GLD Symmetrical Triangle, GDX, $USD, Australian Dollar/Gold ($XAD/GOLD)

| |
Gold is still trying to figure out where it wants to go.... $GLD formed a near term symmetrical triangle or inflection point. It all depends on the US Dollar and inflation expectations going forward. There are still many analysts in the deflation or disinflation camp (links: Roubini, Shilling, Tom Lee of JP Morgan). You can see the inverse relationship between the USD and GOLD and the direct relationship between $XAD (Australian Dollar) and GOLD.

SPY P&F Chart Pierced 94 Resistance, Sideways Channel Since May

| |
Last week SPY pierced through 94 resistance on the P&F chart (previous post shows the resistance test). It printed an X at 94 since it hit an intra-day high above $94 on Friday. For more information on point & figure charts go to The chart labeled the move on July 16 as a "Double Top Breakout" with a preliminary price objective of 109. In the very short term it could pave the way for a June 96 retest however I'd be ready to flip SPY if it rolls over and short/buy puts to position a h&s neckline retest. Since early May SPY has traded in a sideways channel and at some point a new trend MUST begin. The slow death of the VIX (volatility index) imo anticipated this 3 month trading range.

More $XLP (Consumer Staples) Call Activity (14000 XLP SEP 25 CALL)

| |
Continued from my previous post: Consumer Staples ETF $XLP Calls Active, 40000 Jan 2010 $24 Calls Traded, XLP saw more call activity last Friday (JUL expiration). A large block dropped on the SEP XLP CALL. It closed w/ 14,503 contracts traded/1848 open. Looking closer via ISE, 10,000 contracts were traded at 10:11am on the ISE at 0.25. The ISEE value (ISE Customer Opening Long Calls/ISE Customer Opening Long Puts)*100 = 1.03M up 1.02M or 13.97k%. Calls/Puts = 10.32k/1 and Average Calls/Puts = 2.55k/2.09k.

Karl Denninger is Short the S&P!

| |
Karl Denninger who runs The Market Ticker blog was featured on Kudlow & Company on CNBC (moving on up from Dennis Kneale's show). Karl was not optimistic on the economy and disclosed that he shorted the market on Friday.
"Well my basic view point is that when it comes down to whether or not you're going to have profits you have to look at the income statement first and when you look at revenues what you see isn't bullish at all. Harley Davidson for example is 30% down on shipments, we have the automakers all going from 14 million units to about 10 million units a year that's about a 30% decrease, we had REVpar for Marriott down about 19%, we had GE's revenue down 17-18% and the same story keeps getting told. We're in the high teens, low twenties, thirty percent decrease on revenue. What you're seeing is profits from operating efficiency and how do you get operating efficiency? You offshore and you fire people. That's great for the bottom line but it isn't any good for America on (as a) whole."

"I think it's time to get very short. This rally is absolutely unsustainable and unsupportable on the fundamentals."

"GE is too late to sell they are already in the toilet. As far as being short the S&P yes I shorted it hard at the close today and the reason is this, you have a credit recession that was caused by too much debt being throughout the economy in banks, in consumers, in businesses everywhere. Consumers have managed to take $60 billion out of a $1 trillion between secured and unsecured debt not including mortgages off their balance sheet since the peak which was just a few months ago. That's less than 6% and you're telling me that's enough deleveraging for the consumer. Not a chance Larry."

3M-10Y Treasury Yield Spread at 3.45, Yield Curve is Steep and Normal

| |
Take a look at the 3M-10Y Treasury yield curve spread. The Fed lowered the Fed Funds rate to 0-0.25% to get money flowing again. This free money on the short end combined with Treasury bond volatility is responsible for the steep curve which benefits net interest margin on the bank income statement.

Yield Curve (

Consumer Staples ETF $XLP Calls Active, 40000 Jan 2010 $24 Calls Traded

| |
The Consumer Staples ETF ($XLP) saw bullish call activity today. Over 40,000 January 2010 $24 calls traded today between 1.00-1.05. According to SeekingAlpha and CrimsonMind, 20,000 were bought this morning at 1.02. So this fund paid $2,040,000 for the right to own 2,000,000 shares of XLP at 24 which would profit above $25.02 or if call volatility spikes.

