Promises are only valuable when they can be relied upon AND when they finally turn into reality. This market is full of promises and yet, the realities are not so certain.

A few weeks ago the market was pumped up by the promise that the UAW and GM were making great progress during the negotiations. Here’s a quote from a 09/13/07 BusinessWeek article:

The Dow Jones industrial average rose by more than 130 points after General Motors Corp. surged 10 percent amid reports that talks between the automaker and workers over the thorny issue of health care costs have perhaps been fruitful.

Of course, the national GM strike over the past few days ended up happening anyway. The market loved the promises from weeks ago that failed and yet, when negotiations fell apart, the indices did not sell off. Now that we have a “tentative” deal between GM and the union, the market is loving it again.

This is one of the things I look for in evaluating market sentiment. The bulls are still in charge and regardless of whether it is justified or not, useless stories like this prove it for now. The market hoped for Fed rate cuts, stocks went up on the promise and the FOMC delivered. You might think that proves that the promise turned into reality. But what reality did we get? A rate cut is reality, but the economic benefits are still just a promise. GM and the UAW may have a contract, but that contract ends at some point. Did the agreement result in a harmonious relationship between employer and employee - I doubt it. Does this solve GM’s problems? Will GM be profitable now? Will GM design and manufacturing issues be resolved? Promises Promises Promises.

Tomorrow, (somewhere near Minneapolis) - I’ll be teeing it up with Charles Kirk of The Kirk Report.  If you are not familiar him for some reason, you are missing out on a superior blog full of excellent trading ideas and portfolio management strategies.  As for the golfing, Charles won last year.  No excuses - he was better than me.  But it’s not about the golf really, it’s a great chance to discuss the investing business with one of the best.   Enjoy your day in the markets tomorrow or better yet, call a friend and go tee it up.

Last week, I gave a bunch of new UP signals so this week it wasn’t so surprising that I am sitting tight with only 53 new UPs vs. 52 new DOWNs.  I sensed a great hesitation to move forward with a lot of conviction last week.  Obviously, we got the huge move on the FOMC decision and a few good days of additional gains, but it’s only reasonable that investors didn’t get overly excited too fast.  We are approaching the resistance levels of mid-July’s record highs, we still have a credit crisis, corporate earnings will likely slow this quarter, the economy is questionable, etc. etc.  Nonetheless, I am sitting tight with my quietly bullish stance until I see firm conviction in either direction.

A month ago, I mentioned that there were Less Shorts at the peak of the market panic (mid-August) than there were at the peak of the market greed (mid-July). Of course, if you love to cheer when shorts get hurt, this probably came as a bit of a disappointing surprise. For all my criticisms of the shorts who provided a lot of juice with their panicky covering during the bull market, it’s nice to see that Bears Afraid Of Ben took the opportunity to get out of the way again last month. Per the NYSE Short Interest report for September 14th, short interest decreased to 11,841,051,529 from 12,466,511,521 as of August 15, 2007. Since the recent market top in mid-July, short interest on the NYSE has declined 1.1 billion shares or 8.5%. Except for a few trading days and despite all the Fed-induced reasons to create a short covering rally, most of the reduction in negative bets was handled much better than prior to mid-July. Until the credit crisis is resolved, I think bears would be wise to do the opposite of what you might expect me to say. I’d like to see them sit tight and use every momentary weakness to cover their shorts. For right now, I don’t see an end to government protection of the record stock market highs and any short that thinks he will not get a promptly timed intervention shoved up his ass whenever the next crisis arises is way too optimistic about pessimism. The most profitable period for the shorts occurred when the longs closed their positions and sold whatever they could. For the time being, the Bernanke-put has brought them back and until the bulls give up on themselves, it just doesn’t make much sense to me to make too many short bets.

Clearly, I am at odds with the prevailing wisdom of the bulls who love to use every PCE, CPI, and PPI to scream for the rate cut they “deserve” “need” “want”. Not only is my opinion different than the permabulls, but it’s different than the Fed. Consider today’s statement from Dallas Fed President Richard Fisher, “The question was really the trade-off…on the economic growth side, given the fact that we had seen inflation trending lower, by whatever means you measure…and in expectations… It was the considered judgment of the (Federal Open Market) Committee that we had some wiggle room.”

