There’s a difference between reporting the news and becoming the news. CNBC and Charlie Gasparino are great at reporting rumors - good for them. Now it looks like they are proud of becoming the news - not so good for them. The timing and wording of the “breaking news” story on an Ambac bailout was perfect monoline manipulation. It doesn’t take much to move markets dramatically on a light volume Friday by scaring the shorts in the last hour of trading. It makes me wonder how long Gasparino sat on that story waiting for the best time to manipulate to the greatest effect and how less newsworthy it would have been if it came out after the market close.

Silly me, but I will wait for the news to actually be factual. And if it actually happens, I am confident it will have a short term positive effect. But as for a bailout of Ambac solving all the problems facing our markets and the economy - that’s ridiculous.

As it was, the short covering and whatever other kind of panic caused by the Gasparino “news” created some significant challenges for technical analysis. Closing prices have a large effect on the charts and in this case, the monoline manipulation has greatly distorted the way many stocks look. If I had the resources, I’d redraw every chart by assuming the market closed using 3:00 pm prices and cumulative volume. Instead, I am doing a few other things to desensitize the effects of the end of day action. I recommend you take a look at each stock in your portfolio and carefully evaluate whether you can trust what happened.

There is a lot of talk about a “pennant” formation in the index charts. Since I can only stand hearing so much technical analysis bullshit, I have reached my limit. I rarely discuss detailed technical analysis with anyone or write about it on this blog. It’s just not something I like to do. I make exceptions when I feel that the media is intentionally or unintentionally misleading investors. First of all, non-technicians should shut up. Appearing on CNBC or Bloomberg does not mean they are experts on anything, much less technical analysis.

As it relates to the pennant formation, there are two types - bullish and bearish pennants. Listening to many of the supposed experts lately, you might be led to believe that all pennants are bullish. That is not the case. Typically, these are continuation patterns meaning that they follow the preceding trend. Expecting that this is a reversal pattern or something you see at the top or bottom of a trend is not a good assumption. If the market action from January 22nd until today truly is a pennant, then I am concerned. Remember the preceding trend over the past several months is down so a continuation of that is also down. Please read this article on bearish pennants and then read this one on bullish pennants. You decide which one is more relevant to the way today’s index charts look.

The government agency that is the “pension fund of last resort” for failed corporate pension plans should not be treated as the “hedge fund of last resort.” If this was a hedge fund, it would be suffering from massive redemption requests due to poor performance. And the Pension Benefit Guaranty Corporation (despite using the word in its name) is not a “corporation” - if it would be, it’s creditors would have forced a bankruptcy a long time ago. This “corporation” runs continual operating cash flow deficits and has been insolvent for many years. As of fiscal year end September 30, 2007, the PBGC had $68.4 Billion in assets against $82.5 Billion in liabilities — a $14 Billion deficit.

So what to do about the fact that the government agency meant to look after the promises made to anyone covered by an underfunded pension plan is itself, underfunded? What to do about an agency that is currently making payments to approximately 612,000 retirees of failed pensions plans like UAL? If you listen to PBGC Director, Charles Millard, you would think that the answer is to make up the $14 Billion shortfall by investing in riskier assets. The spin being offered up is to call this strategy “diversification” and to avoid cutting benefits or to avoid the need for a government bailout using taxpayer money. This government seems to love bailouts so I am unsure as to why bailing out retirees is unacceptable to them.

Last year, 28% of PBGC assets were equities. Now the PBGC is ramping that up to 45%. And to top it off, 10% of the portfolio is now going to be set aside for “alternative investments”, including real estate. Only 45% will be left in fixed income investments. Sounds like a “hedge fund” to me. Director Millard refers to this strategy as a longer term approach and through “diversification” a safer approach. That certainly sounds optimistic but it doesn’t sound realistic. Using the phrase “long term” is a common tactic for investors to downplay the short term risks. There is no guarantee that the long term will be good for any investment and certainly not equities. As for suggesting that equities are “safer” in the long term - well, I don’t like using the word “safe” with any investment and once again, certainly not equities.

You would think that the media would have vigorously questioned this decision to increase the PBGC risk appetite. During the CNBC interview I saw, Maria’s typical softball interview questions were asked and all the answers were accepted. All the unsolicited statements from Millard were taken as fact and not challenged. Financial Journalism at its best! And if you don’t like that criticism - how about reading this “news article” from December 2007 (2 months before the decision was announced.) The similarities between the official statements made by the PBGC and this article make it look like it was used to test the waters or promote the new strategy. You decide.