Taking a look at the XLP stock chart, all of this activity could be setting up for a break above $24 resistance. XLP closed at 23.91 today and rallied out of a symmetrical triangle/downtrend. Call volume also picked up in the AUG 24 and 25 strike (6,550 between 24-25) and December saw 3,900 $26 calls trade. Click on the charts for a better view. The MACD and RSI are relatively healthy and XLP is trading above the 50 and 200d moving averages. I'll be watching the $24 resistance level during the next 6 months.

Gary Shilling Still Bearish, Expects Deflationary Pressures

| |
FYI these embeddable videos are from Yahoo's Tech Ticker:

The Market's Going to Crash: Here's What to Buy

Obama to Change His Tune: Get Ready For A Second Stimulus, Shilling Says
Market to Hit New Lows While We Wait for Next Year's Economic Recovery

Gary Shilling still believes we are in for deflationary pressures and 600 on the S&P by year end. He was spot on predicting the housing led recession. You have to respect his stance here with the market reversing and breaking through both shoulder resistance levels within the head and shoulders set up (1, 2). We'll see if this was just a crowded trade squeeze.

$SPY Technicals, Point & Figure Chart and Resistance Levels + Targets

| |
This week has been a great week for $SPY with Goldman Sachs and Intel coming out with decent earnings. $SPY rallied off of it's 200 day moving average and broke through the 50 day today. The head and shoulders trade was very crowded imho, however $SPY still needs to break above 96 resistance, or the head, to prove itself. The P&F chart has a target of 80 however if $SPY breaks above 94 it would print a new X and be bullish for the ETF. If $SPY breaks above 96 it would be pricing in some potent green shoots and allow a clear path to $100. We'll see how the market reacts to the CIT news tomorrow. The e-mini S&P is down 0.58% tonight. QQQQ (tech) has been dominating the tape technically and the Qs could lead us out of this great recession (w/ jobs replaced by robots).

Roubini and Shiller Featured on Bloomberg Radio (July 9, 2009)

| |
Professors Roubini and Shiller were featured on Bloomberg Radio on July 9, 2009. In 53 minutes they covered the economy, housing, unemployment rate, fiscal consolidation, consumer spending, stimulus and their outlook.

CIT Group Implied Volatility 250%, 2010 Bond Yields 82%, CDS 34%, Will FDIC Subsidize Default Risk?

| |
CIT Group is another victim of the credit crisis. They are a middle market lender to over a million small businesses and have $75 billion in assets with $10-$12 billion in debt due through 2010. Implied volatility is at 250%, bonds due February 2010 yield 82% and CIT CDS tightened this morning to 34% from 40% upfront. S&P says 1,881 synthetic CDOs are exposed to CIT Group (Reuters). All eyes are on the FDIC to save this company. If CIT gets subsidized by the FDIC implied volatility could sell off, CDS spreads tighten and bonds rally. Or this will print a big fat zero. Another interesting article states that CIT Group borrowers could survive without the company (Bloomberg). CIT would be the 4th largest bankruptcy in US history. Here is a chart of CIT's implied volatility, 2/2010 CIT bond and stock. On another note, from a glance at CNBC it looks like the porn industry needs a bailout. We live in interesting times. $DJI is up 202 and $SPX is up 22 this morning on Goldman/Intel earnings. Afternoon update: CIT Trading Halted as Lender Awaits Word on Possible U.S. Aid (Bloomberg).

Barney Frank On Home Ownership 2005 vs. 2009 (Daily Show)

| |
Just to clear up what Jon Stewart was talking about when he quoted Barney Frank on his show regarding home ownership. You can argue the meaning of his language. Frank said he was for affordable rental housing and regulating Greenspan on sub-prime mortgages. In 2005 Barney's thoughts on the housing bubble were spot on.. for 6-9 months.

Barney Frank June 27, 2005 - House Floor
"We have, I think, an excessive degree of concern right now about home ownership and it's role in the economy. Obviously speculation is never a good thing. But those who argue that housing prices are now at the point of a bubble seem to me to be missing a very important point. Unlike previous examples we have had where substantial excessive inflation of prices later caused some problems. We are talking here about an entity, home ownership, homes, where there is not the degree of leverage that we have seen elsewhere. This is not the dot com situation. We had problems with people having invested in business plans for which there was no reality, with people building fiber optic cable for which there was no need. Homes that are occupied may see an ebb and flow in the price at a certain percentage level but you're not going to see a collapse that you see when people talk about a bubble. So those of us on our committee in particular will continue to push toward home ownership."

