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Matrix Agents Resign


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Mark?s Market Commentary ? December 6, 2002

 

Earlier this morning, Mama San Elaine Chao?s unemployment numbers came in higher than expected, and two Agents of The Matrix (Paul O?Neill and Lawrence Lindsay) resigned.

 

I think O?Neill and Lindsay see the writing on the wall, and do not want to be stuck under the pile when the base of the 700-story derivatives tinker toy tower gets hit with the 14-lb pipe wrench.

 

O?Neill would rather spend his rocking chair days back in West Virginia, and Lindsay decided to take ?the other pill? and remove himself from the Alice and Wonderland Rabbit Hole.

 

The Color Commentator?s comment:

 

?Triple jowled super PigMan Larry Lindsey being rolled by henchmen operators at the preMarket. 'Mr. Rodgers' O'Neill, the prototypical Fall Guy, retiring to obscurity. His reason? He intends to spend more time at the Vietnamese strip club in Arlington. Bush blood lust is high. Someone must take the blame for this term's disastrously inept economic policy. Why not the wimp from the West Virginian coal mines who tooled around the world sharing sympathies with that queer wigged out rock star??

 

?Not enough brass in his balls. Cut him loose and batten down the war hatches. If facism is the marriage of government spending and the armaments industry then we need somebody like Schwarzeneggar in there or that wrestler governor from Minnesota. No more Mr. Nice Guy. Al Green may need some new muscle to help jam those massive levers. Himmler is unavailable. Inquiries were made down in Argentina but he died just shy of 100 in a retirement home south of Buenos Aires. Have to find someone else. Who will it be? Strom Thurmond would bring some balance to the cabinet and afford Democratic representation therein plus he would bring with him discounts to the Richmond Gentlemen's Club for lunch breaks. A possibility. If you have no economic policy, why not hire someone who is already dead to head it??

 

The market gapped down hard on the open, and as usual, The Magic Wand magically appears to light a fire under the OEX futures.

 

That sent the shorts covering once again. Notice how the new single stock futures has allowed Al Green to powertrade a few key stocks to get the broad indexes going, evidenced by yet another +1100 TICK and basement TRIN readings.

 

I wonder how much of the budget deficit is being shaved off by ?trading profits? from all this manipulation?

 

While the rich, white speculators continue to trade stocks, options, futures, swaps, currencies, straddles, collars, credit volatility, mood insurance, GDP futures, unemployment futures, ISM options, and all the rest of the trading exotica, the ?lesser known? underground investors continue to accumulate gold, which had a nice move today.

 

I wonder when that 10-sigma event will finally come in, and what will all those who are Pointing and Clicking their way to prosperity do when they suddenly find a sea of ?N/A? symbols on the Bid and Ask boxes on their E Signal terminals?

 

Over in the real estate circle, the psychology is starting to change. From today?s The Wall Street Journal:

 

?In a twist that?s catching many people off guard, real-estate agents say they?ve seen more deals dissolve during the past year than at any time in recent memory ? as high as double the number a year ago. The number of ?kickouts? on contracs for high-end new house is up 30% from last year.?

 

?I?ve never seen so many deals come undone?, says Bonnie Adams in La Jolla. ?Its unbelievable.?

 

While buyers think the market is weakening, sellers still expect the high returns of the past few years and resent any negotiating. ?Every deal is just excruciating?, says a Boston realtor. ?Every time we think we had a deal, the stock market dropped.?

 

In the meantime, the Weekend Journal continues to feature $250,000 automobile reviews, and page W16 features the ?House of the Week?, a 6 bedroom 11 bath ?Villa Di Capri? in LaJolla with an asking price of $41 million.

 

No doubt the object of adoration among the Riverboaters.

 

While the Speculative Globe remains hypnotized in a trance, fascinated with the ease with which wealth can be accumulated by ?riding the HedgeHog momentum herd? jump started by the same old Al Green Starter Pistol, other parts of the world are not so fortunate.

 

From today?s The Wall Street Journal:

 

?Public outrage in Argentina about pervasive hunger in the provinces, a wave of revulsion over dramatic cases of malnutrition in Tucuman comes at an inopportune moment for President Duhalde. The stark evidence of poverty has revived concerns about the possibility of social unrest and violent street protests.?

 

?Striking workers and executives paralyzed the state oil monopoly in Venezuela, halting exports in a growing confrontation with Hugo Chavez. The strike at ports left dozens of waiting tankers empty, forcing refineries to curtail operations and forcing crews to switch off oil-field pumps.?