And what about all the politicians? So far I have not heard a peep from either side of the aisle. And that’s amazing considering the battles that were waged by the Dems when President Bush dared to suggest that citizens should be able to have more control over their retirement investments through his “private savings account” plan. Maybe that isn’t so surprising given that socialists believe the government is much better at investing and managing budgets than the masses they feel they must protect. But I just cannot believe this will go unchallenged by responsible politicians (whoever they may be) to make sure that we protect the promises made to our pensioners.

When President Bush tried to get legislation that would require the PBGC be better funded through increased premiums in 2005, it faced serious pressures from politicians who were being pressured by industry lobbyists. The net result was that these proposals were left out of the Pension Protection Act of 2006. Go figure. He’s making similar proposals now but his lame duck status ensures it has no chance of getting enacted during his term (or likely the next.)

Maybe Mr. Millard and his crew either are the best money managers on the planet or they have hired the best. I hope so. But I doubt it. In the past 7 years of the Bush administration, there have been 4 different Directors or Acting Directors or Interim Directors (or whatever the temporary title may be.) Does that impress you with the “long term” approach to managing this money? Would you feel comfortable investing in any fund that changed its portfolio managers this frequently? Director Millard told Maria he was looking at the next few decades for this new investment strategy. How much of that time do you think he will be there to implement it?

To me, the fiduciary responsibility for pensions is a solemn duty that has more to do with preservation of capital than it has to do with blockbuster returns to play catch up for big deficits. I look at this as an insurance company and the premiums should be raised to reflect the increase in obligations. That means the assets in the fund should be low risk and low return - stuff like Treasuries. I guess the US government is making a statement that it doesn’t like the returns it is offering on its own investments. Or maybe it is suggesting that Treasuries are too risky and they should have less of it in their portfolio!

And stop it with this concept that the PBGC is not funded by tax revenues. Here is a line from their press release…

The PBGC is not funded by tax dollars, and does not enjoy the full faith and credit of the United States government. The agency is financed by premiums paid by employers, assets from failed pension plans, recoveries from bankruptcies and returns on invested assets.

Consider this quote from the FY 2007 annual report, “The FY 2008 President’s Budget request includes $424 million for the PBGC administrative expenses.” What funds the budget? I thought the budget was funded by tax revenues. Maybe I am confused. As for the comment that the PBGC “does not enjoy the full faith and credit of the United States government” - that’s absurd. To me, it’s like saying that Fannie and Freddie don’t have the full faith of the US government and then seeing the government making bailout after bailout in the mortgage / housing industry to avoid the problems with Fannie and Freddie.

In investing, timing is very important as we all know. However, I find the timing of the PBGC move to increase their equity exposure (domestic AND international stocks) and other risky assets to be less than superior. I guess if you believe that equity markets within 10% of record highs are great times to jump in to the market, you might be impressed with the timing. I would have many of the same concerns if this had happened 5 years ago, but at least I would have been impressed with the timing.

Some bulls have suggested that this is a positive catalyst for the market. Come on! The PBGC currently has approximately $55bn to invest in the new investment policy. This roughly translates to an incremental $10 billion in demand for stocks out of the $26 trillion of stocks trading in the US. Hardly a long term market mover.

Before I close this post, I want you to click on this link to the PBGC 2007 Financial Statement. You might want to pay special attention to the statements that begin on page 34 and the footnotes that begin on page 37. Take a look at the list of existing assets as of September 30, 2007 and remember the situation with the credit markets. Note 3 shows that they had $1.188 billion in Commercial Paper and they had it priced at face value. They also had $4.544 billion in Asset Backed Securities marked at 99% of face value. $13.25 billion of “Corporate and other bonds” showed a market value of $13.21 billion. No writedowns of significance at the PBGC. Did they have the foresight to avoid all the problems in the credit market? Maybe their use of derivatives has protected them.

I truly hope the new investment strategy at the PBGC works out. I would like nothing more than seeing a surplus there and knowing that promises made to retirees will be kept. I just don’t think that the new investment strategy is a wise decision.

Each week, I usually write a summary of how many UP and DOWN signals I gave and try to fill that in with some color commentary about the market. Going forward…I will only be doing that if I feel like it’s meaningful. Otherwise, if you want to find out what changed, you’ll have to sign up for using the database (which is FREE by the way.) I am cutting back on anything that I can these days to focus on the research, meetings, phone calls, emails, etc. associated with what I will be doing after shutting down HEDGEfolios later this year.

