The Little Engine that Could

by Larry Levin

In yesterday's update "Failed Rally" we spoke about The Little Engine That Couldn't. He went for it again today and made it: rally time. (I wonder if he quit smoking.) But seriously folks, we were expecting some kind of rally. The information found in our Notes from the Pit was telling us that the selling pressure was waning, downside volume was not increasing with lower prices, and the market was struggling to find value. A reversal was immanent. Whether one gives credit to the CEO of Shitibank, the power grab of the Federal Reserve or "The Little Engine That Could" is missing the point; it was going to happen regardless, it just needed a reason.

Shares of Shitibank rallied 38% today (40 whole pennies) after its CEO said the bank was, get this - profitable - in the first 2 months of this year. What did he say - PROFITABLE? Is this guy joking, or a joke?

Reprinting what this liar said is useless so I'll break it down for you in my special way. He said something like this "If we ignore all of our bad debt and bad assets, count the TARP money, do not include the government guarantees, AND if you ignore that Shitibank is insolvent then we were profitable in Jan and Feb."

Of course, the profit claim may be due to the government's (G) quasi-nationalization. The "G" had $45 billion in preferred shares at an interest rate consistent with a typical junk bond on the verge of default. Then the "G" waved its magic wand and converted $25 billion of its preferred shares into 36% ownership of a company with a market cap of just $8.83 billion at the time of conversion, so they got $3.2 billion worth of stock for "only" $25 billion. (LMAO! This is outrageous even for an outfit known for the $500 toilet seats and $200 hammers.) So the taxpayers were robbed of $25 billion and given junk stock certificates worth only $3.2 billion for a net profit of $21.8 billion to Shitibank.

But this was not enough; the dividend on preferred shares was taken to zero. This has two effects; first it converts the remaining $20 billion of preferred shares into an interest free loan from the taxpayers, and second it is an attempt to force private preferred shareholders into the same deal, essentially converting $16 billion of preferred shares into $1.6 billion of common shares, taking a 90% haircut to prop up Shitibank.

In fact, the government made a $21.8 billion GIFT to Shitibank, which should be bookable income. Therefore, the Shiti CEO can claim "profits" with the "G" looking right over his shoulder smiling.

This morning Fed Chairman Ben Bernanke gave a speech to the Council on Foreign Relations. In the speech he said big banks will NOT be allowed to fail - ever. He also said the Fed needs more power to blah, blah, blah.

During the speech he said "The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy. Its fundamental causes remain in dispute. In my view, however, it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s. In the simplest terms, these imbalances reflected a chronic lack of saving relative to investment in the United States and some other industrial countries, combined with an extraordinary increase in saving relative to investment in many emerging market nations."

Finally, he touches on something that is very true and very important and yet, he doesn't focus on it enough. As I have written before, savings are required for a healthy investment environment. But Mr. Bernanke would have you believe something ridiculous: the Asians save too much. Poppycock! We simply save too little.

What he failed to mention was that this downturn is due to a broken system in which GDP for the past 20-years has been fudged because it is based upon credit/debt based growth which fueled a huge run up in real estate and equity share prices. The moronic assumption of both government and Wall Street was that these prices would continue to go up in perpetuity; therefore it didn't matter if the borrowers put little or no money down. The second cause is the failure of the US government to enforce strict leverage on banks and the fraud provisions of the federal mortgage laws.

Bernanke is intentionally trying to obfuscate the cause because it would be an embarrassment to the government in general and the Fed in particular. Yet we all know what is true. Math does not lie.

How long does the rally last? Stay tuned. Today, however, that Little Engine That Could - Did.


Previous Day's Trading Room Results:

Trade Date: 3/10/09

E-Mini S&P Trades*
(before fees and commissions):

1) B/away buy @ 8:30am at 690.25 = +1.00 & +8.50 (2-lot)

2) OTF buy @ 11:50am at 712.25 = -1.00 (1-lot)

3) Engf buy @ 12:20pm at 711.00 = +1.25 (1-lot)

4) OTF sell @ 12:30pm at 712.50 = -.25 (1-lot)

5) FT buy @ 1:15pm at 708.75 = +1.25 & +1.00 (2-lot)

6) Algorithm positions (9)...combined SofT and Algo total...+11.75


Electronic (YM) Mini-Dow:

1) None



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