Debtor Nations: NOT A GOOD BET

LAWYERS DRAFTING REGULATIONS
It's refreshing to have an administration bent on bringing change in the form of regulation to the markets. Unfortunately the outcome of most encounters are starting to show wear and tear. The fox has left the barn, guys! Law firms and lobby groups in Washington must be having a record year! With so many new regulations coming out, we are surprised only a few SEC agents have been caught doing insider trading!


TIME TO TALLY
We have winners and we have losers...


FOR NOW

Winners have been large banks supported by taxpayers on a global scale. Unfortunately this is a shell game and until assets start to transact and deals get done, balance sheets are just illusions.


The biggest losers are by far foreign holders of US bonds. They just have been destroyed in the last month and we predicted that at one point the rest would follow. Unfortunately, the massive injection of liquidity is not having the results hoped for. While banks are winning on the spread game, everybody else is losing out.
Conventional market knee jerk reaction of flight to safety from out of stock to the relative SAFETY of bonds has NOT OCCURRED. We said this would eventually happen. IT took six months longer but we have defeated valiant efforts by Chairman Bernanke and Secretary Geithner. BOTH Equity and bonds markets fell this week. Gold rallied.

THE TYPE OF NEWS TO EXPECT THE NEXT SIX MONTHS
Bbg - Kokusai Cuts Treasuries as Fukoku Sees End to Rally
May 21 (Bloomberg) -- Bond investors in Japan from Kokusai Global Sovereign Open Fund to Fukoku Mutual Life Insurance Co. are trimming their holdings of U.S. Treasuries, betting that the biggest slump in U.S. debt in 15 years will likely continue.
Kokusai Global Sovereign, Asia’s largest bond fund, reduced its bet on long-term Treasuries in March, while Nippon Life Insurance Co., Japan’s biggest life insurer, plans to focus its new purchases on yen-denominated debt, it said last month. Fukoku Mutual says it will buy yen bonds because a 10-year rally in U.S. debt will end this year.



THE PATIENT IS NOT RESPONDING

We suspect that the market which lost an aggregate of $50TB in value from July 2007 to March 9,2009 isn't really well served by the $13TB thrown at the problem by global leaders.

Unfortunately, the cost of capital is rising, deals are not getting done because banks are requiring more equity for transactions to occur and the process seems bogged down.

WHAT TO EXPECT
On the upcoming short week, it will become a more pressing matter to see what financial reporters decide "what" is news.

CALIFORNIA
We suspect that California's finances will come front and center and from there the markets will take their cues.


KEEP AWAY FROM THE US DOLLAR
In any case, the odds of the S&P going to 1k seem diminished while those of the US 10yr hitting 3.50% are now but a foregone conclusion.

As Recently as two weeks ago, pundits were suggesting that the US was going to lead the world out of recession, but the recent destruction of the USD suggest, that investors may be more keen to looking to China and other creditor nations as safer harbors in these troubled times.


Good trading to you.


DCW

Not SO fast on the equity rally!

Great week was had by all the longs but a massive hangover is the price to pay for all the giddiness! Day trading was exhilarating and the shorts got squeezed!
In a bear market Longs get clobbered and THEN Shorts get clobbered!
Amazing how the financials went up an aggregate of 23% last week but our sole long holding C barely moved! $4.23 will be the death of us! After trading it long at 1, 2,2.50 and 3.25 we couldn't leave well alone!

BONDS ON SHAKY GROUND
Fed today bought $3.510BB out of $10.426BB offered. The percentage taken, 33.7%, was the highest takedown in a bond operation, though not significantly higher than the 30.7% taken on March 30. The dollar amout purchased was a high for the bond sector, exceeding the $3.025BB purchased on 4/30!
That should tell you something!
If the Fed has to both support the dollar AND bond yields in the face of repeated skepticism, there is trouble brewing.

SKEPTICISM RAMPANT
The skeptics complain that the banks have cornered The Treasury secretary and sold him on a bill of goods were more TIME is necessary to fix their balance sheet. Any stricter test would put "undue "pressure on them. As usual bankers have gotten it ALL wrong. When BAD economic numbers come out after this BEAR RALLY, bank stock will be testing and visiting other bottom dwellers.

LET THE FACTS SPEAK FOR THEMSELVES
Stress test “adverse” scenario for 2009 GDP growth:

-3.3%

Actual annualized 2009 GDP growth year-to-date:

-6.1%

Stress test “adverse” scenario average unemployment rate for 2009:

8.9%

Actual 2009 average unemployment rate year-to-date:

8.3%, with a rate of 8.9% in April

Stress test “adverse” scenario indicative loan loss rates:

3% to 4% for prime
9.5% to 13% for Alt A
21% to 25% for subprime

Actual Q1 2009 serious delinquency rates of Fannie Mae, the largest mortgage lender in the U.S.:

3.15% for conventional single family
9.6% for Alt A
18.0% for subprime

Could the American public handle the facts about Fannie Mae and Freddie Mac?

Estimate of total U.S. Treasury commitment to American International Group:

$170 billion

2008 Treasury funding commitment to Fannie Mae and Freddie Mac:

$200 billion

New 2009 Treasury funding commitment to Fannie and Freddie:

$400 billion

Total Q1 2009 nonperforming loans at Fannie Mae:

$144.9 billion

Actual Q1 2009 loss at Fannie Mae:

$23.2 billion

Total value of home mortgages owned or guaranteed by Fannie and Freddie:

$5.3 trillion

CHERRY ON TOP? PAKISTAN!
Now more worrisome and of more immediate concern than US treasuries(actually betting on !)is the rapidly escalating conflict in Pakistan...
For all the strategists that have sound dire warnings for the last 50 years, simple trips and a few drone missions won't make the Talibans retreat!


There are reasons enough not to sell ALL your gold just yet... adn some puts on the S&P 500 sound juicy enough!


Good trading to you