So one last time…..I gave more UPs (152) than DOWNs (95) this week. Personally, I think the market is delusional if it thinks that it has discounted all the problems in the credit markets and the economy. As for inflation, I find it hilarious that those economists and market participants who have denied inflation has existed for years are now suggesting that today’s inflation data was already known and priced in. Kinda tough to price something in that didn’t exist.

Do you know about “Synthetic CDOs”? I am not talking about the now familiar plain vanilla piece of crap CDO that has devastated our financial system. Nope - as complex as they originally sounded - those CDOs were simple by comparison because even though they were backed by crappy mortgages, at least they were backed by some kind of real asset. Synthetic CDO’s are much scarier to me because these are CDOs of CDSs. As I have mentioned in the past, I believe the CDS market poses a significant threat to global financial stability. Wrapping a portfolio of Credit Default Swaps into a CDO is over the top. On Friday, Moody’s downgraded 16 of these Synthetic CDOs. When the original subprime mess started, a lot of efforts were made to create lowball estimates of the size of these CDOs. So how big is the Synthetic CDO market - I am guessing it’s between $1 to $2 trillion. If you want to learn more about these timebombs, here is an old (but good) explanation.

On 12/1/2006, a private equity consortium led by Blackstone and including Carlyle, Permira Funds and Texas Pacific Group acquired Austin, Texas-based Freescale Semiconductor for $17.6 billion. The valuation multiples were huge and it was one of the highest profile deals of the 2006-2007 Private Equity mania. Now it’s not so hot. Sales are down. Its former parent and big customer Motorola is struggling and its automotive industry client base is in even worse shape. More importantly, like many of the buyout deals, it was overleveraged when it went private. As a result, Freescale bonds are trading at a steep discount and if it wouldn’t be for the covenant-lite terms and toggle bond components, default would seem even more probable than it already is. Of course, a default in any of the old Private Equity deals would put a serious hurt on the possibility of a return to the days of big PE lovefests. At all costs, these deals must be propped up. This is one case where putting good money after bad may have some merit. It’s kinda like putting your money where your mouth used to be. When Freescale agreed to buy SigmaTel a few weeks ago, I started to wonder whether we might start to see more of the old private equity deals buying small companies to improve cash flows. They cannot afford to do big transactions and rather than creating a separate new portfolio company, I suspect it’s better to try to fold them into some of the older companies that need help.

143 million pounds of beef produced by Hallmark/Westland of California.  Good thing this largest food recall in history doesn’t involve a Chinese company. Just imagine how the anti-China crowd would go crazy on this one. Just imagine how the protectionists would be using this for political purposes. The video of abuse towards the cattle was horrendously inhumane. If this was a Chinese food supplier, it would likely have a much harsher spin based upon the animal rights offenses. Remember how petlovers flipped out about poisonous dog food? Oh and I almost forgot the farmers and their lobbyists…they love to applaud how safe they have made our food supply for generations (for the most part they have). In order to promote the farm bill, they used the past Chinese problems to gain emotional support. You can bet they won’t spend too much time discussing this one. How about child protection advocates - are they going to have a proportionate response for an American company as they did when lead paint was found on children’s toys imported from China? We’ll see.

Where’s the beef? Really - where is it? Almost all of it has already been eaten. So it’s a strange recall since we won’t see a recovery of the evidence - thankfully! But if you’ve eaten it at various fast food burger chains or your children consumed about 37 million pounds of it in their school lunch chili and hamburgers, you may not feel too good. It’s great that there appears to be no imminent health risk for the future and since we haven’t seen a pattern of sick people in the past, it’s likely the food was not harmful. However, when the complaints against Hallmark/Westland center around BSE (Mad Cow), this is a serious issue. Consider how we handled BSE concerns when it involved imported beef from Canada. The United States banned imports of Canadian cattle and beef after Canada’s first BSE case in May 2003 and that lasted until July 2005. Certainly our beef industry wouldn’t want the same treatment to be imposed upon us.

Isn’t it weird how this is getting airtime on a holiday? The press has reported on this since the first few days of February. The video of the abusive workers was available since then as well. It just seems a bit odd that the USDA would put out the release of their determinations yesterday (a Sunday) and the day before a national holiday.