Barney Frank's reply to his quotes on the Daily Show July 13, 2009:
".... But not for low income people. Home ownership for people that could afford it"

Commercial Real Estate Needs CPR, Systemic Risk? (Joint Economic Committee)

| |
It shouldn't be a surprise that commercial real estate and CRE debt markets continue to de-lever and re-price during this recession. Toxic commercial real estate was levered up just like the housing market and the "other shoe" is falling as we speak as unemployment increases, cash flows dwindle, Rent/FFO declines, vacancies and delinquencies increase and properties underwater become hard to refinance. Banks exposed to this toxic CRE debt will see their capital position deteriorate further. This is why the Government (essentially the taxpayer) is trying to backstop bank stress and jump start the CMBS (CRE debt securities) market.

I've been watching this market for 2 years now and this cash crunch will MURDER sub-prime CRE debt originated at 100% LTV (loan-to-value) at the height of the CRE bubble. On a positive note Big REITs recently raised equity to pay down debt (Simon Properties, Vornado, Kimco, Acadia, Kite Realty). The commercial real estate market is still distressed and might need a TALF/PPIP backstop if realized CRE deflation poses a systemic threat. Of course that would mean rigging the market of natural price discovery.

The Joint Economic Committee held a hearing (Webcast: Commercial Real Estate: Do Rising Defaults Pose Systemic Threat?. Here are quotes from the hearing. Visit link above or click the photo to be redirected to the hearing.

Denninger Featured On CNBC, Kneale Disses The Fly

| |
This feud kind of reminds me of the East vs. West Coast rap rivalry during the mid 90s. Now it is CNBC's Dennis Kneale vs. Financial Bloggers and Dennis keeps putting fuel on the fire. Is CNBC trying to start a show that features financial bloggers? Karl Denninger who runs The Market Ticker blog was featured on Kneale's show for a few minutes based around his recent blog post. Karl made a longer reply to Kneale on YouTube. Dennis then dissed The Fly (second video below). Financial journalism implied volatility is catching a bid and there's activity in the out-of-the-money calls. So who is Suge Knight, GE

RRE's James Robinson on StockTwits Traction -CNBC Video

| |
Venture Capitalist James Robinson (@JDrive) of RRE Ventures was on CNBC discussing tech at the Sun Valley conference. He's putting new money to work. He mentioned his recent investment in Revolution Money (a Steve Case venture). He is looking for companies that demonstrate traction and he mentioned StockTwits.
"What you are really looking for now is some sort of traction. The companies that we see at the earliest stages have, even without venture funding, demonstrated traction. If you follow Twitter there's a group called StockTwits founded by an entrepreneur named Howard Lindzon, and what Howard did is instead of doing anything other than some angel funding he went out and built a community of 100,000 people so now he can get venture funding because he has proven his concept. By the way I'm not an investor and I probably should've been". (Double check wording, starts at 3:25)

Credit Default Swap (CDS) Market Needs Transparency, Still a Good Signal

| |
Wikipedia Definition of Credit Default Swap:
"A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded."

Ever since Bear Stearns, Fannie, Freddie, Lehman Brothers, Merrill, Citi and AIG blew up in 2008 (which all started when two Bear Stearns structured product hedge funds blew up in June 2007 pre-Gov bailout: Bear Stearns Tells Fund Investors `No Value Left' -Bloomberg), credit default swaps were supposed to insure against losses on defaults but instead brought down the whole financial system (AIG Trading Partners Squeeze Insurer Before Bailout Bloomberg June, 09).

The Lehman Brothers bankruptcy put the nail in the coffin (Lehman CDS Settlement Disappoints - WSJ) and taxpayers ended up being the credit default swap. Here's a great article from Financial Sense on June 6, 2008 predicting the CDS crisis (CREDIT DEFAULT SWAPS THE NEXT CRISIS by Financial Sense) and Time also had an article. Also Soros warned about CDS in early 2008 in the Financial Times (more below) and Warren Buffet wrote in Berkshires 2002 shareholder letter that they were "financial weapons of mass destruction".

Rosenberg: Secular Bear Market at Halfway Point (CNBC Video)

| |
David Rosenberg, former Merrill economist now at Gluskin Sheff was featured on CNBC. Here is the video and a summary of his thoughts.
  • 40% dead cat bounce from March to May
  • 6 points of multiple expansion during rally, not earnings driven
  • Consensus: $75 operating earnings per share priced into 2010
  • At best we'll see $50 this year in S&P earnings
  • Equities are pricing in an earnings recovery we won't see until 2012
  • $50 in EPS + 13-14 multiple = $675ish... (So, retest?)
  • Another fiscal package won't save the day
  • Had 18 Year bull market (1982-2000), we move in 18 year cycles..
  • Halfway through secular bear market in equities, w/ two price peaks (wow)
  • There will be huge spasms along the way, you can't be a buy and hold investor!

