Populism Rages Against 85 Broad St

Sorry for the lack of posts with much substance of late. I should be back to a more normal schedule from now on.

The Goldman Sachs earnings this morning were, as expected, a total blowout. They even blew away the blowout expectations. Short of being good news, people are angry. And for good reason. That's not to say we should be wishing all of these financial institutions ill. It is obviously in the best interests of everybody to see any company perform well. But it is the nature of how Goldman managed to achieve this feat that has people fuming mad. The issues are as follows:

1) Goldman, along with Morgan Stanley, American Express and a number of other financial players were in deep, deep trouble in September. Within days of outright collapse. Bear Stearns was already toast, Lehman was done, Merrill was forced into the hands of BoA (or the other way around, depending on how you look at it). The brokerage model was collapsing. They were all leveraged to the hilt - 40:1 in most cases. So in order to "save" the economy from collapsing, Paulson, Bernanke, Geithner, Chris Cox and Sheila Bair figured out a way to save the big kids: They would convert them to banks. As banks, they would be more eligible for backing by the FDIC and the Fed could trade paper with them through the discount window.

But instead of acting like banks, Goldman (and the others as well) essentially continued operations as usual. They continued operating an enormous hedge fund. They maintained their enormous proprietary trading desk. They even gained market share in intra-second hypertrading (known as supplemental liquidity providers). Evidently, attracting deposits and making standard loans was not in Goldman's plans. So they took the taxpayer's explicit guarantee of risk, and continued doing what got them in so much trouble in the first place.

2) Goldman received tens of billions of dollars from the taxpayer. Some of it was direct, through the TARP program. An unknown amount was guaranteed or swapped with the Fed. But a large chunk was indirect - primarily via the AIG bailout. Goldman had a ton of exposure to credit default swaps (CDS) where AIG was the counterparty. When AIG went boom, Goldman (and nearly every other financial institution in the western world) were left holding the (empty) bag. It would have been enough to cripple the firm. So the lackeys in Washington again decided to discretely pump up the balance sheet of Goldman via a $100+ Billion dollar bailout of AIG. AIG would then pay Goldman every penny that was owed to them (13 Billion, plus 6 from just days before AIG's failure). There was no haircut to be taken because of unwise bets. They were made whole.

3) The treatment being paid to Goldman and many of the other industries (the auto industry, for example) are not even close to balanced. Of course, I don't believe anyone should be bailed out. Period. But allowing individual claimants (not just bondholders, but injury claimants) of the automakers, to be run roughshod over in bankruptcy court, while claimants of financial firms (Goldman to AIG) to be paid 100 cents on the dollar is beyond hypocritical. It is an insult to anyone with a conscience.

4) And now that Goldman has paid back what it is supposed to owe from the TARP program along with a one time special dividend for the privilege, Goldman is back to business as usual, raking in enormous profits by taking enormous risks in volatile markets. And their using those profits to make their highest bonus payments ever. Not to mention an average salary of $700,000 for everyone in the firm. That includes the mail boy and the secretary.

People have a right to be mad at this. Not always is populist outrage at private business unjustified. But the populism is growing like a raging fire on this issue. After Matt Taibbi's apt description of Goldman as, "... a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," many have taken an interest in the shenanigans going on at 85 Broad St. Below is a great discussion with Barry Ritholz, author of Bailout Nation and Dylan Ratigan. It's hard not to agree.

But will the American people do anything to stop it knowing the political clout Goldman carries in Washington? I guess that is the Trillion dollar question...

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Technical Update 26.09

Another low volume week saw the major US indices give back an additional 2% of the spring rally. As usual, however, there were a number of underlying developments in the currency, commodity and bond markets to keep matters interesting.

The equity selloff was widespread across the globe but not equally as mundane. The Russian market lost 13%. Italian, Japanese and Canadian Indices were off over 5%. And most european indices took about a 4% hit. This is consistent with my forecast of weakening fundamentals around the world as the US "muddles through" for the next few months. Eventually, I feel all the major markets will meet the same fate of much lower prices as debt and leverage continue to be unwound.



The German market looks similar on the chart below, but is clearly underperforming.



The US Treasury market had no problem gobbling up an additional 70+ Billion in supply and gained additional ground on the week. Yields fell to 4.2% on the 30-year. Continued strength in the bond market came as a surprise to many who had feared that the Treasury's need to raise money would cause skyrocketing rates (lower prices). But it can be thought of as nothing short of amazing that amid all the increasing budget deficits and unfunded liabilities that are mounting, investors are still willing to accept such a low rate. Why would they do this? Well, for one thing, the savings rate is rising among the average consumer. And second, they obviously feel that there are no better investments to preserve their purchasing power - hallmarks of deflation. Unfortunately, for the economy in general, treasury bonds are probably the worst investment that could be made. If a robust recovery is to be had, we would expect to see money flowing into the early stages of production - capital investments that leave us with wealth when they are finished. That isn't happening yet. Most businesses are still in the process of downsizing and deleveraging while any spare cash gets recycled into treasury bonds.

This may or may not make long term bonds a good buy at these levels. I am not, however, expecting to see much lower prices anytime soon.



The currency markets continue to be where the action is. The Japanese Yen had a very strong week, perhaps a sign that the carry trade is again being unwound. This is something that has kind of fallen off the radar of late, but was a harbinger of pain to come last summer. I prefer to watch the Euro/Yen cross, which itself had a very large move last week. Continued adverse movements here will likely portend a continuation of Dollar strength.



The Dollar, however, has made a series of lower highs in the last few weeks, which is not exactly what one would want to see if they were a bull. There is a possibility for a new low that would draw an elliott wave "5" down on this recent "C" wave of the move since March.



And finally, the commodities markets saw additional weakness this week as well. The CRB index posted one of the weakest recoveries among asset classes that got smacked in '08 and is now leading the way down in this correction. I'm looking for substantial new lows in commodities in '09.



Have a great week!

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Midweek Thoughts

It has been a very slow week in terms of news, and I get the feeling that many are on holidays or in a "wait and see" mode. The recovery/no recovery debate has been beaten to a pulp. Earnings season doesn't get quite underway until next week.

The selloff to date has run into the first area of support on the charts. Secondary support levels are around 830 and 780. It is possible that the selloff has exhausted itself for now. A number of my shorter term indicators are flashing oversold, and the bounce that ensues should give us a signal as to whether it was just a seasonal movement before late summer highs ahead, or simply a working off of the oversold condition.

I favour a move to one of the lower levels mentioned above, but will hedge my short side exposure with some calls in the financial space. I'm taking a long weekend for some much deserved R&R. I'll be back Sunday and will hopefully have a technical update before Monday morning.


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.