As I have said before, it’s impossible to avoid some problems with food safety.  What bothers me is the disproportionate treatment of various groups when comparing domestic and imported products.  Protectionism is a dangerous and growing threat to our economy.  It works both ways so please consider this case the next time you hear a union discussing protectionist demands or a politician promising protectionist policies.

Now that the Fiscal Stimulus plan is signed, I’ve been thinking about the potential impacts and their timing. Yesterday, Chairman Bernanke said he expected the help to appear in the July-September quarter. First off, I doubt this plan will help and secondly, I disagree with the timing. According to Secretary Paulson, the checks will be going out sometime near May. So I can understand why Bernanke would expect to see the impact come in a few months later. However, my thoughts are different. Considering the American consumer’s inability to wait for things and their love of credit cards, I think many Americans will purchase in advance of receiving the checks and put those purchases on their credit cards. Once the government checks come in, the majority will go to pay down some of the credit cards. We’ll see how it turns out but I will be very surprised to see a measurable effect in July-September. Some of the checks have probably already been spent. Some more will be spent between now and when they arrive. Some of the checks will be spent as soon as they are received. Some will be spent months later. According to recent surveys, a percentage of Americans don’t intend to spend it at all. There’s a lot of bad things happening in the credit card market (read this post from Mish). Credit card debt is way too high, but didn’t grow much in December. Payment delinquencies are rising. I wouldn’t be surprised if the administration paid attention to that as they dreamed up the plan I call the “credit card stimulus plan.”

I rarely share any elements of my political views here. I may talk about political figures on both sides that I believe are harming our economy, but that’s as far as I want to go. So I’ll just make a blanket statement - our country is moving rapidly towards socialism where supposed believers of free market capitalism have a never ending demand to rely on politicians or the Fed to orchestrate the economy. The alternative to that is to believe in the market participants, the employers, the employees, the producers, and the consumers but that seems to be a fading concept called capitalism.

And when something goes wrong, it is increasingly being viewed as a failure of the government to make sure it went right in the first place. And that more government intervention or different government intervention is seen as a solution to the previously ineffective government intervention. It is naive to believe in the capitalism and political environments I want to exist. Note that I said “environments” as a plural. Politics being politics. Economics being economics. Instead, we have one environment of “political economics” where not only do the politicians who crave the power to dictate what happens in life seem to want political economics, but worse yet is the increasing majority of citizens who want the government to dictate what happens in life.

There are many causes of this move towards socialism but the strangest(most ironic) of all comes from the corporations and lobbyists that have infected our political environment. They are “capitalists” who need the government to give them an edge in capitalism. That isn’t capitalism in my book, but since “everyone is doing it” I guess it would be unrealistic to expect anyone not to do it. Just consider the NAHB’s decisions to stop buying political influence because they have not gotten enough government help to solve the mortgage/home price problem. If it wasn’t so pathetic, it would be hysterically funny.

When you think of politicians today, how much of that is based upon the activities in business or markets? The Farm bill. The Energy bill. Subsidies. Fed intervention. Fiscal stimulus plans. Protectionism. It’s all political economics. Sadly, with only a few exceptions, we don’t typically elect politicians for their business acumen or experience with markets or trade. Instead we mostly elect lawyers. 24 of the 43 US Presidents were lawyers (there’s a 50/50 chance the next one will have a law degree.) Historically, about 45% of Congress have law degrees or were lawyers. I have great respect for lawyers - as it relates to the practice of law. I do not have great respect for lawyers - as it relates to the practice of business and markets. The idea that we want the government to influence so much commercial activity is sad and the idea that we want lawyers to do this work is devastatingly bad.

Our economy is a mess.  Our political system is a mess.  Political economics is a mess.

….but you cannot make him drink.  Just like many aspects of our financial situation. It’s another way of saying the traditional “pushing on a string” concept but since my version is a bit more common to most people, that’s what I am using today.

• The Fed can inject gazillions of liquidity, but they cannot make the banks use it.
• The administration and Congress can send consumers $168 billion, but they cannot make them spend it.
• The Treasury and other politicos can offer to renegotiate troubled mortgages, but they cannot make the troubled “homeborrowers” ask for the help.
• Dealers can hold Auction Rate Security auctions, but they cannot make bidders bid and they cannot even make themselves bid.

There are many examples of “you can lead a horse to water” behavior.  It’s a major dislocation of the supply/demand equation.