SPY Put/Call Volume Ratio Low vs. Open Interest

| |
Look at the difference between SPY put/call open interest ratio and put/call volume Ratio via Schaeffersresearch yesterday. The $SPY put/call open interest ratio was at monthly highs and put/call volume ratio was at monthly lows. At the 7/6/09 close the SPY put/call open interest ratio was at 1.83 and the 21 day SPY put/call volume ratio was at 0.77. The last time we saw 0.77 was when SPY sold off from 89 to 68 (March 2009 lows). Look at the chart. The sentiment reading could totally flip to be contrarian in nature though. So traders are loading up on puts vs. calls but trading more calls vs. puts (21 day average? from Schaeffers). So will a volume rush into puts make put holders money? The VIX has been in a range since May (24-33) so a put premium volume spike would need to occur, or a big complacent SPY sell off.

SPY Put/Call Volume Ratio (Courtesy of

SPY Put/Call Open Interest Ratio (Courtesy of

$SPY is down 1.34% as we speak and there are technical levels near by that could CRUSH the S&P if broken (June 28: SPY Head and Shoulders Chart Pattern, Watch 875 Neck Line). A head and shoulders neckline breach would bring in sellers. I'm thinking this is why traders/institutions are speculating or hedging with puts imho. You never know though. In May the put/call open interest ratio hit monthly highs while the market kept rallying, so those contracts were ripped up or a big fund pocketed some nice premium if those puts were sold-to-open (SPY May Put Pessimists Squeezed, Contracts Ripped Up).

$SPY Head and Shoulders Pattern?

Oil Put in a Double Top -Credit Suisse Sneddon (7/6/09)

| |
Reported from BloombergTV today (7/6/09). Credit Suisse technical analyst David Sneddon said oil put in a "double top" today. "Double tops signal the trend is changing. Oil prices stalled out at roughly the same price over the last month". Sneddon sees $59 as the first support level with a potential break to $57.75.

Goldman Sachs Program Trading Code Stolen

| |
I thought this may be of interest. According to Reuters and Zero Hedge (must read), Sergey Aleynikov, a former Goldman employee, was arrested for allegedly stealing Goldman's secret program trading codes. He uploaded them onto a German website registered by a person in London. The complete affidavit can be found at those two articles (PDF). Was this dude a quant spy? Goldman code stealer by day and professional dancer (h/t Reuters) by night? We shall see.. The story is kind of a mix between Hackers, Pi, Wall Street and Office Space. If he gets off for "accidentally" stealing Goldman's proprietary code, he should definitely play the lead role in Wall Street 3. Here's more from Bloomberg: Goldman Sachs’ Investment in Trading Code Put at Risk by Theft.
“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said. “The copy in Germany is still out there, and we at this time do not know who else has access to it.” (Bloomberg)

UltraShort Oil & Gas $DUG Testing $20 Resistance

| |
The UltraShort Oil and Gas ETF $DUG is testing ceiling and downtrend resistance at $20. A break above $20 could bring some upside momentum. We'll see if this oil correction is for real and if it breaks below the 50 day moving average. Crude could then test $57.50-60 support/200dma, imo.

If the US Dollar breaks down, equities catch a bid, middle east tensions arise or a hurricane hits, this oil correction would be short lived. Protect yourself...

UltraShort Oil & Gas $DUG (Courtesy of

UltraShort Oil & Gas Weekly DUG (Courtesy of

Crude Oil ($WTIC -

JPMorgan Strategist Lee Bullish On Cyclical Stocks, ISM Rebounds

| |
The weekend strategy session continues. Here is JP Morgan's Thomas Lee on BloombergTV. He thinks the rebound in manufacturing data shows an industrial recovery (JPMorgan Global Manufacturing PMI, 46.9% - July 1, 2009 PDF). He sees a V-shaped recovery on cyclicals or "smoke stack" industrials given the recent rise in ISM data. From the report:
"The worldwide manufacturing sector took a further step towards recovery in June. The JPMorgan Global Manufacturing PMI — which acts a barometer of the overall health of the sector — posted 46.9, its highest reading since last August. Output expanded slightly following a year-long period of contraction." (Source)

The June ISM Manufacturing Index number increased 2% to 44.8%. The 17 month trend trend in economic activity is still contracting at a SLOWER pace. Look at the downtrend. History shows dramatic rebounds after ISM hits less than 40%. The chart does not show ISM during the 1930s. The # needs to break above downtrend.

