Rebel Traders – Analysis Without The Hype

Editorial by RebelTraders:

The demise of Lehman Brothers (LEH), which filed for bankruptcy on September 15, 2008, was suicide. And that suicide was for all intents and purposes assisted by the government and the Federal Reserve Bank of New York, then headed by one Tim Geithner.

This week the examiner’s report on Lehman Brothers bankruptcy proceedings was released to the public and it reads like a murder mystery, not all that dissimilar to the board game ‘Clue’.

From my own interpretations of the report thus far, Lehman’s troubles began long before their collapse on September 15 2008. The troubles, heightened by the collapse of the mortgage market and then amplified by a never ending shell game at the hands of upper management, financial officers, and even the independent auditors. Many now claim they had no knowledge of the tricks being played with the books, but, it was their job to know where the money was, and why it was there or not.

Ernst & Young were the independent auditors for Lehman Brothers, they were supposed to be the final check and balance that everything on the books was honest and fairly represented. In that they signed off on the financial statements implicates them by default in my opinion. This reminds me of Arthur Anderson, then auditors for Enron all over again.

What Lehman was doing was hiding bad assets, what otherwise would have impacted their quarterly balance sheets in a negative way by moving them around in a complex shell game called “Repo 105” and Repo 108”. These were essentially conduits to move bad assets off the books, and in turn receive cash for those bad assets. This made the bad stuff disappear for a while so to speak, and the quarterly reports reflected the cash on hand and not the bad assets. Even worse is that Lehman never reported that these were repo operations, instead they recorded these transactions as sales. This alone is fraud, and it should have been known by upper management, including the independent auditors.

Now comes the assisted suicide part. Lehman Brothers was truly sick. As far back as March 2008 the Federal Reserve Bank New York (FRBNY), at the time when Tim Geithner was at the helm, began monitoring Lehman Brothers. The FRBNY devised stress tests for Lehman to gauge the health of the company under adverse conditions.

From page 1488 of the report:

After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress?testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754 Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757 It does not appear that any agency required any action of Lehman in response to the results of the stress testing.

In other words, The Federal Reserve Bank of New York devised three separate stress tests and Lehman failed every one of them. Then, Lehman devised its own stress test and they passed. Lehman then submitted the findings of their own stress test to the FRBNY and the issue was put to rest. No one knew at the time that Lehman had failed the FRBNY stress tests except for Lehman and The Reserve bank of New York.

Is this another case where Tim Geithner will say that he had no direct knowledge of the stress testing being done, like he has claimed with certain AIG emails and transactions concerning material information be withheld from the Securities and Exchange Commission?

Why is it that the biggest decisions always happen to take place under the noses of those in charge. To me it seems to be selective memory.

It is my opinion that the problems at Lehman Brothers was known for many months and the FRBNY knew this but kept it secret. In my view the actions of the regulators, the SEC, and that of the New York Reserve Bank was a coordinated effort to hide the problems taking place from the public, this too is fraud. The act of keeping quiet and not disclosing what was known from the stress tests was, in my opinion, the same thing as the FRBNY acting as Dr. Kevorkian. However in this case the death was not painless and the pain was felt by individual investors.

Lehman, under the daily supervision of the FRBNY, played with the books by constantly moving the bad money out of view, falsely creating a better picture of the liquidity situation within the company. It is my opinion that all of this was conducted in a way to protect the knowledge of how Wall Street operates. The 2,200 page report reads like a murder victims coroner report. In it, is enough information that should have upper management at other large firms scurrying like cockroaches in the night when the lights are turned on. The games that were being played at Lehman were, and are, probably being played at other firms to this day in varying degrees, this I have no doubt.

The collapse of Enron was supposed to serve as a wake up call, and actions taken then were to prevent this kind of stuff from ever happening again. But with any regulation comes new ways to hide things.

What is even worse, what is so scary, and what should have everyone unable to sleep comfortably is that the current financial reform bill being proposed by the Senate has absolutely nothing in it of any substance that will change the normal way of Wall Street business. The tax payers will always be on the hook in the event of another big failure or bailout. The financial reform being proposed is nothing more than an illusion that the Government is on top of things and will prevent it from happening again.

