Retail And Rates

Costco and WalMart reported decent retail results, everything else rotted - and that's being polite. Teen-and-fun oriented retail is on life support (gee, you think when Miss Priss needs to preen a bit but Mom and Dad are strapped she might get the boot on that demand for another $100 pair of jeans? Oh the horror!) Never mind JC Penny, Saks and Kohls, all of which looked really bad; Gap and Abercrombie were off double digits (!) Target down more than 4% - nasty.

WalMart, however, stripped of fuel, wasn't up nearly as much as you might have thought - 0.7%.
So when you're broke you go to WalMart. Surprised? Not me! Believe me, if WallyWorld gets into actual trouble we're not in a recession - its an all-on economic collapse.

ICSC came in at -0.5% .vs. the up 0.9% expected.

The BOE cut by a quarter as expected with no significant effect on the overnight market.

Oh, China's currency continues to appreciate. There are those who have been screaming for this, but the nasty is that this will of course push our import prices from them higher. Hmmmm....

Now let's add another nasty into the mix - trade deficit. It was much larger than estimated at $62.3 billion .vs. $57.1 expected. Add in the appreciation of the yuan and you've got a serious situation brewing here; US consumption slowing, consumers squeezed, consumer confidence in the tank and both Chinese imports and energy rising in price - all at once.

Welcome to what happens when the "virtuous" cycle of "offshoring" our production turns vicious.

Jobless claims came in at 357,000 which was a bit of a surprise on the downside (better), but the continuing claims didn't move, with the 4 week MA moving up a bit.

Trichet continues to say that their policy obligation is towards price stability and that inflation pressures remain uncomfortably high. Oh Ben, how's that vise feeling about right now on your "package"? Looks like Trichet gave the handle another twist this morning eh? Mmmmmm... dominatrix games in central bankerland - I like it. Will there be a video available at the local "dirty picture" store soon?

The "credit crunch", in particular, the Auction Rate Security Mess, is now hitting students.

"The 18-year-old planned to obtain a government-backed loan of about $10,000 from a New Hampshire nonprofit group to pay the $32,000 tuition and expenses not covered by financial aid and a music scholarship, just like last year. That option evaporated when the New Hampshire Higher Education Assistance Foundation stopped making such loans in March."

Let me see if I get this right - $32,000 a year for tuition and expenses for college? To study political science? Are you kidding me? Well, obviously not, and what is also obvious is that the bubble hasn't been confined to houses. One of the "dirty secrets" is that the "college benefit" has been pumped to unreasonable levels and the "easy money" rubric has in turn spread to college costs, driving them to the sky. Employers of course have piled in with "demands" that you have that sheepskin, or else you work flipping burgers.

So now we have more complicity in forcing the ever-expanding debt bubble down people's throats, hoping it won't explode? What happened to the ivory tower being the place of open expression and critical thought?

Well, it got swept up in useless "research" and "publication", advanced degrees got watered down to the point that regurgitation passes in a thesis defense, and budgets swelled while return-on-investment wilted.

My advice to would-be-matriculators? Take a cold, hard look at the economics before you pack up. Consider community college for the first two years. If you live somewhere that you can do a collegiate high school program (NW Florida for example), do it - getting the first two of your four years free cuts half the cost off right up front!

Until and unless students start practicing a "just say no!" approach to this sort of insane escalation in costs it will not stop. If you're a student or parent, its time to stand up. What's clear is that the phrase "Higher Education" has come to indicate a pervasive invasion of bong hits in the board rooms and meetings of the reagents of these institutions.

Lehman disclosed this morning that it wasn't three money market funds it bailed out, it was five. So far. Hmmm..... so much for being "off balance sheet" eh - they all seem to be coming back home to roost. There are rumors flying around about Lehman - I won't repeat them in detail and I can't find verification but they're not positive, and what may be adding a bit to this is an interview out with their CFO that was decidedly downbeat.

Paulson is out this morning with comments that Fannie and Freddie need "strong oversight". Oh really Hanky? Gee, how about walking the talk you lying sack of crap? Fannie and Freddie are sitting on a ticking bomb in credit risk and the administration - which happens to include you - have sat back and let them expand that risk instead of contracting it. In the most outrageous example they are using their "expanded" balance sheet to make unsecured loans!

Strong oversight eh? Ha! I smell nationalization of these firms in the not-distant future along with a 100% loss for their stockholders. Beware!

