Bull-Meat Thursday

Just gotta put the video out here again...... pass it around!

Retail sales..... well, we knew we were going to get those numbers.

Overnight the futures did a cliff-dive initially, then slowly clawed their way back, helped by Ford losing less than forecast.

But then The Bulls had a bit of trouble - see, those retail numbers started to show up. WalMart's numbers were poor at best, and other retailers are generally crappy. Macy's down 1.5%, Ann Taylor poor, Limited had limited results, Gap found an 8% gap (down) in their same-store sales, etc.

McDonalds' continues to post impressive gains. I guess when you can't afford any better........

Everyone is blaming weather for the retail numbers. Yeah, ok. How about "the consumer has no money"? Did you look at the Consumer Credit report? No? Hmmm..... see the previous ticker.

Morgan Stanley claimed a writedown at the "lower end" of expectations. Yeah, ok. Are all the monsters out from under the bed? And how is it that Goldman has all these Level 3 "assets", yet we keep hearing that a huge part of the issue is that many of these Level 3 "assets" in fact have no bid!

Well, look, as an investor/speculator/trader, I have "assets" on my sheet from time to time that have "no bid" too. It sucks when that happens, but "no bid" means that their value is easy to determine - its zero!

The troubling thing here is that we're being told different things from different people and at least one of them has to be lying.

"Accounting" contains the word count. There's a reason for that.

Yet we keep trying to come up with some sort of odd alchemy that supposedly makes the numbers "more accurate".

To that, as a former business owner, I say "nonsense."

MCSNet, my former company, never had a reason to play tricky games with the books. This is one of the advantages of a privately-held company - the shareholders that I had to impress were limited to a handful of people, with the most important one being myself (as the majority stockholder.) And since I couldn't spend money we didn't have, if we failed to impress it was going to do impressive (on the downside) things to my bonus and CapEx budgets!

As I see it, then and now, its very simple - a "thing" has a value only if someone else will pay you some amount of money (or something else of value) in exchange for it - today, right now, right here.

If nobody wants it then the "value" is zero.

Period.

We ran into this at MCSNet from time to time, and believe me, it sucked. Sometimes the "zeros" were relatively harmless, like the 1,000 "customer CD packages" that were rendered obsolete when some of the software. Instant zero. Oops.

Then there were a few big zeros. Those you go over really, really carefully to see if there's any fraud or false claims somewhere that would allow you to stick someone else with it (justly so) rather than eating it yourself. I earned some infamy in the Internet space a number of years ago over one of those deals when I successfully "put back" a really big six-figure potential zero.... guess what - it can and does happen.... let's just leave it at that.

Technically the market is broken. 1490 fell resolutely yesterday like a knife through butter, and then the S&P closed under the 200 DMA.

Here's reality - a technical bounce was totally expected this morning. Whether any of that is going to hold is another matter. The answer - for now - appears to be a big fat NO.

Worse, "The Horseman" - the big cap tech momo stocks - are getting slaughtered today. All of them. The losses are huge and "hot money" doesn't stick around to see how much worse it might get - they run for the door. This is very likely to pick up steam and those huge gains that came from the summer until now are very likely to ALL be given back. If you're long those names, and you know which ones they are, GET OUT.

The ECB held rates steady, but Trichet said that the risks to price stability "are fully confirmed as lying to the upside" - a hawkish statement that I expected (even if many others did not), and threw cold water on the idea that we would be seeing the ECB "follow" The Fed's lead and drop interest rates.

Jobless claims came in a bit below consensus but the 4 week moving average is elevated. Not in "panic" yet, but elevated nonetheless. We shall see how employment holds..... I'm not taking any bets on it being good going forward; employment is always a lagging indicator on economic downturns as CEOs tend to be overly optimistic - after all, you get punished when you say you expect bad results, right? Well, what does firing people say?

Oh, don't look at First Solar (FSLR). Talk about a bubble. Give me a break; a P/E of over 200? Yeah, right. Don't try shorting it though - when this breaks is not possible to say, but that it will - and will crush people who are long - is an absolute certainty. Psst - you do realize that solar power, on a total energy return basis, is a net lose right? The only reason these guys have a market at all is due to government subsidies. If/when those evaporate.......

