Are the Bailed Out Banks Speculating
With Taxpayer Money?

by Anthony Cherniawski, The Practical Investor, LLC | September 11, 2009

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Under Quantitative Easing, the value of the Total Securities Held Outright on the Fed's Balance Sheet has increased by $917 billion- from $584 billion to $1.5 trillion. This has been accompanied by an almost linear increase in the S&P 500 Index, from 721 at QE announcement on March 18 to 1048 today.

This $917 billion in extra liquidity, instead of igniting an inflationary spark, as the QE program was designed to do, is now (metaphorically) sloshing around bank basements. As a reminder: the most recent reading of Total Deposit Reserves was... $886 billion dollars: An almost dollar for dollar match with the increase in Securities Held Outright of $917 billion (by the Fed).  Thanks, ZeroHedge.                 

Insiders selling like there’s no tomorrow.

 --The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.     But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.  This week, the ratio of sellers to buyers was 95 to 1.

Investors show insatiable appetite for Treasuries.

-- The U.S. Treasury Department’s auctions this week of $70 billion in notes and bonds shows the unprecedented amount of debt being sold to finance the record budget deficit is failing to curb investor demand.  At yesterday’s $12 billion sale of 30-year bonds, investors bid for 2.92 times the amount of securities offered, the highest so-called bid-to-cover ratio for that maturity since November 2007, the Treasury said.

 Gold is setting new highs.

--Gold surged to the highest price since March 2008, heading for a fourth-straight weekly gain, as a dollar slump lengthened, boosting demand for the metal as a hedge against inflation.                         

Earlier, the metal touched $1,013.70, the highest price for a most-active contract since March 17, 2008. On that date, gold reached a record $1,033.90 in New York.

Japan’s economy is growing less than anticipated.

-- Japanese stocks declined, led by car manufacturers and steelmakers, after the nation’s economy grew less than estimated in the second quarter and the dollar weakened against the yen.  The Nikkei 225 Stock Average lost 0.7 percent to close at 10,444.33 in Tokyo. The broader Topix index fell 0.8 percent to 950.41 after changing direction 13 times. This week, the Nikkei advanced 2.5 percent, and the Topix added 1.6 percent.

 Will China avoid the bear market?

-- The Shanghai Composite Index rose to the highest in almost three weeks after industrial production and investment growth expanded, increasing optimism a rebound in the world’s third-largest economy will continue.  The Shanghai index has rebounded 12 percent this month on signs the government will adopt measures to support equities after the index tumbled 22 percent in August on concern a plunge in lending would derail recovery.

Is it time to unwind the dollar carry trade?

-- The Dollar Index fell for a sixth day, its longest losing streak since March, after reports showed China’s factory output and lending increased more than forecast, spurring demand for higher-yielding assets.  “The data has been relatively good and the burden of proof in on the doomsayers,” said Paul Robson, a senior currency strategist in London at Royal Bank of Scotland Group Plc. “With policy makers saying they are going to keep monetary policy low and accommodative for some time, that’s supporting risk and people are using the dollar as a funding currency.”  Time to unwind that bet?

The next leg down.

-- Loose lending standards in government-backed mortgages is setting up the next wave of defaults and sharp declines in housing prices. Beneath the hype that housing has bottomed is an ugly little scenario: lending standards are still loose and the low-down payment, high-risk loans being guaranteed by government agencies are setting up the next giant wave of defaults and foreclosures… the Feds have compensated for the implosion of the Fannie/Freddie housing-bubble machines by ramping up their other two mortgage mills: FHA and Ginnie Mae.

Gasoline has had 4 consecutive quarters of declining prices.

The Energy Information Administration Weekly Report suggests that, “With global oil consumption having decreased relative to year-earlier levels in every quarter since the middle of last year, we have now experienced four consecutive quarterly declines in world oil use, with another decline expected in the current quarter. This is an unusual situation, as declines in global oil consumption over that long a period have occurred only twice before over the past 50 years, in the mid-1970s and the early 1980s.” 

Natural gas prices still modest.

The Energy Information Agency’s Natural Gas Weekly Update reports, “Despite increases during the week, natural gas prices were very volatile, reaching lows not seen in seven years. Natural gas prices varied significantly during the report week, with prices at the Henry Hub in Erath, Louisiana, falling below $2 for the first time in more than 7 years and its lowest level in nearly 8 years. On September 4, heading into the Labor Day weekend, prices at the Henry Hub closed at $1.84 per MMBtu, the lowest level since December 6, 2001.” 

Art Cashin on CNBC. 

In an article on cnbc.com which covers Art Cashin's observations between the "eerie" similarities of the current market and the exponential ramp in the Spring and Summer of 1987 (and we all know how that ended), the video that accompanies it and is supposed to show Art Cashin's real time ruminations was replaced with an overlay of Rebecca Jarvis discussing market headlines. Obviously, this is merely a glaring technical glitch at the GE subsidiary.

The highlights from the article (which one hopes will not be pulled):

“I’m still somewhat skeptical about this [market],” said Cashin. “I’ve been wrong—got out too early. I took some money off the table a few weeks ago—didn’t take it all off.”

“There’s just some eerie things about this—it’s reminiscent of spring and summer of ‘87 when nobody believed the rally and it kept going up despite skepticism, people shorting into it,” he said. “It ate them alive until it suddenly turned.”

Always better to keep these things under wraps of course, and not provide some clip that could go viral in a matter of minutes.  We hope CNBC promptly rectifies this error.  (Source: www.zerohedge.com)

Copyright © 2009 Anthony Cherniawski
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Anthony Cherniawski | President and CIO, The Practical Investor, LLC. 
State Registered Investment Advisor | Mason, MI USA | Email | Website

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