ISM Manufacturing: PMI CompositeIndex (St. Louis Fed)

Summary of JP Morgan's Thomas Lee on Bloomberg:
  • Manufacturing is a huge generator of corporate earnings, 30% profits/9% employment
  • 2002 playbook was consumer credit expansion, 2009 recovery = global industrial cycle
  • Sees V-shaped industrial recovery pulling us out of recession
  • Will be different recovery, smoke stack industries will beat expectations
  • If ISM recovery plays out, will be upside revisions to transports, steels, auto parts, tankers
  • Lee Doesn't like GOLD, output gap and slack in terms of unemployment not inflationary
Roubini is also bearish on GOLD and inflation so keep an eye on $GLD. Also $XLI (Dow Jones Industrials SPDR), $IYT (iShares Dow Jones Transports), $SLX (Market Vectors Steel) for JPM's industrial recovery forecast.

Peter Schiff Market, $USD Video Update July 4, 2009

| |
Peter Schiff July 4, 2009 Video Update from Euro Pacific Capital. It is always interesting to hear what Peter Schiff has to say.

  • 80 points from head and shoulders neckline, a close below could spell a bigger decline
  • Catalyst for weakness was jobs data, lost 470,000 jobs, higher than expected
  • Gov bailouts are interfering with the correction process that will ultimately lead to hiring
  • Days of dollar rallying off of bad economic news will soon come to an end
  • India calling for alternative, in addition to Russia and China is negative for Dollar
  • **But read this: Reuters: China says dollar to remain leading world currency (7/5/09)
  • Schiff Expects economy to weaken further, unemployment rise

Other videos featuring Peter Schiff:
Peter Schiff on Jon Stewart, Yes He Was Right 6/10/09
Peter Schiff Expects a New Low in Nominal Terms (4/10/09)
Peter Schiff Says Beware of Inflation, US Dollar (3/22/09)
Schiff: Dow Hits New Low Priced in Gold, TIPS Understate Inflation (2/12/09)
Peter Schiff Compares U.S Economic Crisis to Collapse of U.S.S.R. (1/10/09)
Peter Schiff, Rick Santelli Talk Gold and US Dollar Recycling (10/23/08)

Soros on Dollar, China, Credit Regulation (WSJ Videos)

| |
Here are videos with George Soros interviewed by WSJs Alan Murray at a conference. In April Soros never replied to my question, but I'm sure he shorted the USD trend break. Soros, Are You Long Or Short The US Dollar?.

Nassim Taleb, Black Swan on CNBC Video July, 2009

| |
This is from the CNBC article: 'We're in the Middle of a Crash': Black Swan. He talks about the economy, temporary relief, fragile system is crashing, jobs report, unemployment numbers, continued deleveraging, and the U.S debt.
"Instead of deflating debt they are thinking of inflating assets". "What makes me very pessimistic is not to see any leadership or any awareness on a part of government on what needs to be done, which is to deleverage somewhere between $40-to-$70 trillion worldwide" Nassim Taleb 2:55 (double check wording).

Economic Updates From Walstreetpro2

| |
ALERT: Economic Updates from Walstreetpro2.

IYR, SRS Real Estate ETF Chart Observations

| |
I'm looking at the real estate ETFs IYR/SRS after $SRS (UltraShort Real Estate Proshares or the Inverse Dow Jones Real Estate Index ETF) failed to breakout in mid May. SRS has a 2x inverse relationship w/ IYR. No fundamental data here just checking out the charts.

On a short term basis $SRS is being wedged and will be forced to move one way or another soon. The long term charts are interesting. The SRS chart looks wacked out because of it's 200% inverse relationship but you can see some potential technical set ups. IYR/SRS could be setting up normal and inverted head and shoulders patterns across multiple time frames. For now IYR needs strong green volume above 30.81. It's time for the market to make a decision on real estate.

High Yield Corp Bond ETF (HYG) Correction Due?

| |
In my opinion the High Yield Corporate Bond ETF (HYG) looks due for a correction. Even if we are in a bull market there are still corrections. It looks like the risk dump has already begun with a report showing a higher than expected 467,000 jobs lost in June and a 9.5% unemployment rate (CNN). $SPY (S&P ETF) is down 2.27% and $HYG is down 1.36% to $78.12.