In reality, the government is simply coddling Wall Street as they always have, this time under the illusion that the Government is interested in ‘our’ best interests by presenting a financial reform bill that has no teeth, but sounds good on the surface because it uses the publicly identifiable buzz words like “too big to fail”. Really it is nothing but worthless paper in this authors view.

As usual Dylan Ratigan always has a way of explaning things.

Visit msnbc.com for breaking news, world news, and news about the economy

The economy is doing so good now that some states can’t afford to pay tax refund checks. Yes, that was intended sarcasm.

Residents eager to get their state tax refunds may have a long wait this year: The recession has tied up cash and caused officials in half a dozen states to consider freezing refunds, in one case for as long as five months.

[…] "It’s an indicator of how bad it is," says Scott Pattison, executive director of the National Association of State Budget Officers. "You know things are bad when you have to do that."

New York, hit with a $9 billion deficit, may delay $500 million in refunds to keep the state from running out of cash, says Gov. David Paterson. […]

Hawaii’s Department of Taxation says some residents may not see state income tax refunds until the end of August, The Honolulu Advertiser reported. It was part of a plan by Gov. Linda Lingle to deal with a revenue drop-off by pushing costs into the next fiscal period, which begins in July. […]

[…]The delays come as some states continue to face deep budget holes, even as economists say the nation as a whole has begun recovery. In a recent report, the budget officers group and the National Governors Association said state fiscal conditions "have continued to worsen," and that state revenues can be expected to lag one to three years behind a national recovery from recession.

This fiscal year, the report said, 36 states have cut nearly $56 billion in spending, and 30 states have cut funding to public and higher education. (USAToday)

State and local budgets are suffering greatly.

While not the most popular technical indicators in the chartists toolbox, A Fibonacci Time Series analysis does occasionally provide food for thought. Especially on the two S&P 500 charts shown below.

(click on image for full size)

Once again investor sentiment comes to the forefront as more and more of the small retail investors pile into stocks. Investor sentiment has usually served as a contrarian indicator to the market.

From the Pragmatic Capitalist

The warning flags continue to pop up all over the place and investors continue to run head first into stocks.  None of the recent warning flags are as alarming as today’s huge spike in individual investor sentiment.  Small investor bullishness surged to 45.3% versus last week as the market continues to melt higher.  This has served as a fairly reliable contrarian indicator in the past as small investors tend to pile into stocks near the end of rallies.

Individual investor sentiment has reached levels that have historically been followed by very poor equity returns.  A few of the notable periods when investor sentiment was this high include:

• A 50% reading prior to a 3 month 10% sell-off in Q2 2008
• A 45% reading prior to the 2008 market crash
• A 47% reading prior to the 20% sell-off to the March 2009 lows
• A 49% reading prior to the January 2010 sell-off

[…] With institutional investors stacking up on the bullish side of the trade and now individual investors stacking up on the same side you just have to wonder – who is left to buy stocks?   Better yet, who are they going to sell to?

There is a nice graph on the Pragmatic Capitalist page showing the investor sentiment.

Fitch ratings has released an update on Residential Mortgage Backed Securities.

Fitch: California prime jumbo RMBS delinquencies rise to 11.6%; Florida to 17%

California prime jumbo loan performance continued to weaken in February, with 60+ days delinquencies rising to 11.6% from 11.3% in January (and 4.7% in February 2009). During the first two months of 2010 Florida had the biggest jump (nearly 1%) of the five states with the highest volume of jumbo loans outstanding. New Jersey was second of the five states with an 80 basis points (bps) increase over the same period.

The five states with the highest volume of prime jumbo loans outstanding (California, New York, Florida, Virginia, and New Jersey) represent approximately two-thirds of total  delinquencies. Prime jumbo RMBS 60+ days delinquencies for these states at February 2010 compared to the prior month, and their approximate share of the estimated $376 billion market, are as follows:

–California: 11.6%, up from 11.3% (44% share of the market);
–New York: 6.3%, up from 6.1% (7% share);
–Florida: 17%, up from 16.6% (6% share);
–Virginia: 5.7%, up from 5.6% (5% share);
–New Jersey: 7.9%, up from 7.4% (4% share).

