns and losses by the world’s largest financial institutions.

Vikram Pandit, the bank’s newly installed CEO is making many moves, any moves, but none that will make a difference. Under the crushing weight of the losses and write downs the pressure builds up and up, up to where the responses become spastic, failing.

Citigroup will begin a new bonus plan aimed at getting its senior executives to work for common earnings improvement across the entire company instead of only driving profits within their departments. According to the FT, the new system is “an effort to increase co-operation and minimize in-fighting among the disparate parts of the sprawling financial services conglomerate.”

The plan is designed to fail because it fails to account for bankers most basic human failing.

The most wrong-headed part of the thinking behind the program is that it does not account for the fact that banking executives do their best out of personal greed. The current system of having every operation in the bank strive for its own best results already maximizes overall earnings. The profits from a number of successful divisions within the firm adds up to better financial results for Citi as a whole. Bonuses based on the performance of the the bank as a whole simply makes star executives believed they are being robbed by being lumped in with the company’s losers.

As usual the bank punishes the rank and employees, although in the case of a company that grew too fast too quickly on the wings of too many risky investments the job cuts are at least a justified begging.

In a conference call with shareholders last month, Gary Crittenden, the finance director, indicated that Citi may cut parts of its retail-banking and consumer-finance operations in certain countries where it considers the business to be too small.

“Citi has a presence in 106 countries,” said one source close to the company. “But does it really need to be in Greece, Slovakia, the Czech Republic and Italy? In a lot of those places it has no scale at all.”

And on it goes, despite the frenzied, desperate day by day maneuvers that will cut 18,000 jobs, write-down in excess of $8 billion, and raise at least $10 billion, (from where?) in addition to the $50 billion already diluting share holder value. Still the neediness for a banks life-blood cash, gets more dire and management gets more delusional.

Vikram Pandit, the bank’s recently installed chief executive, had just sent an e-mail to every employee in the company.

Headed “Our culture”, the memo praised the “remarkable efforts” from staff and the 200 years of history that ensured Citi would continue to be the “backbone of world commerce”. Citi would become “the greatest turnaround story of our age”, Pandit promised. “We can make this the best company in the world, bar none.”

Most of the 200 years of that history were spent as the City Bank of New York founded in 1812, but that profit history was wiped out in less that five years by the risk hungry methodology of Sandy Weill and the suicidal subprime credit binging of his successor, Chuck Prince.

And now Pandit come aboard to clear the decks more than right the ship. The frenetic activity will make headlines and delay itchy trigger fingers poised on the mouse, hovering above the sell button at best. But when all the huffing and puffing is done, Pandit will have done nothing, there was never really nothing he could have ever done; saddled as he is with the misfortune to reign with the albatross of huge exposure to the unstable credit instruments that began to blow up last year. So in the end it was the same old thing, slash jobs, raise cash, boost moral. But the hand outs from rights issues are drying up along with investors burnt patience, earnings in the post bubble burst are nowhere to be found and it will take a lot more than pep-mails and ill conceived bonus plans to repair the house that Prince ruined.

Trade Update: OIL

Yesterday OIL gaped down at the open below our stop point, by holding we have seen it rally back to 84.54 so we are 35 pennies in the green. The stochastic on OIL is at 20 and looks to be turning sharply up. We will stay long OIL with a stop @ 84.01. In the long term OIL will probably fall hard, maybe 50% or more, but for now the usual suspects are keeping it up. But we have seen this movie brfore, when Buffet was buying Country and again when he bought Bear Stearns and we all know how that turned out. Whenever you hear talk of sabre ratteling between the US and Iran you can be sure the price of oil was crashing and that Bush just got off the phone with the holy warriors and this was the best they could come up with.

Trade Update: OIL

You may be wondering why OIL has dropped below our stop price, but we are not out of the trade. It's not a bad question, the answer can be seen by looking at the 5 day chart in the 15 minute time period. Notice that on Monday the stock closed near 85 and on Tuesday morning it opend at 82.75 only to trade lower all day. Our stop price was at 83.45 which fit nicely into the gap between the prior days close and yesterdays open. What that means is that our stop was never hit. That gap
down blew right past our stop. OIL is trading at 82.22 up .90. Lets see if we can squeeze little more out but move the stop to todays low 81.89.

Finger In The Dike

The ripples of the monoline downgrades have smashed like a tsunami on the shores of Merrill Lynch and Citigroup. The brute force of that impact is now expected to be nearly $2B for fiscal second quarter 2008. Today, Wall Street’s favorite financial cut-down analyst, Oppenheimer’s Meredith Whitney, cut second quarter expectations on write-downs related to the subprime market and bond insurer downgrades:

Whitney said the downgrade of the so-called monoline insurers last month will force Merrill and Citigroup to book more losses. She sees a $2.5 billion writedown for Merrill related its monoline assets and a writedown of $3.6 billion for Citigroup.