HYG just tested $80, a resistance level not seen since July, 2008. You can see from the chart that HYG traded between 80 and 90 before the financial crisis but during the recession. Are high yield investors ready to be compensated for pre-crisis level risk priced in yield? You can always argue about the "priced in" threshold though. This is an interesting article I found at
Downgrades Point to Wider High-Yield Bond Spreads, Moody’s Says

"June 22 (Bloomberg) -- Downgrades in the U.S. high-yield credit market to Caa3 or lower are occurring at a record pace this quarter and suggest bond spreads may be too narrow, Moody’s Investors Service said.

Rating cuts to Caa3, the ninth level below investment grade, or lower are on track to reach 97 in the April through June period and 182 for the first six months of the year, the most for any two-quarter period, Moody’s said in a June 19 report. The downgrades indicate that the U.S. high-yield default rate will exceed May’s 10.2 percent by a “substantial margin,” Moody’s Chief Economist John Lonski wrote in the report.
(read full article)

California Issues IOUs, California GO Bond Bets

| |
Kudlow talked about California's General Obligation bonds last night. I'm trying to find a California Municipal Bond ETF consisting strictly of general obligation bonds. Info from the video:
  • Martin Weiss of Weiss Research released a report on June 22 saying the bonds are a sell.
  • Matt Fabian of Municipal Market believes California GO bonds are a buy based on yield.
  • Jon Schotz of Saybrook Capital likes the GO bonds because by law they are second in line behind education in payouts.

Save Capitalism From S&P Futures Manipulation!

| |
Weekend note... Save capitalism from the possibility of S&P Futures manipulation ($ES_F). Read this post at Zero Hedge and follow the instructions to notify the SEC so they can investigate the matter..
"Since FINRA and the Securities and Exchange Commission believe in going only after $1,000 insider traders with the full weight of their enforcement teams, yet ignore major market manipulation in futures and other markets, Zero Hedge wanted to present readers an opportunity to be heard by the market's regulators."

Lets heal the world people, we are the world.

Ken Lewis' Testimony on the Bank of America/Merrill Lynch Merger

| |
I posted Bernankes testimony on the Bank of America/Merrill Lynch merger today. Here is the CEO of Bank of America, Ken Lewis, testifying before congress on June 11 (full video via CSPAN).

Bernanke Testimony On Bank of America, Merrill Lynch Merger

| |
Here is the full video of Bernanke's testimony on the Bank of America/Merrill Lynch merger via CSPAN.

Here is Bernanke's full testimony:

Chairman Ben S. Bernanke
Acquisition of Merrill Lynch by Bank of America
Before the Committee on Oversight and Government Reform, U.S. House of Representatives, Washington, D.C.
June 25, 2009

Chairman Towns, Ranking Member Issa, and other members of the Committee, I appreciate the opportunity to discuss the Federal Reserve's role in the acquisition by the Bank of America Corporation of Merrill Lynch & Co., Inc. I believe that the Federal Reserve acted with the highest integrity throughout its discussions with Bank of America regarding that company's acquisition of Merrill Lynch. I will attempt in this testimony to respond to some of the questions that have been raised.


On September 15, 2008, Bank of America announced an agreement to acquire Merrill Lynch. I did not play a role in arranging this transaction and no Federal Reserve assistance was promised or provided in connection with that agreement. As with similar transactions, the transaction was reviewed and approved by the Federal Reserve under the Bank Holding Company Act in November 2008. It was subsequently approved by the shareholders of Bank of America and Merrill Lynch on December 5, 2008. The acquisition was scheduled to be closed on January 1, 2009.

As you know, the period encompassing Bank of America's decision to acquire Merrill Lynch through the consummation of the merger was one of extreme stress in financial markets. The government-sponsored enterprises, Fannie Mae and Freddie Mac, were taken into conservatorship a week before the Bank of America deal was announced. That same week, Lehman Brothers failed, and American International Group was prevented from failing only by extraordinary government action. Later that month, Wachovia faced intense liquidity pressures which threatened its viability and resulted in its acquisition by Wells Fargo. In mid-October, an aggressive international response was required to avert a global banking meltdown. In November, the possible destabilization of Citigroup was prevented by government action. In short, the period was one of extraordinary risk for the financial system and the global economy, as well as for Bank of America and Merrill Lynch.

