Resuming blogging

During the financial crisis that accelerated since January 2008, I stopped blogging for two reasons:

1. I was too busy. The movements in the financial markets were too violent and frequent to allow much of a break.

2. I had no reason to spill the beans, as one of my professors used to say: when you have figured out a secret formula that makes you money, why would you publish it and tell the whole world?

Well, the results are in from the first four and half months of the year, and I had no reason to write about it or debate it in any shape or form. Suffice to say it was a great market environment to make money. Now that relative calm has returned before the next storm hits, I will take some time to write again.

Latest CPI and the make-believe world we live in

Today's CPI numbers were better than expected, or so you were told by the government and the mindless mainstream media that reports anything the government says as truth except when it has to do with terrorism or the Iraq war.


The CPI numbers were better because gasoline prices in April had a "seasonally adjusted 2% decline", even while the compiler of such numbers (the much respected Bureau of Labor Statistics that used birth-death model to add 267,000 jobs last month) acknowledged that "Gasoline prices rose 5.6 percent in April ...".

Now that is art. To scientifically smooth out the rising gas prices you and I notice at the pump and make it contribute to a decline in inflation is akin to the creation of the magical emperor's clothes. You've heard this, even on CNBC, the question was asked where do we go to fill our tank with "seasonally adjusted gasoline".

The yield on long-end treasuries duly fell, then rose throughout the day.

Fed speak, only talk so far, time to act is NOW

Fed chairman Bernanke gave clear indication yesterday that he is prepared to take "substantive" policy action to counter the threats to the US economy. Fed governor Mishkin today spoke of the readiness to act "decisively" to counter the turmoil in the market. It seems that they finally get it, that the US economy is facing increasing risk of recession.

What is puzzling is why there is just talk, not action. As is widely recognized, the housing bust and ongoing credit crisis in the financial market is starting to take a toll on the real economy. Granted, the Fed funds rate has been cut by 100 bps. If the Fed believes that is enough to forestall the risk to the economy, they should stop talking about the downside risk to the economy being "substantial", and becoming more "pronounced". Give the market time to sort it out. If they believe more policy action (i.e., rate cuts) is required to prevent or lighten a recession, they should cut the Fed funds rate now, not 3 weeks from today.

One, for sure, the Fed understands the time lag for their rate decisions to be felt in the real economy. Two, they should also understand if expectation for further rate cuts is widely held, it acts as a brake on economic activities that business and consumers would normally enter into today. Any reasonable expectation of change in the cost of borrowing in the future results in adjustments in financial calculations today. Put bluntly, the Fed's delay in a rate decision is causing everybody to postpone economic decision making that can be pushed off into the future, which in and of itself is a huge negative to the market.

To start the healing process, the time for the Fed to act is NOW.

The birth/death (of business) ratio and the jobs number

Yesterday's jobs number was not good, to say the least. What most people are not aware of is that it could be really bad out there had it not been for the statistical method used by BLS. The so-called birth/death ratio tends to overestimate jobs created when the economy is at a turning point.

If we subtract the 66,000 jobs that BLS magically adds to the jobs number, we could be looking at a job loss of 48,000 in December. If that's the case, recession had started.

Herd mentality and unwillingness to give up

Today, the Philadelphia Federal Reserve Bank said factory activity in the Mid-Atlantic region fell to a four-year low in December. To anyone who needs more data points that the economy is slowing, and slowing quite significantly, this is pretty solid evidence. Yet, the equity market closed higher. Numerous analysts were cited to insist that a slowdown is likely, but the risk for recession is still remote. Obviously, they drink a different brand of Kool-Aid.

This morning's jobless claims were expected to be flat or lower, yet crept up. The job market is one area that the Fed has repeatedly cited as a promising sign that the economy is still strong. Once the jobs go, the road to recession will appear very short, not windy and endless.

S&P 500 closed around 1461. Even after reluctantly giving up hope that Santa is coming to the Wall Street, the market refused to let reality sink in. It still has some catching up to do on the downside.

Don't fight the Fed, to some extent

I went into Tuesday's Fed meeting with a short-term long view on the market, i.e., I believed in a continued Santa rally. It was foolish on my part to believe in what both Chairman Bernanke and vice-Chairman Kohn clearly led the market to believe: they understood how fragile the market is.

I had no quarrels with their rate decision. Actually, living a world with food and energy (not ex food and energy), I could appreciate how inflation might be a risk (yesterday's PPI and today's CPI confirmed that). What I couldn't comprehend is the amateurish way the Fed handled the rate decision and the announcement of coordination with 4 other central banks the next morning (after a deliberate leak Tuesday evening by a senior Fed official who asked not to be named). Had they made the announcement at the same time they announced the rate decision, the Santa rally might have continued.

What their inept handling of the two announcements revealed was a Fed that is behind the curve. In a credit crisis (i.e., a crisis of confidence), the Fed needed to exhibit confidence-inspiring steadiness.

My positions got whacked by the Fed, but I got the chance to short into the Wednesday morning rally, and I continue to short the market. What profit the Fed took away from me, I am going to claw it (and more) back on the downside.

The Fed blew it

Until today, I kept my hopes up that the much-feared recession can be avoided. The Fed's failure to act more forcefully yestoday dashed that hope. I think the odds of a recession next year is now higher than 50%.

What the Fed seems to fail to appreciate is how severe the housing recession is (and will continue to be) and the resulting pains felt by the financial system. Individual members on the FOMC may get it. But the much-emphasized consensus-driven committee as a whole fails to reach an understanding on this and act on it.

It would be naive to sugar-coat this: the biggest housing bubble in US history is bursting. The S&P 500, even after yesterday's drop, still stands only 5% below its October all-time high. The equity market has some catching up to do, on the downside.