Items of interest from the wires and the financial circles:

  The government ran up the largest monthly deficit in history in February – AP NEWS Wire 

    Greece – Economy will decline more than expected – Oops! – Reuters

    Sales tax rates reach new record high – Forbes

    UK ask banks to check their books to see if they can withstand another two years of recession – London Times

    Airlines throw temper tantrum, threaten to cancel flights over new rules that prohibit them from keeping passengers locked in the plane for hours on end while still on the ground – WSJ

    GMAC – No exit plan = Billions of losses – WSJ

    JAPAN Q4 FINAL GDP Q/Q: 0.9% V 1.0%E; ANNUALIZED: 3.8% V 4.0%E; NOMINAL Q/Q: 0.1% V 0.2%E; GDP DEFLATOR Y/Y: -2.8% V -3.0%E (wires)

    FHA may warn Congress on Thursday that a double-dip in housing prices may be caused by a modest increase in the minimum down payments on FHA-backed loans – (wires)

    In February, Shanghai property sales volumes declined by 54% (wires)

    CHINA FEB INDUSTRIAL PRODUCTION Y/Y: 12.8% V 19.0%E (5-month low) (wires)

In 2007 Money Magazine named Moorestown, NJ as the best place to live ranking it as the number one spot in the yearly analysis of cities and towns all across America.

How quickly things change. Moorestown, NJ is now in financial hardship and may have to layoff employees. This story is of particular interest to me as Moorestown is in the area where I reside.

In early 2008 NJ Monthly magazine oozed with puffery:

Sprawling estates are set back from the road or clustered in new developments, while smaller homes kiss the sidewalk in older neighborhoods. Throughout town you’ll see For Sale signs, but all the recent attention hasn’t pushed Moorestown’s housing prices to the stratosphere—at least not yet. The average home price in Moorestown in 2005 was just under $483,000, according to the state Division of Taxation, a 61 percent increase since 2000. That average can be misleading, pumped up by new and old mansions that dot the town. Housing values vary widely, with most homes priced from $250,000 to $2 million.

Then there’s the 45,000-square-foot hilltop home of Vernon C. Hill, chairman and CEO of Commerce Bank; known as Villa Collina—a bit of wordplay; collina is Italian for hill—it may be the largest private residence in New Jersey.

"Moorestown has more of what every buyer wants,” says Maria Giarratano of Prudential Fox & Roach Realtors in Moorestown. If you’re looking for new developments, Moorestown has them: A cluster on the east side of town ranges from modest single-family homes to multimillion-dollar showpieces. If you want to break out of the cookie-cutter model, Moorestown is full of Victorian homes that evoke a traditional small-town feel. But expect to pay more the closer you live to Main Street, with its toy store, ice-cream parlor, lots of crosswalks and benches, and, of course, Starbucks. Main Street is Moorestown’s heart, the center for activities such as the annual Halloween parade and winter carnival.

Moorestown is also home to Computer Science Corporation, PNC Bank, and Lockheed Martin, Burlington County’s largest employer, with 5,000 workers. Routes 73 and 295 connect Moorestown to office parks in nearby Marlton, Mount Laurel, and Cherry Hill.

Owens and Hill are hardly the town’s only big names. Moorestown has a history of attracting the rich and famous. The suffragist Alice Paul was born there in 1885. Town resident Samuel Leeds Allen invented the Flexible Flyer on Stokes Hill in 1889—and, yes, kids still sled there. Eldridge Johnson, owner of the company that became RCA Victor, called Moorestown home. And a string of professional athletes have settled in Moorestown over the years, among them Eagles quarterback Donovan McNabb.

How fast things can change:

"What we face is what all towns are facing — significant budget challenges," Gallo said. "Council’s job is to act responsibly for a long-term, sustainable way to take care of employees and provide services to the town."

Mayor Daniel Roccato said the township is asking unions to agree to forgo a raise this year and to have employees contribute 1.5 percent of their salaries to the cost of health benefits.

