Wednesday, January 20, 2010

Popularity Sinks Lifeboats

Reader email: "I really like the comments you made about BAC and GS but about the insinuations of the FED wanting to kill BAC or other are a bit light on the facts and argumentations if you can post when time maybe mention why GS would go under
or elements that would direct one's thinking toward that understood that some stuff might not sit well on internet pages"

I do not want to be popular, I'm just posting where the truth is.

It is interesting to see the reaction to my forecast, that most major banks and insurances companies (and every other mega-leveraged financial as well as the industries dependent upon them like airlines and autos), will go bust within a few years.

When I first made that forecast, the Dow was 14K and Bear and Lehman and GS and AIG and Countrywide and NovaStar and Fannie and Freddie were all "infallible," so I understood why most people didn't get it. But after the bailout "saved" the financial system from "certain collapse" according to the banks themselves, who then stole TARP money to finance another high stakes gambling fix as they found themselves unable to continue speculating with people's deposits, it's amazing, but not surprising, that the same people who didn't get it the first time around still don't get it now, and to an intensified degree.

They didn't see any problem, then they were told the entire financial system was in collapse (completely unexpected, from their perspective), but the fact that a huge heist claimed to fix all the underlying problems (problems they never saw nor understood) has actually served to increase the amount of blind faith in the system.

Nothing has changed, Goldman Sachs still went bankrupt.

Goldman Sachs is still bankrupt. Even more so, now that they quintupled-down with money they stole from poor people on the same losing bets. I pick on GS a lot, because I like to point out that the false gods that so many people blindly worship are not immune from the laws of nature. To the contrary, their fundamental incompetence is the very cause of the larger scale manifestations of those laws. Everyone knows, but doesn't want to hear, that Goldman Sachs went bankrupt (along with LEH, BSC, CFC, NFI, the list goes on....). So they need me to state the utterly obvious.

I've posted a lot of specific numbers on GS over the past year, their asset column has only massively deteriorated against their $1.1T debt. So you can simply subtract a few hundred billion more from net. This is a company, mind you, that only had $39B in operating capital above $1T+ debt, in their heyday. What fraction and how much their massive commercial and residential subprime "assets" have deteriorated is impossible to know, since the few who might know (though I doubt anyone knows) aren't saying, but it is safe to say that GS's failure to write any portion of their mega-leveraged real estate "assets" down is laughable at best, and a laughable crime at worse.

It is all an incredibly interesting exercise in the irrational nature of group human behavior. Even after my first forecast came to be, completely to their astonishment, they are still convinced that everything is wonderful--no, they think it is even better.

The greatest shorting opportunity of our lives (I said that at Dow 14K, but that one is behind us) sits right under our nose.


  1. Take a look at CREE. People thought they were shorting a 100 p/e company because they were looking in the rearview mirror. They wake up to find out that the stock beat earnings and is now a 30 p/e company, even with the stock up 15%. This is the problem with looking at trailing earnings, they mean nothing, all that matters is future earnings. For your predictions to come true you need to see the S&P bring in earnings in the $40 range in 2010. This is very possible, but if the S&P brings in $70, which would be coming up short of most peoples view, it is fairly valued in here, maybe better valued around 1000. Should be an interesting year, but CREE shows you why much of your basis is flawed. Of course I sold into CREE here as it is a good time to get out when the shorts mis- read reality and are forced to cover. I bought shares from them and sold them back to them.

  2. "They wake up to find out that the stock beat earnings and is now a 30 p/e company"

    Even a 30 P/E still needs to fall 80% in price to get to the "normal" depression range, assuming earnings don't get depressed too.

    But P/Es in isolation are meaningless. For example, 5th waves could produce extreme P/E's that are just fine.

    Since we are starting a 3rd wave down right now, major index P/Es flashing near 200 mean something. Big.

  3. You can have a domestic depression and a 30 p/e. The evidence is right in front of you, you just need to understand why. Perception is all that matters, everything that is wrong with the economy is already known. Everyone knows the banks are insolvent, everyone knows the debt to GDP is off the charts. What does that have to do with CREE? Follow the cash flow and you will find the profits. Maybe something unknown occurs that the market has not discounted and you may return to a time when people have a different tolerance for risk and thus are not willing to pay a premium for something. Until now the market is trading at a pretty historically average price. Those that understand how the markets work have been long for months and are now selling because the market is fairly valued and there is no distinct advantage to being long or short, so take the profits and wait for the next rally to get short or the next tank job to get long. The money is made in fading the large swings. If you don't care about losses you can of course always buy or always sell and you will both win depending on when you exit.

  4. "Perception is all that matters, everything that is wrong with the economy is already known."

    Maybe, by the 2% who register bearish.

  5. Personally, I don't care what the published P/E of Cree says, or any company's, as I don't believe their accounting.

  6. I see those gold and silver short plays are working well today FDR (+13%). Nice.

  7. Thanks Hetty. I'm pretty excited about the next few years. The Bear Bandwagon (which didn't even exist in 07) is finally empty again.

    I think I might be the cockiest trader ever to be down 8%. But that's a quick snapshot in volatile market, give it a little time to roll over...

  8. FDR, you said there has never been a better time to go short. How confident are you that we'll see another nose dive? Would you recommend 50/50 long short or 25% long, 75% short? Would you recommend going 100%? 200% short? Just curious. What would you recommend to your clients?

  9. FDR, what do you think about EDZ? 3X emerging market short etf? I see a lot of problems with emerging markets being over-leveraged. Half of Europe is overleveraged, and China really hasn't experienced much of a downturn yet and could face trouble ahead. Curious to get your take on it.

  10. "FDR, what do you think about EDZ? 3X emerging market short etf?"

    All double and triple leverage etf are designed to steal money, they do not produce the advertised return over time. A far better idea is to short the opposite-position 2x-3x leveraged etf.


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