So much to say, so little time.
Obviously the dominant market news of the last week has centred around Obama, Treasury Sec. Geithner and Bernanke's numerous plans for "saving" the economy. Unfortunately, if not unpredictably, they are flawed. Massively flawed. The main focus of the last couple of days was on the program created to get "toxic assets" off bank balance sheets. The ultimate belief here is that the banks aren't lending because they're inhibited by the fragility of their balance sheets; if we clean up the balance sheets then hi-ho-silver welcome to 2004! This is fatally flawed for two very simple reasons:
Many of the banks are insolvent and taking toxic assets off them without revealing that fact will be impossible unless somebody gets ripped off.
Lending requires borrowers – borrowers who are not running already stratospherically high debt/income levels in societies plagued by rocketing unemployment.
Geithner's plan basically involves bringing in private-enterprise, giving them a loan from one arm of the government, leveraging up that amount through another arm of (the same) government and using the total to bid up the banks crappy assets and then pretending that that's what they're worth. Honestly, that's it! That's what took months to figure out – to all intents the government are just financing a call option on the toxic securities. The fact that it sky-rocketed the Bank stocks should have aroused healthy scepticism in the plan and such scepticism is well deserved because, frankly, it has more holes in it than an 80's Alfa Romeo. Ultimately the plan depends on the trustworthiness of the banks involved and, let's face it, the word "trustworthy" hasn't been used in the same sentence as the word "banks" very often over the last year. We could go through the details but it's been discussed ad-nauseam in the mainstream media and the general consensus from intelligent commentators (so that's nobody on CNBC) is much the same as ours: sweet deal for the private enterprise, suckers deal for the US Taxpayer. Hmmm, why does that arrangement seem so familiar? Perhaps more worrying for the US markets is the following transcript from Geithner's congressional testimony yesterday:
Rep Barrett: "The last question I have guys, which is the $64 million question or I guess I should say $64 trillion question is: What's the backup plan? If everything fails what do we do? Where do we go from here?"
Treasury Secretary Geithner: "Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability."
So there you have it; "Plan B" is: PANIC - there is no plan B.
Geithner's behaviour here reminds us of Cortés conquering the Aztecs in 1521; after his army disembarked to attack, Cortés ordered that they burn their own ships, believing that it would steel their resolve - there was, literally, no turning back. Here's another Birdsong prediction, we're particularly confident on this one: Timothy Geithner will not be as successful as Cortés was and he will not, in fact, be Treasury Secretary come Jan 1st, 2010.
As mentioned, a financials rally was induced by the Geithner plan and, though it's not one we're going to jump in on, it's not one we're yet ready to short either. But that time will come. The markets are in the midst of a typical bear-market-rally and a glance at the chart below shows how dangerous, but ultimately futile, such rallies can be. The second set of data is a clear example of how many bear market rallies you can expect in a severe downturn. It shows that the 1929-1932 crash had five very clear, strong rallies, with the largest being a 48% pop and the last being a 24% pop...followed by the steepest, 53%, decline. Mark our words: when the tide reverses on this one, there will be money to be made on the short side.
If you are considering going long the banks, what we would highly recommend is having a quick peek at this chart first; hidden in the depths of a Goldman Sachs report yesterday it has some truly dynamite data. Check out how delusional optimistic the markdowns taken by the banks on their loan books have been! This stuff is bordering on the insane and shows just how vulnerable the banks are; consider the pain they've taken thus far then imagine where these numbers should be... Folks: the system is insolvent.
Away from the banks, the economic data continues to deteriorate. Headline grabber this morning is probably courtesy of the Japanese who announced last night that February exports are down a simply shocking 49% on February last year, with shipments to the US down 58% and to Europe down 54%! Anybody who thinks "the bottom is in" after reading those stats needs their head examined.... Nurse Ratched style.
Birdsong's only long position was Coca Cola. We tipped the stock at about $37.50 and it closed yesterday at the $44 mark. Including the 40c dividend, that was an 18% return in about two weeks... you can't beat the real thing indeed! Unfortunately, and in the interests of full disclosure, we didn't predict that size of a run-up and sold options against our position, meaning we were called away for a more modest return on Monday morning. We should also acknowledge that our suspicions that Coke were, in effect, bribing the Chinese to pass their massive takeover of Huiyuan Juice proved completely unfounded and the deal was called off last week... guess we'll have to consider eating less cynical cereal in the mornings.
Only time for four more words:
GRAND SLAM.
GRAND SLAM!