"We want to realign some employee costs and to have informed, reasonable discussion about how we can work together to create a more sustainable budget and to avoid layoffs," he said.[…]

As of Monday night’s deadline to respond, township officials said none of the unions had agreed to reopen negotiations.[…] (Courierpost)

Also this:

[…] Moorestown’s school board, which initially planned to cut more than 40 jobs and raise taxes by $80 on an average house, has had to re-examine those measures after the (State) spending freeze claimed $1.4 million, said Superintendent John Bach. "We face several stark choices," he observed in a budget overview.

How quickly times can change. In 2007 Moorestown enjoyed a $5 million budget surplus. Today the town is in financial chaos as it tries to open up and renegotiate existing contracts to cut costs. The school board is facing spending cuts and layoffs, and town services are also likely to be curtailed in the future.

Once the number one town in the nation, now just another town facing financial strife. Moorestown is still a very beautiful town, but internally it is facing significant hurdles.

Moments ago I went long TWM @ $21.11 (ultrashort of the Russell 2000)

Stop is $21.04

I am playing a trade based on the current chart pattern on the Russell 2000 at this moment.

What will be the total impact of the 2010 Census in terms of employees hired to work on the project, and when can we expect to see the peak in census hiring?

Going over data from the Bureau of Labor Statistics I was able to create a graph that depicts the government employee staffing levels during the current 2010 census against the employment levels from the 2000 census.

The census, which takes place every decade, begins with a small amount of hiring by the government to prepare for the big day when the actual mailings go out to every home in the country. This preparation includes such tasks as taking the previous census data and updating it to current electronic database standards (so as comparisons can be made once the current census data is entered), a committee to work on what questions will be included in the mailing, legal advisors, and other office staff to support the project.

The largest jump in employees working for the census project occurs between 3 and 5 months after the mailings go out to the public. This is when the government hires the most temporary workers to be key punch operators (data entry specialists in today’s lingo). These are the people who will either scan and verify every document returned by the residents of the country, or will enter the entire data manually. More than likely it will be a cross between the two methods as no matter how easy you make a form someone will fill it out incorrectly and it will have to be entered manually.

We have been hearing for many months that the 2010 census will be adding jobs and will improve the employment situation for the country. On paper it will look good, for a while anyway. A great majority of people who are hired to work on the 2010 census will be gone once it is all wrapped up. Many before it is even completed.

The only employees left will be a handful of number crunchers who will spend months extracting every nuance of information from the massive computer database of information.

This month (March) the 2010 census questionnaires will be in the mail. If this census follows the time line as the census of 2000, then we can expect to see the largest hiring to take place around late June to late August of this year. On the graph you can see that hiring spike during the 2000 census (blue line) which was approximately 4 months after the questionnaires were mailed. That employment spike was a significant number of data entry specialists. And once the data is entered from all of the forms, those workers were let go soon after as evidenced on the graph by the large drop that followed.

It is with no doubt that the main stream media will be reporting the ‘total’ employment situation as greatly improving come late Spring and early Summer this year. But, once again, one only has to look underneath the veil to see where the numbers come from. In this situation it would appear that aside from any organic growth, if any, in the real economy that most of the employment gains in the months ahead will be temporary government workers.

I will update this graph when new data is issued each month.

Taxes go up in 33 states in response to declining tax revenues.

The tally for 2009 is in and it is historic. State tax revenues declines by $87 Billion, the steepest decline on record. This decline is attributed to lost jobs, reduced wages, and lower economic activity.

As tax revenues decline some states have responded by eliminating tax exemptions, increasing fees, and broadening tax bases.

Who said that the middle class would not see their taxes increase before the election?

The full report from the Center on Budget and Policy can be read below.