As you know (or should know), I believe inflation has been growing for the past few years and not declining per Mr. Fisher. So when he says by “whatever means you measure” he is obviously not using my measuring stick. Or for that matter, he seems to be pretending that there is no measure or no economist that is seeing inflation that he does not see. That is the dangerous part. If the Fed is so convinced that we really do have low inflation and if they believe the PCE or CPI is calculating the true pricing situation - well - then we are screwed.

Hearing that the FOMC thinks we have “wiggle room” because inflation is low and trending lower just shows how out of touch my commentary is with the wisdom of the Fed and many bulls. I am not wiggling, I am squirming with an ever increasing fear that I am so wrong. Because I am experiencing significant inflation in almost every aspect of my life and the smart guys that can and should do something about it, just see “wiggle room.” So feel free to disregard my stupidity or ignorance on the inflation question. If your life is not getting as expensive as mine is, I am happy for you and envious that you have a lot of wiggle room where I have cramped spaces.

We had inflation before the Fed cut the Discount Rate and the Fed Funds Rate.   Since last Tuesday, the markets in the 10-year Treasuries and Gold and Oil and general commodities and the US Dollar are all responding to fears of inflation.  I don’t see the wiggle room.  Fortunately for all the lovers of interest rate cuts, I have no vote.

Last week, it looked like banks were finally starting to show up and borrow at the Discount Window, but after reading the new H.4.1 report, I was a bit surprised to see the repayments. Average borrowing decreased by $753 million and the ending balance dropped about $6 billion. One view I have seen in the financial media is that they found it cheaper to borrow at the new Fed Funds Rate but that doesn’t fit with the math. Remember that the 50 bps cut didn’t occur until Tuesday afternoon, and this weekly report ends on Wednesday. That leaves one day to affect the average borrowing of $2.2 billion. If you do a simple 7-day average and use the beginning value of $7.2 billion and the ending value of $1.1 billion, to get to that $2.2 billion average you need to assume that the majority of the loan repayments came last week Thursday. Believing that last week Wednesday’s ending balance of $7.2 billion was outstanding until the rate cut spurred everyone to borrow at the cheaper rates would have resulted in an average of approximately $6.3 billion. Anyway - playing with the numbers gives us very little insight into why the loans were repaid. I find it hard to believe that the 50 bps cut has solved the liquidity problems in the few hours contained in this report. If you are a bull who believes FOMC rate cuts are capable of solving the world’s problems, there’s nothing my cynical mind can do to change all that. A reduction in the Discount Window borrowing goes a long way towards improving sentiment that the worst is behind us.  It’s often easy to agree with the spin, just not with the facts.

Warning: if you are a bleeding heart do-gooder this post will probably piss you off.

I feel terrible for people in financial trouble - I’ve been there. I want everyone who deserves help to avoid foreclosure to get it. But I want to see proof of their innocence first. If all this political drama about subprime borrowers who were innocent and taken advantage of is true, I want them to provide proof. Listening to Paulson, Jackson and Bernanke today fielding questions about the housing crisis from politicians was very interesting. I know these guys mean well and of course, no one wants people to lose their homes. However, assuming that the government needs to help everyone who is in trouble is just plain wrong.

First of all, in the case of troubled borrowers who got a “no money down” mortgage, what equity are they going to lose? Sweat equity? Emotional equity? Appraiser inflated equity? Bubble equity? I doubt they built equity from mortgage payments they’ve made since achieving the “American Dream of homeownership” that is “the envy and role model of countries around the world” (sorry I am just tired of hearing that crap.) As most people who are not ignorant of mortgage payments should know, almost 100% of your payments in the first few years goes to interest, not principal.

Next, let’s evaluate the cost of a sweetheart mortgage versus paying rent to shelter the family. It seems to me that these tight budget folk bought got into the house because they figured out that the teaser mortgage payment would be cheaper than the rent they were paying. Seems logical, but we have been expected to believe these people are not capable of evaluating the financial consequences of such a complex transaction. Oh well, let’s assume they were at least capable of comparing two numbers. In that case, they may have actually saved money by being in this mess. Other than the stigma of foreclosure how bad has it been for these people compared to what they would have had to spend for shelter anyway? In summary, what can you lose if you have not contributed anything?