On the forward-looking side, let's talk about where we are heading.

Debt issuance as a way to "spend" only works until cash flow is exceeded by debt service requirements. At that point the entire pyramid collapses.

We are not there - yet - in the consumer space. We have long since passed it in the Government space, but we're hiding it by keeping our FICA and Medicare liabilities "off balance sheet" (now do you understand why they ignore banks doing the same thing?)

The problem in the consumer space is that we've enabled fraud and avarice to pump the consumer's "presumption" of wealth. Unfortunately this "wealth" has not been real over the last four or five years, but the debt service is real. As the "wealth" contracts - and it both will and must in order for housing to return to historical affordability levels - consumers will exceed the point where debt service exceeds forward cash flow.

That's the "waterfall" moment, and for a few million homeowners, they will or already have reached that point and gone over the abyss.

The bad part of this is the horrifyingly bad advice that people are getting when they find themselves in this box. If you are reading this, or know someone who is, that is facing foreclosure, do not touch your 401k or IRA money, or, for that matter, any other retirement assets! Those are protected in a bankruptcy - if you spend them voluntarily, you're screwed! Instead, get thee to a good bankruptcy lawyer and do what you need to do immediately - do not try to save an impossible situation. You will fail in a contracting credit environment and destroy that which you have every legal right to protect!

While you can blame consumer greed for the mess we're in, that's overly simplistic. If I sell you a car and roll back the odometer, and you as a result buy a car you think is worth $30,000 but it turns out to be worth only $10,000, who's the one at fault when your balance sheet comes up short? The seller of the car who defrauded you.

Yes, you were greedy and thought you had made "a score" buying that car at a "big discount." But the person who actively deceived you is the true monster, because they talked you into taking on debt which you believe was backed by an asset at a certain value, and in fact it was not.

A few days ago I opined on the root of all of this - and now, it appears, at least STATE regulators are getting into the act of going after it. The ugly is that the Federal folks are still fiddling while Rome burns..... you don't think that campaign contributions would be involved in that, do you?

As I reported last night Cuomo is now gunning with his subpoenas at Fannie and Freddie. Not to nail them - but to prove that collusion and fraud was involved in the loans sold to them.

Did you catch Fannie and Freddie's response?

Paraphrased, it was this: "We can and will put back any loan that is found to contain fraud."

Remember my prediction from the spring with regards to loan putbacks?

If the fraud alleged is proved up virtually all of these banks and lenders who sold loans to Fannie and Freddie will be rendered instantly insolvent, as these loans will not only be put back they are also the very ones that are most likely to default!

I will reiterate the prediction I made back in the spring: You are going to see a huge number of banks, thrifts and others seized by the FDIC, and the common stock of those institutions will be worth zero.

As all this unwinds its going to be ugly, and there will be several million consumers who will literally go bust. A trillion a year worth of "consumer spending" is going to evaporate, which is a good 8-9% of GDP, and that's going to remain the case for a while as the adjustment proceeds.

I do not subscribe to either the "Crack up Boom" or "The End of the World as We Know It" theories, although the deflationary scenario looks assured. Simply put, you can't inflate out of this - it would destroy the banks, and that's not going to happen.

But let's not forget that the damage to the banks from the alternative is very real too - just not as bad. As this deflationary pressure builds investment and spending will both contract, and so will the Equity Indices. I am now expecting a thirty percent retrace on the broad indices, and it may get as bad as it did in 2003, with a full retracement of the move up since that time.

Both looks forward are actually far worse than they first appear due to monetary and price inflation - they represent real losses of value of 60-70%. But let's be straight here - there's only one reason to buy a stock in expectation of its price increasing, and that's earnings growth.

The "Global Will Save Us" crowd has their heads on backwards. So do those who are "running away" to Chindia with their money and assets. Those economies are dependant on consumption here and in Europe; they will NOT escape from what is coming and in fact may get hurt far worse than us!

In point of fact I would not want to be anywhere near Chindia when (not if) this comes apart. It is very likely to be extraordinarily violent over there, with those nations resorting to the usual when things get bad and money necessary to pay for critical imports (think food and energy here) scarce. Nations in this position almost always start wars!