Discussions Regarding the Possible Termination of Agreement to Acquire Merrill Lynch
On December 17, 2008, senior management of Bank of America informed the Federal Reserve for the first time that, because of significant losses at Merrill Lynch for the fourth quarter of 2008, Bank of America was considering not closing the Merrill Lynch acquisition. This information led to a series of meetings and discussions among Bank of America, the regulatory agencies, and Treasury. During these discussions, Bank of America's CEO, Ken Lewis, told us that the company was considering invoking the Material Adverse Event clause in the acquisition contract, known as the MAC, in an attempt to rescind its agreement to acquire Merrill Lynch.

In responding to Bank of America in these discussions, I expressed concern that invoking the MAC would entail significant risks, not only for the financial system as a whole but also for Bank of America itself, for three reasons. First, in light of the extreme fragility of the financial system at the time, the uncertainties created by an invocation of the MAC might have triggered a broader systemic crisis that could well have destabilized Bank of America as well as Merrill Lynch. Second, an attempt to invoke the MAC after three months of review, preparation, and public remarks by the management of Bank of America about the benefits of the acquisition would cast doubt in the minds of financial market participants--including the investors, creditors, and customers of Bank of America--about the due diligence and analysis done by the company, its capability to consummate significant acquisitions, its overall risk-management processes, and the judgment of its management. Third, based on our staff analysis of the legal issues, we believed that it was highly unlikely that Bank of America would be successful in terminating the contract by invoking the MAC. Rather, an attempt to invoke the MAC would likely involve extended and costly litigation with Merrill Lynch that, with significant probability, would result in Bank of America being required either to pay substantial damages or to acquire a firm whose value would have been greatly reduced or destroyed by a strong negative market reaction to the announcement. For these reasons, I believed that, rather than invoking the MAC, Bank of America's best option, and the best option for the system, was to work with the Federal Reserve and the Treasury to develop a contingency plan to ensure that the company would remain stable should the completion of the acquisition and the announcement of losses lead to financial stress, particularly a sudden pullback of funding of the type that had been experienced by Wachovia, Lehman, and other firms.

Ultimately, on December 30, the Bank of America board determined to go forward with the acquisition. The staff of the Federal Reserve worked diligently with Treasury, other regulators, and Bank of America to put in place a package that would help to shore up the combined company's financial position and reduce the risk of market disruption. The plan was completed in time to be announced simultaneously with Bank of America's public earnings announcement, which had been moved forward to January 16, 2009, from January 20, 2009. The package included an additional $20 billion equity investment from the Troubled Asset Relief Program and a loss-protection arrangement, or ring fence, for a pool of assets valued at about $118 billion. The ring-fence arrangement has not been consummated, and Bank of America now believes that, in light of the general improvement in the markets, this protection is no longer needed.

Importantly, the decision to go forward with the merger rightly remained in the hands of Bank of America's board and management, and they were obligated to make the choice they believed was in the best interest of their shareholders and company. I did not tell Bank of America's management that the Federal Reserve would take action against the board or management if they decided to proceed with the MAC. Moreover, I did not instruct anyone to indicate to Bank of America that the Federal Reserve would take any particular action under those circumstances. I agreed with the view of others that the invocation of the MAC clause in this case involved significant risk for Bank of America, as well as for Merrill Lynch and the financial system as a whole, and it was this concern that I communicated to Mr. Lewis and his colleagues.


The Federal Reserve also acted appropriately regarding issues of public disclosure. As I wrote in a letter to this Committee, neither I nor any member of the Federal Reserve ever directed, instructed, or advised Bank of America to withhold from public disclosure any information relating to Merrill Lynch, including its losses, compensation packages or bonuses, or any other related matter. These disclosure obligations belong squarely with the company, and the Federal Reserve did not interfere in the company's disclosure decisions.

The Federal Reserve had a legitimate interest in knowing when Bank of America or Merrill Lynch intended to disclose the losses at Merrill Lynch. Given the fragility of the financial markets at that time, we were concerned about the potential for a strong, adverse market reaction to the reports of significant losses at Merrill Lynch. If federal assistance to stabilize these companies were to be effective, the necessary facilities would have to be in place as of the disclosure date. Thus, our planning was importantly influenced by the companies' planned disclosure schedule. But the decisions and responsibilities regarding public disclosure always remained, as it should, with the companies themselves.