State Tax Changes

Economic data and earnings scheduled for the week of March 8th to the 12th 2010

(all times are US ET, schedules are subject to change)

MONDAY

17:00 Fed’s Sack speaks to economists in Arlington

Earnings

Before the Open: COMV, DGW, FREE, PARD, YGE

After the Close: CAP, CPE, CASY, FRPT, HRB, MAKO, NCMI, RSCR, SNHY, TIVO, VVUS

TUESDAY

09:30 Fed’s Evans speaks to economists in Arlington

10:00 IBD/TIPP Economic Optimism (last 46.8)

13:00 Treasury’s $40B 3-yr note auction

16:30 API Crude Oil/Gasoline/Distillate Inventories

17:00 ABC Consumer Confidence (last –49)

Earnings

Before the Open: BRNC, CALP, CRIC, CODI, DKS, EJ, EXEL, GPOR, KR, LMIA, NXG, SSI, SWSI, TSTY

After the Close: AONE, AVAV, ALOG, BIDZ, SAM, PSS, DXCM, EXLS, FLOW, ICFI, JCG, SLXP, VRSK, ZIPR

WEDNESDAY

10:00 January Wholesale Inventories (last -0.8%)

10:30 DoE Crude Oil/Gasoline/Distillate Inventories

13:00 Treasury’s $21B 10-yr note auction

14:00 February Monthly Budget Statement (last -$42.6B)

Earnings

Before the Open: CAS, AEO, BONT, BF.B, CRZO, PLCE, CWEI, CPIX, ESLT, ELMG, FSIN, HRBN, HWK, QLTI, SOL, TRK, RMIX, MTN

After the Close: AACC, BLDP, CLNE, FCEL, GYMB, HIL, HOTT, IDSY, IPAR, JAS, MW, MBLX, VITA, PRSC, SMTC, STAN, TTGT, WES

THURSDAY

08:30 January Trade Balance (last -$40.2B), Initial Jobless Claims (last 469K), Continuing Claims (last 4.50M)

10:30 Natural Gas Inventories

13:00 Treasury’s $13B 30-yr note auction

14:00 Fed’s Dudley speaks to London economists

Earnings

Before the Open: CSUN, DK, IMAX, JTX, MEA, PNY, SFD, STEI, SUI, BKE

After the Close: ARO, AIRM, CCO, GG, KOG, NSM, OMPI, OPTR, PSUN, PLL, POWR, ZQK, SEAC, SHFL, SWHC, ZUMZ

FRIDAY

08:30 February Advance Retail Sales (last 0.5%, ex auto 0.6%),

09:55 March preliminary University of Michigan confidence index (last 73.6)

10:00 December Business Inventories (last -0.2%)

– OKE to be added to S&P500, GHL to be added to S&P400, POWL to be added to S&P600 after the close

Earnings:

Before the Open: ANN, CTRN, HIBB, KIRK, PEI

When investment advisors are all leaning one particular way (bullish or bearish) then it is a sign to be cautious. That is what history tells us.

The Hulbert Stock Newsletter Sentiment Index (HSNSI) is a gauge of several hundred investment advisors that are tracked on a routine basis.

Based on the several hundred investment advisers I track, I’d have to say that bullish sentiment is approaching dangerously high levels. Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which represents the average recommended stock market exposure among a subset of short term stock market timers tracked by the Hulbert Financial Digest.

It currently stands at 62.8%, up from 13.8% just one month ago. That’s an awfully big jump for so short a period of time, especially considering that the Dow Jones Industrial Average rose a modest 4.4% over this period.

Also worrying is that, with but one exception, the HSNSI is now at its highest level since early 2007, more than three years ago.

That one exception, when the HSNSI was higher than it is now, came in early January, two months ago. Soon thereafter, of course, the market entered into its January-February correction, during which the Dow declined by nearly 8%.

Does the stock market face an equally large decline this time around? The answer, from a contrarian perspective: It depends on how advisers react to whatever weakness materializes. […]

We’ll know soon enough how the sentiment picture unfolds, of course.

But, as of now, because advisers have been so quick to jump back on the bullish bandwagon, downside risk appears to be elevated.[…] (MarketWatch)

Human psychology is one of the most intriguing aspects of market research. No matter how educated a professional investment advisor may be, he or she is still human, and that human psychology is still a factor in decision making. Separating the exuberance of price advances from reality is, and always has been, the most dangerous single factor in making bad trading decisions.

I have read a number of books concerning the psychology of trading. One of my favorites is still the book “Trading in the Zone” by Mark Douglas. Well worth the read in my honest opinion.