My expectation is that India/Pakistan and China are the two worst places to try to "hide" in what is coming. China is very likely to find itself in a horrifyingly bad place with regards to resource needs and their consumer's inability to pay for them. This is how wars start, especially when a resource-rich nation sits just to your north!

Am I predicting major regional conflict? Yep. Sure am. And if you're invested over there, think about what happens if that conflict doesn't remain "conventional." All of the protagonists and antagonists in this game of "oh oh" have nuclear weapons.

Should Pakistan's government fall (and it is looking increasingly likely), with radical muslim interests getting their hands on Pakistan's nukes, Hell on Earth is likely to break loose, as much for economic reasons as geopolitical ones. Should China get squeezed as we see a deep recession in the United States and decide to try to solve its problems by "going North young Chinaman" the odds of that going nuclear are very real.

Consider what happens if Shanghi's stock exchange is vaporized in a ball of fire, then tell me again why you want to be invested over there when all the elements necessary to engender that sort of instability are present.

I think the Dollar is a major problem but my issue with foreign investment is that The United States is actually in a position to be able to pull manufacturing back here and survive. Most other nations are not, especially over in the far east!

Timing? Two to four years. By the middle of next year it will be obvious that we are in a deep, long, deflationary recession as the consumer balance sheet is defaulted or readjusted to account for deflation in home values. I believe we will see real GDP contraction of 6-7%, although you can bet the government will try to hide the truth through manipulation of the statistics.

By next summer the entire "emerging markets" area will be in freefall. I expect you will see a literal implosion in the emerging market stocks. China wants to try to keep all the balls in the air until after the Olympics - I wish them luck, because I don't think its going to happen, and when they come apart it is going to happen with ferocious intensity. Real civil unrest is a possibility, followed by the usual way out for a trapped government.

The US has options available to it that most other nations do not. Canada, for example, has an enormous resource base, and we're friendly. We have an enormous resource base, although we have to take the Greenies and string them up by their toenails first. We'll do it, once gasoline is $5/gallon - the Greenies will be thrown under the bus and then backed over repeatedly just to make sure that the last bit of life is squeezed out.

Then we will develop our oil and gas resources in the Gulf, we will drill off California and the East Coast, and we will recover shale. We will build nuclear plants. We will use the vast landmass out in the desert southwest to install aquaculture-based biomass production to eventually wean us off oil as a transport fuel, moving to biodiesel, using the nuclear plants we build next door to desalinate the water and provide artificial lighting so they can crank 24x7. We will "see the light" and ban gasoline cars, insisting on compression ignition or external-combustion if and when those prove more efficient (e.g. stirling cycle)

This path forward brings us to a carbon-cycle neutral and renewable resource for road and rail transport fuels, along with "heating oil." It leaves us with a nuclear-powered electrical system as we wean ourselves off coal, leaving our coal resources to be turned into petroleum for manufacturing purposes. Our remaining liquid oil (along with conversion from coal) will allow our use of polymers to continue.

Yes, the US will have a tough decade ahead of it. The age of the $30 DVD player will be over, and large price increases for things that currently are built with $2/day labor are in store for us.

But we will be ok, and we're isolated enough - by oceans - that others trying to come and steal our resources are in for a rough ride of it, as there are easier places for them to go to try to meet their needs than the United States.

The trick will be finding ways to stay out of wars that are inevitable in the Asian Theatre, all of which will threaten to go nuclear.

I wouldn't want to be a Japanese housewife, or a Chinaman, or, God forbid, someone living in Taiwan.

Europe will fare no better than us, and may fare worse. Their odds of getting embroiled in the mess over in Asia will be higher than ours, simply because of proximity, but if they can stay out of it they will be ok. If they get dragged into the mess, and there is a decent chance they will, then things will be bad over there too.

I took a lot of risk down this afternoon, mostly because I had a lot of potentially-expiring PUTs that were losing time value by the day, and if we had even a short-term corrective bounce tomorrow I was going to get hurt. So off they come; I can always buy 'em back on a daytrade if we get a good downdraft going again.

Here's your technical.....