Not to be outdone, UB analyst Glenn Schorr sliced and diced with the best Mrs. Whitney could offer and served up a $4.5B estimate of his own:

UBS AG analyst Glenn Schorr today reduced his estimates for Merrill’s second-quarter to a loss of $2.20 from profit of 55 cents, and he predicted $4.5 billion in writedowns. He also cut his price target to $35 from $47 a share.

The problem for most banks in this bubble bust economy is that as losses and acidic debt rise, earnings are nowhere to be found and the capital raising spigot is being turned off too:

“While the stock looks fairly cheap on our numbers, given the challenging earnings backdrop, Merrill’s remaining exposure to troubled asset classes and the potential dilution from capital raises we remain neutral,” Schorr wrote.

So, as the wave comes rushing to crash in on them, the banks sit motionless with a finger in the dike:

“One of the major problems facing many financials today, including MER, is that new equity raised is merely going toward plugging holes in company capital structures and is not going toward funding new growth opportunities,” Ms. Whitney writes.

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Loan Pains Turned Site Into a Hit

The misery in the housing market is registering on the Implode-O-Meter.

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Bayne Stanley for The New York Times

Aaron Krowne started the Implode-O-Meter Web site in 2007, believing that the troubles in housing would worsen.

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Layoff phone message to Family First Mortgage employees (the company says message was altered) (mp3)

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Mortgage Lender Implode-O-Meter (external link)
Times Topics: Mortgages and the Markets

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Implode-O-Meter’s page experienced a surge in traffic as mortgage problems deepened.

As millions of homeowners fall behind on their mortgages, a fledging Web site called the Mortgage Lender Implode-O-Meter is gleefully tallying the number of lenders that run into trouble too. On Monday, the count was 265 — and rising.

With its tongue-in-cheek tone and running lists of the “imploded” and the merely “ailing,” the Implode-O-Meter has become a sort of Gawker of the subprime world. At a recent Mortgage Bankers Association conference, a speaker addressed what has become a hot topic among lenders: how to keep your company’s name off the site.

“No one wants to be number 266,” said Jim Reichbach, a vice chairman and leader of Deloitte’s banking and securities team. “This is a death toll that is equivalent to the casualty ticker of the Vietnam War.”

The Implode-O-Meter is the brainchild of Aaron Krowne, a former researcher at Emory University in Atlanta. A computer scientist and mathematician, Mr. Krowne, 28, started the site in 2007, believing that the troubles in the housing market, and by extension the mortgage industry, would worsen.

He was right — and the Implode-O-Meter took off. Traffic on the site soared, reaching as many as 100,000 regular visitors, and advertising dollars rolled in. Mr. Krowne quit his day job and hired 10 people for his company, Implode-Explode Heavy Industries.

“The crisis has come in waves,” Mr. Krowne said. “It just keeps coming.”

With the economy struggling, more financial companies, even well-known ones, are finding themselves on the fated list. When parts of Bear Stearns’s residential mortgage unit were sold to private equity investors, for instance, the Implode-O-Meter recorded the sale. And E*Trade Financial could not remove the link on its site to its mortgage division or change the recording on its mortgage division’s 1-800 number without the site chiming in.

The tips usually come anonymously from employees at the troubled mortgage companies. Critics of the site say some of the tips have been more gossip than reality. But the Implode-O-Meter often posts the phone recordings and company e-mail to back up the bad news coming out of places like Merrill Lynch, which in March fired nearly everyone at First Franklin Financial, a business it purchased in 2006.

The Implode-O-Meter is just the latest iteration of online death-watch lists. When the dot-com bubble burst, a slew of similar sites popped up, most notably one with an obscene name playing off the title of Fast Company, the magazine. That site and others like it faded when the technology company blowups were no longer front-page news.

Mr. Krowne is hoping to keep his franchise around longer by looking for trouble in areas like hedge funds, banks, home builders — the list goes on. It has been an adventurous 18 months for the site, including a nasty lawsuit, a run-in with a celebrity and attention from financial commentators like CNBC’s Jim Cramer.

As more mortgage companies go broke, Mr. Krowne hopes to turn a tidy profit by selling his site, possibly to a media company. He takes advertising from “nonimploded lenders,” which, he says, his company has scrutinized. On occasion, he says, he has had to remove a lender’s name from the safe list as their fortunes turn, though he declined to name which ones.

The Implode-O-Meter, Mr. Krowne likes to say, has beat out the mainstream media time and again. Case in point, he says, was last October when it broke the news that Michael Jackson faced foreclosure on his Neverland property. Mr. Jackson’s representatives quickly denied the Implode-O-Meter’s story, which Mr. Krowne chalks up to his start-up status. His response? He posted the notice of Mr. Jackson’s defaults.

In December, proof of trouble at one mortgage company came in the form of a 42-second a