A related question is whether there should have been earlier disclosure of the aid provided by the U.S. government to Bank of America. Importantly, there was no commitment on the part of the government regarding the size or structure of the transaction until very late in the process. Although we had indicated to Bank of America in December that the government would provide assistance if necessary to keep the company from being destabilized, as it had done in other cases during this time of extraordinary stress in the financial markets, those December discussions were followed in January by significant and intense negotiations involving Bank of America, the Federal Reserve, the Treasury, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency regarding many key aspects of the assistance transaction, including the type of assistance to be provided, the size of the protection, the assets to be covered, the terms for payments, the fees, and the length of the facility. The agreement in principle on these items was reflected in a term sheet that was not finalized until just before its public release on January 16, 2009. The Federal Reserve Board and the Treasury completely and appropriately disclosed the information as required by the Congress in the Emergency Economic Stabilization Act of 2008.

In retrospect, I believe that our actions in this episode, including the development of an assistance package that facilitated the consummation of Bank of America's acquisition of Merrill Lynch, were not only done with the highest integrity, but have strengthened both companies while enhancing the stability of the financial markets and protecting the taxpayers. These actions were taken under highly unusual circumstances in the face of grave threats to our financial system and our economy. To avoid such situations in the future, it is critical that the Administration, the Congress, and the regulatory agencies work together to develop a new framework that strengthens and expands supervisory oversight and includes a broader range of tools to promote financial stability.

I would be pleased to take your questions.

Frontline - Breaking The Bank, Shadiest Weekend In Financial History

| |
Yup, the shadiest weekend ever in financial history.

The Frontline video, "Breaking The Bank", gives a behind the scenes look at the moments leading up to the Lehman bankruptcy and Bank of America/Merrill merger. Was September 13-14, 2008 the shadiest weekend in financial history? DV was there, Lehman Disaster Sending Index Futures Lower, BAC Buys MER. The drama continues tomorrow as Bernanke testifies before congress regarding allegations that he pressured Bank of America's Lewis to buy Merrill from Thain. Hopefully I'll be able to embed the hearing video.

"In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer." New York Times

Hat tip Value Plays

Fed Keeps Rate At 0-0.25%, (6/09 FOMC Statement)

| |
Release Date: June 24, 2009

For immediate release

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

AUDJPY Hit Retracement Level, Needs Reflation Jumper Cables

| |

I'm revisiting the $AUDJPY currency pair. It just hit the 50% fibonacci retracement level and sold off (104 2008 high - 55 2009 low, hits 80). I wrote about the AUDJPY carry trade unwind, reflation trade and commodity currency relationship a few posts ago. The Australian Dollar bottomed out against the Yen and rallied hard as the reflation trade caught traction (or China restocking unwound the carry trade unwind - Baltic Dry Index On Fire, 1, 2, 3). China is a big importer of Australian commodities which requires Australian Dollars. With oil, gold and other commodities losing strength it could sink the $AUD. GOLD could sell off to the 200dma (875ish) if the risk aversion trade sticks for a while.

As you can see from the chart below, $AUDJPY broke through the 75.52 support level and could test the 38.2% retracement level (74.26) then possibly hit 70 if nothing can hold. C-bank moves and Japan fundamentals could also affect this pair. It will be interesting to watch and stay protected w/ stops. I'd probably hedge w/ ITM calls somehow. So will the Yen carry trade unwind unwind, unwind?

For better info and analysis visit these articles:

Barclays’ Englander Sees Room for Australian Dollar to Retreat (Bloomberg)
Dollar and Yen Extend Rally on Falling Stocks and Commodities (IBTimes)
Risk Aversion Spikes as World Bank Sees Deeper Recession (FXStreet)
Yen gains as uncertainty stalks market ahead of Fed (
Australian, New Zealand Dollars Decline on World Bank Outlook (Bloomberg)
Nikkei Plummets As Stocks See Massive Sell-off On Economic Woes (RTTNews)


Market Needs Support From IYT, Transports, FDX

| |

Not too long ago the Dow, S&P and Nasdaq all busted through their 200 and 50 day moving average. The Transports ($TRAN, $IYT) tested and failed that level recently and now price action is being squeezed between the 50 and 200dma awaiting trend decision. I wouldn't stand in front of this uptrend (or at least in size) until it breaks the 50 day and trend support. Also watch for the 50/200 day "golden cross" to the upside which would be a long term bullish indicator. Puts open are dominating calls however there is no crazy OTM activity. The IYT Schaeffers Volatility Index is at 0.41, up 10% from 0.37 on June 5. Look at the $IYT chart.