 

Edgard Leal, at Cambridge Energy Research says: ?If you can?t get the ships out, you can?t get the products out of the refineries. It affects production at all levels. The oil markets must be quite nervous, because if we get a crisis in Venezuela, it will mix with the war situation in Iraq?

 

The credit markets are now going to be facing the Stress Test from the UAL fallout. After all the bond and credit insurance shorts were blown out, we?ll see how fast the credit spreads start expanding.

 

And as usual, The Matrix agents immediately hit the tape, with all sorts of ?announcements? and ?proclamations? by GE, UTX, BA and all the rest on how the UAL bankruptcy will have ?no material adverse change? in their credits, because somehow the ?risk was mitigated? and ?offloaded to outer space? where it couldn?t possibly do any harm.

 

And then you have the usual spinning about how the aircraft leasing business will not be affected, because the planes are ?new? and will retain ?resale? value despite the 1750 some aircraft parked in the desert.

 

Resell to who??

 

Nigerian Airways?

Afganistan Air?

Iraqi Airlines?

 

According to The Wall Street Journal:

 

?For more than a year now, most of the U.S. airline industry has been circling the drain, causing the prices for all used jetliners to drop to their lowest levels in history.?

 

?Most airplane financing companies will be forced to take significant cuts in their lease rates and note payments just to keep the planes flying. But United?s troubles could be so deep because its financial arrangements so complicated, a restructuring would be impossible.?

 

Why is that?

 

Could it be that United?s balance sheet was a favorite Grand Experiment by the off-balance sheet financiers, who sucked every member of the Hillbilly Family into the UAL Vortex by offloading this risk, and swapping it to this party, who in turn stripped it and sold it to the other party, who turn around and hedged it to that party, who arranged a Bermuda corporation to transfer risk to a counterparty, who in turn bought puts on GE stock, which was purchased by a HedgeHog, who in turn countered the trade by buying AIG options, hedged by credit swaps on JPM, who in turn transferred half of it to MER, who marked it up and sold it back to UAL?

 

Even unrelated companies like DIS were sucked in, stuck with $114 million in aircraft lease investments which management ?is now monitoring?.

 

UAL?s unsecured debt is now trading at 12 cents on the dollar.

 

So much paper.

 

So much complexity.

 

So many contracts.

 

So many promises.

 

So much obscurity.

 

So many exotic securities.

 

So many who believe that ?their risk is properly hedged? and that there is no downside.

 

So many credit tentacles everywhere.

 

So much trust in Al Green.

 

So much ?monitoring? to make sure things work ?as planned? by The Matrix Agents manning the bullhorns and loudspeakers.

 

Over in the telecom area, the supposed ?rescue? of Qwest from insolvency is now unraveling. About $12.9 billion of bondholders were offered an exchange into new bonds issued by Qwest Capital Funding, Inc. which have a higher coupon and a higher status in the capital structure in return for a haircut. For some reason, $4 billion of the bondholders are suing to block the exchange, claiming the following:

 

?Initiating a coercive exchange offer at a discount to the face value of the current notes, causing earlier maturities to be unilaterally pushed out, failing to disclose any of the material facts regarding Qwest?s current financial and business condition, and by improving the equity at the expense of the noteholders.?

 

The claims are based on warnings by Qwest in the offering prospectus which say that the restated financial statements promised to the SEC ?were not available?.

 

Yet another ?N/A?.

 

Yet another scam job. Some investment banks trying to push another costly restructuring on unsuspecting bagholders, and failing to reveal the true financial condition of the company.

 

What a joke.

 

After all this destruction and credit market dislocation, these jerks are still trying to engineer some shell ?Capital Funding? company to jam the bagholders into which will likely turn out to be worthless, and the same group of investment bankers will probably end up buying the real operating assets out of a liquidation for 3 cents on the dollar.

 

What is shocking is how The Matrix has been able to maintain some type of ?trust? among all the participants, who some how believe that all this complicated financial engineering is really going to ?create value? and provide a quick road to riches.

 

When in reality, the Wall Street Financiers are gaming the public for profit, undeterred by the bear market because trust refuses to break.

 

When will it end?

 

When the cycle of trust be broken, and the cycle of distrust and revulsion begin?

 

When will the public finally realize that they are repeatedly being taken to the cleaners by the agents of The Matrix?