I get the whole plan of lenders voluntarily renegotiating with troubled borrowers. But if they didn’t ask for proof that the borrower knew he was capable of making the payments when they gave the loan, are they not going to ask the opposite question this time? What proof is required for someone to say they cannot afford to pay their mortgage? I think it’s reasonable for the borrowers to have to show hardship if they want a handout or a bailout. What kind of car are they driving? What cell phones are they dialing? What restaurants are the eating at? What clothes are they wearing? How many packs of smokes are they burning? What about booze? The mortgage is a big payment, but there are many choices that we all make for spending money. If the borrower is capable of buying nothing other than the necessities, I am all for them getting the lowest possible refinance payment. Isn’t it fair to ask for proof?

One of the key things that has bugged me about helping people with their mortgages is the whole concept that most of them did not know what they were signing and they were taken advantage of by the predatory lenders. I’ve seen the estimates that over half of the no doc loans were made to people that lied about their financial condition and capacity to pay. One poll suggests that the exaggerations were extreme - the equivalent of saying you make $50,000 per year when it’s really $30,000. Why did people lie? Did they just accidentally lie? How did they come up with the number that they needed to say to get a loan when they weren’t good enough at math to evaluate the future interest rates and associated payments? So, I think it’s only fair to pull out the original loan application and look at what they signed their name to. If they can show a number that was truthful and matches tax returns or other evidence, then give them the help. If the info was true at the time and they lost their job or had other financial problems since getting the mortgage, then give them the help. On the other hand, if they lied about their income to get the loan, then they aren’t innocent and they don’t seem ignorant of the financial implications of their actions. Isn’t it fair to ask for proof?

Many people are in need of help. If they are innocent and did nothing to contribute to the subprime mess, then they deserve all the assistance they can possibly receive. Unfortunately, there will be others who lied to get the mortgage and who will lie again to take advantage of this opportunity. We cannot allow the limited resources we have for those truly in need to be diminished in this way. I am fully behind the idea that we need to help the innocents who have been taken advantage of but isn’t it reasonable to ask for proof of that innocence?

I’ll be traveling over the next few weeks so my posting will be less frequent and the posts will be shorter. I work from wherever I am compliments of cellular broadband but one of my destinations is likely to be too remote and rustic to get a signal. As usual, the market will survive quite well without my commentary and more importantly, I’ll survive better with a much needed time away from the computer and tv.

It’s time to refresh my perspectives and focus on meeting with subscribers and prospective users of the HEDGEfolios database. Over the next few weeks, I’ll be touring the midwest cities of Chicago, Milwaukee and Minneapolis meeting with investors, fund managers, and financial advisors. I am looking forward to hearing what others are thinking rather than having to explain my own thoughts.

I have a few gaps in my schedule so if your firm is located in or near any of the cities I mentioned and you want a visit, contact me and I’ll see if it can work out.

Starting on September 11th (a week before the FOMC decision) the 10-year Treasury rates started to increase. I was a bit hesitant to make any changes to my expectations before the Fed Funds decision, but after yesterday and today’s action, it’s time for me to get on board with a bias towards higher rates on the 10-year. In my last Market Forces article, I talked about the failure of support at 4.5% which ended up happening. So while I am expecting a continuation in higher rates at the long end of the curve over the short term, the next time we reverse course I’ll be worrying about a retest of 4.35%

The markets may have needed a rate cut yesterday but it really put another hurt on our seniors. Let’s not forget that a huge percentage of our population is retiring or retired and their portfolios are moving increasingly towards fixed income. Income which is less “fixed” each time the Fed lowers rates. Many of our citizens in their 60’s, 70’s and 80’s are fiscally conservative and very savvy. It’s highly unlikely they are living in houses financed by adjustable rate mortgages or in any way responsible for or affiliated with the subprime mess. So they are not getting the benefit of a cheaper mortgage thanks to Ben but they did get a cut to their income. Meanwhile, property taxes at local government levels are squeezing the portion of their budget devoted to shelter at the same time that their home prices are at risk of declining. As for expenses, the inflation that our Central Bankers decided to ignore are especially hard on our seniors. Economists may love pretending that core inflation is the only thing that matters but just ask any retired person and find out whether energy (home heating/power) and food are significant parts of their wallet. As for medical costs - those aren’t getting any cheaper.

We all get caught up in our own lives and the value of our portfolios. Now that the excitement from yesterday’s rate cuts have made many investors happy, please take a few moments to reflect on older friends, neighbors or family members that need your assistance. I suspect they have been hurt more by yesterday’s decision than the rest of us have been helped.