Precious bullets

It's been humorous to hear the likes of Larry Kudlow and Ben Stein (since when did this guy become a market expert? Didn't he write speeches for Tricky Dick Nixon and play an Economics professor in Ferris Bueller's Day Off?) blast away at Ben "Helicopter" Bernanke for being to tight with his monetary policy. Bernanke has now caved on every occassion. I had friendly bets with a number of friends after yesterday's close here in London that he would do an emergency rate cut before this morning's opening in New York. He did. EZ-money!! I wish betting futball was this easy. This was first emergency rate cut since Greenspan's more obvious slash prior to the first day of trading following the 9/11 terrorist attacks. I'd be remiss if I didn't remind readers that stocks continued to get thrashed for another 18-months following that rate cut--which was followed by even more rate cuts all the way to an eventual 1-percent Fed funds rate. That episode was meant to save us from a crashing technology and dot-com bubble. This rush to free money is in hopes to save us from an even more ominous and far more dangerous mortgage/real estate/derivatives/hedge fund/private equity bubble. I would place the probability that today's not-so-surprising Fed rate cut also happened to cooincide with a low in stock prices at somewhere near zero chance. Even as panic among retail investors was palpable (according to some friends that manage money for retail clients), the institutional side saw today as nothing but a great buying opportunity. I listened to CNBC US in the afternoon here in my London office as one by one, nearly every commentator tried to sooth viewer angst, "This is normal and healthy and we've gotten through much worse in the past," they said. Folks, if you take any advice from CNBC, your totally doomed. These folks are pretty much clueless.

So as Ben Bernanke was throwing bails of hundreds out of his helicopter, stock futures in the U.S. were nearly at their lows by the time markets opened in the U.S. I told a colleague that I had never seen such a muted response to a supposedly blunt tool. Although stock indexes in the U.S. closed not to far from their highs on the day, the last time stocks closed lower on the same day of a Fed rate cut was that day in September 2001. Of course, Ben Bernanke and his other impotent FOMC members did not want to have to cut prior to its meeting next week. The fact that they could not hold out for another 6-trading days is indicative of sheer desperation. The Fed just sunk a couple more precious bullets into this unwieldy beast and the beast did not go down. We're in deep.

Less than zero

Its no coincidence that on the same day, Countrywide Financial (CFC) was bought out by Bank of America (BAC) and JP Morgan (JPM) was said to be a rumored suitor for Washington Mutual (WM). As I said, news of both occurred on January 11th. Both companies are set to announce earnings this month which will be accompanied by more massive write-downs of mortgage related debts; and both are in dire need of fresh capital. I had said on my January 10th blog, the night of January 9th EST in the states, that barring an announced bankruptcy by either of these, my top two candidates for some kind of confidence shattering bankruptcies, markets may have indeed set themselves up for at least some kind of bear market bounce. Most disturbing was the heavy slide into the close on Friday, even after the pre-arranged, forced marriage of Bank of America with Countrywide and a rumored JP Morgan save awaiting Washington Mutual. Given the ugliness of the close on Friday, more market managing news was released iafter the close in hopes of a avoiding increasing odds that a dislocation was in the cards when markets open on Monday, January 13th. The Wall Street Journal reported that Citigroup (C) was close to squeezing China and Saudi Prince Alwaleed bin Talal, already a major shareholder, for somewhere between $8 to $10-billion combined. My contacts that are well versed in the dark matter of the financial universe have indicated to me that barring a buyout, Countrywide Financial (CFC) was destined for ZERO and probabilities of the same fate for the largest S&L in the U.S., Washington Mutual (WM) had also increased substantially. What deal did the Fed's make with Bank of America to buy an asset that is worth less than zero? Regardless, its a shell game. Transferring the toxic assets on the books of Countryfried to that of Bank of America does not make them disappear. Its the summation of these assets that sit on the books of financial firms throughout the world that matters. Repackaging them won't make them go away. Especially as confidence deteriorates making a credit spiral even that much more difficult to arrest. And with gold now at a fresh new all-time nominal record, monetizing these assets is looking to be increasingly difficult for the world's central planners, Mssrs Bernake, Paulson, Trichet and King.

Bounce

Baring an announced bankruptcy by either Countrywide Financial (CFC) or Washington Mutual (WM) in coming days, markets likely began its first bear market bounce of 2008 today. But with so much shrapnel flying amongst the likes of these, Ambac (ABK), MBIA (MBI), PMI Group (PMI) and even little regional banks such as BankUnited (BKUNA), any bounce seems likely to be short-circuited.

Breach

Today had that feeling of heart dropping realization that we've climbed to spectacular heights, peaked over the precipice just as it dawned on us that we had no cogent plans, nor the proper equipment to traverse safely back down the face of the mountain. Even I have been stunned by the shuddering weakness across virtually every sector and every market just four days into the New Year. I certainly expected a much better attempt to ramp things higher given the plethora of like-minded investors and traders that delude themselves with self-reinforcing theories such as "The January effect" and technical breakouts, breakdowns. As the financial markets flailed, George Bush and his Working Group on Financial Markets met behind closed doors today to discuss the dire state of the world's financial system. And the action in gold and oil, both setting new all-time highs this week helps to crystallize the the dire trap in which these folks, Ben Bernanke and the U.S. Federal Reserve find themselves. Further attempts to print their way out of history's greatest global financial imbalance will be futile to stave-off a deflationary spiral in "good" assets such as home values, stocks and bonds while adding fuel to the explosive rally in unproductive stores of value such as gold, silver and oil. The world's central banks find themselves helpless and impotent. The dam has been breached.