 

Today?s volume of 1.2 billion on the Nasdaq was pretty weak.

 

Yesterday?s light volume retracement should have been met with a high volume buying move off this morning?s bounce off the 50-day line.

 

We can expect more strength next week to work off the high 5-day ARMS and push the fear gauges to the bottom of the Bullinger Bands. A likely target of 935 on the S & P could set up a right shoulder.

 

The other scenario would be a continuation of the decline, since we are still trading down in a tight channel. Similar to the decline off the January highs, which produced some real fear and a couple of 85% down days before a March Madness type bounce to get the bulls going into the year end tape paint, possibly peaking at the next turn date around January 10.

 

The Girlfriend of the Week

 

From the cover of FHM magazine, Ali Landry with no arms. Still outstanding, though.

 

Model Portfolios

 

AJC?s Planet of the Apes portfolio is down by 20.6% year to date.

 

The ?I Dare You? short portfolio is up by 13.1% since October 22, thanks to the spectacular blowup in FRX today.

 

?????????..

 

Position Summary:

 

One more half short added:

 

TGT at $34

 

The rest of the cash will be saved for a long position in the QQQ and SMH if we get a major bounce going on Monday if favorable Iraq news materializes on Sunday.

 

We are 53% short, 12% long, 35% cash.

 

Half Short:

 

LOW at $42

KSS at $66

INTU at $53

C at $38

IBM at $85

TGT at $34

 

Quarter Short:

 

FRE at $68

CFC at $49

MBI at $54

KBH at $49

LEN at $56

TOL at $27

NCEN at $30

BBBY at $35

COCO at $40

 

Half Long:

 

BGO at $1.31

HL at $4.10

PAAS at $5

DROOY at $3.35

GG at $10

GLG at $9

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"While the rich, white speculators continue to trade stocks, options..."

 

No, no, no, Mark. You can do better than that.

 

Let me help you out:

 

"While the honky fatcats, unable to restrain themselves in the anal retentive fits so characteristic of their Anglo-Saxon upbringings, continued to trade stocks, options.."

 

See? That's the way we like it, to paraphrase K.C. and the Sunshine Band.

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A dumb question for the brains here: in the extreme downside scenario where the bear market finally hits the bottom or gets pretty close to it, everyone will be scrambling to sell. The short-sell profit eventually comes from borrowing and selling shares from existing inventory with broker houses, and buying them back at a later time/date. But what if there is a simultenaous attempt from the institutions to screw short-sellers by ordering brokers not to lend their existing shares out? (I believe MSTR once tried to do some PR like that to prevent its shares from further declining.) Would that scare off all the shorts to cover and drive the prices way up, and then all the big boyz can get out? Or would there be a day when the market becomes so depressing that there is some attempt from the government to illegalize short-selling? If this is even a remote probability, I think we won't see 100% of the downside, crash-scenario and it'll be wise to protect our profit before the market hits such extremes. Sounds stupid but would love to get your thoughts - I always welcome education, especially from you guys.

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There will always be a way to short. It would be futile to attempt to prevent it. You could circumvent the action by creating synthetic shorts (with derivatives). You could move the action offshore and get it done.

 

Besides which, the market NEEDS sellers to keep the liquidity going, especially on a day to day level.

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Mark,

 

Your commentary today about the aircraft lease business is too compelling to pass up.

 

After I left being a stock Jockey at Smithbarney, (where I realized along with Direwolf), that Borkers know little of anything about anything, except being a salesperson, I went to work at an aircraft leasing firm....Yeah, same thing as a borker, cold call people and tell them about a wonderful "opportunity" to invest a minimum of $100,000 up to a few million in an aircraft with a non-cancelable lease to a major airline.....The airline floats the rent throughtout the lease, investors get tax breaks, and at the end the plane is sold to "a third party", and everyone makes a fortune....yeah right.

 

I was and am still amazed/puzzled/perplexed at the response. One of my partners, a 23 year old kid with no experience in anything other than picking his nose kept cold calling and calling and found the golden nugget...Some guy in Texas, who with no prodding or pleading wired in 2 MILLION DOLLARS that same day. These leases sold like hotcakes, the stock market was going down the drain daily and investors were looking for something else....hey, 10% yields on a asset backed investment is pretty good eh, with the potential for capital appreciation. wow now your talking....We all did well...