"Hiding under the Kimono" continues to be the buzzphrase for our wonderful folks in the investment bank community, with "Level 3" assets - those which the polite claim is "hard to value" (the honest person says "valuations laced with myth and fraud") growing across the board. Our banking and financial system will not clear until this garbage is brought out into the open and marked at whatever the market will bear, which for many of these "assets" may in fact be a dime on the dollar.

Of course our fine regulators don't want to force this. Why that would be sacrilege! Nor do they want to force all the OTC derivatives onto public exchanges where there would be a "man in the middle" (such as there is with equity options with the OCC) as that would force margin supervision into the marketplace.

Reality is that in "boom times" nobody worries about anyone's margin capacity or ability to pay, because you can always just "roll it over" and wink. But when tough times come that stops working because the guy on the other side of the table wants his money, and he insists you cough it up. When you don't have it.....



Right now the "big scam" is that an enormous percentage of the people who wrote these swaps - these "CDS" contracts in "Street Parlance" - simply do not have the money.

The fraud is that they never did have the money, not at the outset and certainly not now.

You need to understand where the actual risk is here. It is not that the person who bought the contract won't get paid - that's not the problem. Yes, they're out the premium and the "win" from their bet, but that's minor, really.

The problem is that when the buyer of this "protection" was not a speculator but rather someone holding the asset that is wrapped, and they are a bank or other regulated entity, their reserve ratios are set by the credit quality of those instruments.

Once these "wraps" are deemed worthless those entities are required to increase their reserve ratios to account for the underlying credit quality instead of the fictional "AAA" previously claimed. In many cases this results in a trebling - or more - of reserve requirements and those requirements come in the form of actual cash.

Bluntly - nobody has it, and so everyone is walking around with a big smile on their face hoping that nobody calls them on the fact that these "swaps" in fact have a zero probability of being paid if and when the defaults occur.

In other words the entire foundation upon which the claim that are financial institutions are "well-capitalized" rests is a lie.

Warren Buffett "gets it", in that he has repeatedly called these unregulated OTC contracts "financial weapons of mass destruction." He's right, but so far we have the near-entirety of the equity marketplace whistling past the graveyard, hoping that the actual defaults do not rise to a level that exposes reality - the credit quality claimed on these institution's books is in fact almost entirely fictional.

Here's the truth for you - so when, not if, it blows up you can direct your ire in the proper place - all of the regulators, including but not limited to The Fed, OTS and OCC, know this to be the case. Yet none of them are forcing these institutions to mark their credit exposure and reserve against it as if the wraps do not exist unless those institutions can prove their counterparties can pay.

The fact is that none of the counterparties can in fact pay even a small percentage of the potential claims against them.

WHEN (not if) this blows up in everyone's face make sure you direct your pitchfork and torch brigade at the correct targets.

It is not the investment banks you need to be angry with - it is our bought and paid for government that is responsible for allowing this pervasive and pernicious fraud to both occur and continue, even though they are, as they admitted when Bear Stearns went down, aware of the problem.

If you're one of those people who is allegedly "smart money" and aren't pulling your cash out of harm's way you're not smart at all.

You are in fact an idiot and that whistle in your ear is in fact an approaching train.

Nonetheless the market this morning doesn't seem to care, rallying significantly in big-cap Tech. Huh? Pull the other one fools. You've got a clear recession underway and yet the Nasdaq 100 is up 1.5% this morning, with lots of 3-5% moves? Who are you trying to fool here?

Oh, the Dollar? You better hope that isn't a symmetric triangle that just broke downward, because if it is, well, we're headed straight for a currency crisis.



Why is that happening? No, its not "too easy money."

It is happening because our regulators refuse to do their damn job and the foreign exchange markets, along with the "real money" behind them, are well aware of the pernicious and pervasive fraud that our lack of regulatory supervision have enabled. In addition, you, dear Reader, have refused (in the aggregate) to speak up and get your neighbors to do so as well, and as a consequence the market is driving up the cost of your gasoline, heating fuel, electricity, milk, cheese, meat and rice.

The target on that triangle break? Potentially as low as 62, if the "staff" on that pennant is in play, a devaluation over the next month or so of another 15%.

Yeah.

Enjoy the "rally" today, and go back to swilling 'yer beer.

Its much easier to pay $4/gallon for gasoline than to call your Senators and Reps and insist that all these complex derivatives be either proven to be backstopped by their writers with sufficient capital to insure performance or declared as the worthless paper that they are.

How much did you say that phone call would have cost you again?

If we get a Depression out of this don't say you weren't warned.

You were.