 

Then, like all things, reality set in. Myself, the 23 year old nose picker who had just made $100,000 on one phone call, and the two others in our office, one a smart MBA number cruncher, started asking tough questions of the sketchy 32 year old CEO. These leases and potential investor upside is based on what? Appraised market value? Oh, Ok, so some appraiser who is in cohoots with the 32 year old CEO, will do an appraisel of a bunch of 1982 737's and say they are worth X. So from that apprasiel, investors make 10% and upside when the plane is sold to Iraqi airlines. The problem is that, THEY NEVER SOLD A PLANE. THE WHOLE DAMN THING IS HYPOTHETICAL. They gathered Millions of dollars of investment capital, entered into numerous leases, and based the whole thing on FUTURE VALUE....What a joke....

 

Then came Sept 11, shortly therafter I bailed, seeing the writing on the wall and the planes stacking up in the desert. Aircraft values plunged overnight, but then rebounded with the promise of a government bailout. Well, looks like the Gov just turned their back on old United, so much for that.

 

Then we found out that 32 year-old Sketchy CEO had been selling cash flows from the leases out to banks like Fifth Third and Providian, taking cash up front for the promise of future payment and residual value, basically screwing the investors and loading them with all the risk and the proverbial bag. Translation= If we can't sell the plane at the "appraised" price at lease end, Investors get screwed.

 

Anyway, the point of the story is this: This is exactly the type of complex, hedged, arbitrage, speculative instrument you have been talking about. Complex transactions that seem to have diversified the risk out to a variety of players when the reality is that one external event blew the entire scheme to Hell in a bucket. And big corporate America has loved this "tax advantaged" business for many years. Big players include GE, Disney, GATX, ILFC, AIG, etc....The trail on aircraft leases leads to very, very surprising places in old school coorations, some with seemlingly little appetite for risk. These companies are eventually going to take huge charges/writeoffs for their losses in this industry, and while they wanted losses to write off gains iniatially, these will be BIG losses and will hurt.

 

 

So now, 32 year old sketchy CEO has a dilemma: He has leases on a variety of mostly narrow bodied 737 aircraft, some leases coming due soon, and a bad/non existent resale market. Whats he gonna do? Farm out more cash flows to another sucker bank on the promise of big name like GE Capital, and then repay some investors with a tainted/ponzi loan? Bottom line is he is going to get screwed, and in turn screw all his silly investors who threw money at a deal they nor anyone else could understand end up in the Caymans running from prosecution and huge investor lawsuits.

 

But thats the American way, isnt it?

 

H2orush

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FWIW

 

Prechter's group calling for MILD upswing on Monday and into tuesday early... and then followed by another major leg down hard from there...

 

Bottom line is your opportunity to short the indexes if you havent established positions already, will come and disappear quickly early next week.

 

The next leg down should bring the NAS index closer to 1320 or so.... the NDX probably 1000

 

Disclosure: I re entered my QQQ 200% short at the close... preferring to be in the position for the full ride coming up...

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Phew, heaps of bad news coming out over there. Don't look good at all. I like the colour commentator's take on whose backsides could fill the seats left by Lindsay & O'Neill....

 

Yahoo put it this way ..

 

"White House officials indicated that replacements for O'Neill and Lindsey will be experts with closer ties to the nation's financial markets who are better able to smoothly communicate the nuances of policy to edgy market players. "

 

What a load of patronizing bull... :angry:

 

Company Earnings:

 

Oneida Ltd. Revising Earnings Downward , Tyson Foods Lowers Projected Earnings, Sonoco sees 2003 earnings hurt by pension costs, Supervalu warns on quarterly profits, Water Pik lowers 2002 earnings view as sales sag

 

Consumers:

 

WASHINGTON (Reuters) - Growth in U.S. consumer credit slowed sharply in October, the Federal Reserve (news - web sites) said on Friday, in a sign shoppers were becoming more cautious ahead of the holiday shopping season.

 

Yep, looks like 2003 shaping up to be a great year..for bears that is.

 

h2orush: thanks for that scary insight into the aircraft leasing biz

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Oops, did Ali's picture get cut in half?

Ali's picture reminds me of that movie, "Boxing Helena."

 

By the way Mark,

I assume your new avitar is another "girlfriend of the week" and not some crazy thing you did to yourself while on vacation in Thailand (not that there is anything wrong with that*).

 

*Lest I offend any Stoolie who is of that persuation.

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