Last week, I suggested that the unbelievable CPI report was no good reason to buy stocks but that traders would exploit it and any other bullish spinning opportunity to push the market higher. This Monday, I wrote that sooner or later insensitivity to high oil prices would catch up with us. I just wasn’t sure it would happen so soon.

Sometimes the market moves in one direction or the other on news that is either flawed and misleading or news that has been known or should have been known for a long time. We have two down days, albeit big ones, and the bulls are shaking. After two months of rallying, it was getting a little sickening to hear all the overconfidence that was boiling over at the end of last week. So it really isn’t impressive to see the whining going on.

It’s as if the PPI data was a shock. Inflation? Really? If you didn’t believe we had inflationary forces until now, why would this PPI report change anything. No good reason. Oil is high!!! Really? If you didn’t care that oil was a threat to business profits and consumer spending when oil ended last week in the high $120’s, why would oil in the low $130’s per barrel change anything now? No good reason. Boone Pickens said oil would hit $150 this year on CNBC on Tuesday. I’ve heard how this pronouncement set bad things in motion with oil prices and the stock market’s negative reaction. Really? He said the same thing on April 29th on Bloomberg, so why would his same comment this week change anything now? No good reason. The FOMC minutes suggested that the last rate cut was a tough call and that they were likely on hold for a while. Really? We knew that already and from all the Fedspeak that’s been going on in the past week preparing us for the minutes, why would this change anything now? No good reason. As for the downward revisions on the economy and employment - none of this should have been a surprise.

Over the past two weeks, I heard quite a few technicians suggesting that we had solidly broken through prior resistance at 1400 and it was onward and upward from here. Now that we are below 1400, does that mean support failed? It was too early to suggest bullish technicals last week and it is too early to suggest bad technicals now. As you may know, I am not a big believer in technical analysis of index charts.

Stocks can go up for no good reason. Stocks can go down for no good reason.

Today, we had another useless Congressional hearing to find out why gas prices are so high or to just beat up on capitalism or to just pander to voters. I usually write about these interrogations when they happen to point out that the only thing we learn is that we have a bunch of energy morons running around in Congress. How many of these meetings have they had over the past few years? Do you remember this one from 11/09/2005? What did we learn then that prevented us from having $4 per gallon now? Or how about this one from April Fool’s day (how appropriate). What did we not learn then that we needed to learn today? Gas prices on April 1, 2008 were about 75 cents cheaper than now.

As a lead-in to today’s nonsense, CNBC had an interview with two politicians - one discussing fact and one discussing fiction. Please watch this interview and based upon your own political leanings, I am sure you will decide which is which.

Personally, I have trouble believing the “facts” presented by Senator Whitehouse (D-RI). At the beginning of the CNBC video, he says “the average Rhode Island family is spending $2000 more on gas than they did a year ago.” Wow! That sounds terrible. But is it true? And if it is true - whose fault is it. A year ago, I was paying about $3.25 per gallon and then by the end of September I was paying as low as $2.75. Until March, gas prices in the US actually averaged about between $3 and $3.15 depending on your location. From May 2006 until May 2007, gas averaged about $2.50 per gallon. As for Senator Whitehouse and his location - click on this link and make sure you select Providence Rhode Island and the 2-year time frame. HMMM?!? How could it be that “the average Rhode Island family is spending $2000 more on gas than they did a year ago?” If the gas price per gallon from May 2006-to-May 2007 averaged about $2.50 and from May 2007-to-May 2008 it averaged $3.25, that’s an increase of $0.75 per gallon. According to the Department of Energy - the Average American driver uses 500 gallons of gasoline per year. At $0.75 per gallon extra in price times 500 gallons per year, that means the Average American driver spent $375 more per year on gasoline this past year than the year before. Following Sen. Whitehouse’s claim, that must mean that the average Rhode Island family has 5.33 drivers in its household each consuming 500 gallons of gas per year.

Politicians love to exaggerate to make their points. I hope Senator Whitehouse was too. Either that or he needs to talk with his constituents about cutting back on their consumption.

Have any of you that watch the credit markets and banking system ever seen the chairman of the FDIC getting so much attention and air time? You probably can name Sheila C. Bair, the current head of the FDIC. Can you name any of the preceding 18 chairmen since the FDIC was established after the Great Depression? How about more recent history? Maybe you know Bill Seidman but I suspect that has more to do with his role as one of the financially-sound and non-cheerleading contributors to CNBC than it has to do with his tenure as FDIC chairman during the S&L Crisis. But in reverse order between Bair and Seidman - do you know anything about Martin J. Gruenberg, Donald E. Powell, Donna A. Tanoue, Andrew C. Hove Jr., Ricki R. Tigert, or William Taylor. What policy initiatives did they propose? You might wonder what Powell was doing during his tenure when the mortgage mess was being created. Sheila Bair is offering up her opinions on quite a bit of the credit crisis and even a few bailout plans from time to time. I am not quite sure what to make of that. On one hand, I respect Ms. Bair’s intelligence and her desire to help fix the problems. On the other hand, I start to think heavily about why she is so outspoken and how this all relates to the role of the FDIC. I’ve been criticized for suggesting that small banks would eventually fail and would be allowed to fail by the politicians and regulators. Yet, Chairmen Bernanke and Bair have said to expect bank failures. Maybe that might be a clue why she is so busy. Ms. Bair and the FDIC are there to make sure that depositors have trust in the liquidity and solvency of the banks they have entrusted with their savings. If there was no risk for bank failures or runs, do you think you would know who Sheila C. Bair is?

Oil consumers used to blame OPEC for high oil prices.

Now OPEC blames speculators.

I am not sure whom speculators blame.

Democrats love to blame President Bush and VP Cheney.

I am not sure whom Bush and Cheney blame.

Socialists love to blame Exxon and “Big Oil” for high oil and for making profits.

I am not sure whom Exxon blames.

Republicans love to blame environmentalists for blocking new exploration.

I am not sure whom the environmentalists blame.

Some people may blame excessive Chinese demand and stockpiling of oil reserves.

I am not sure whom the Chinese blame.

Some people may blame terrorists who attack oil assets in Nigeria or Iraq.

I am not sure whom the terrorists blame.

There is a lot of blame to go around. There is a lot of finger pointing.  None of it is productive.  But get used to it and expect it to continue and expand.

Oil goes up and stock investors are not sensitive. After all, Exxon Mobil and Chevron make up about 12% of the Dow. Nonetheless, I have been impressed (in a bad way) that investors don’t seem to care or be sensitive as oil prices increase about 100% in a year. Conversely, I have been impressed (in a bad way) that investors seem to care or be sensitive as oil prices decrease 1% in a day. I have seen a lot of commentary that suggests investors believe oil prices are peaking and we are ignoring higher oil prices because the future is brighter or less expensive. Of course, there is no evidence of any of that. Oil prices have increased about 20% since the stock market lows on March 17th. Stocks have gone up about 14% since then. If oil drops 20%, we’ll see $100 per barrel again - a level that scared the hell out of us when oil was at $60. With today’s optimistic market, a decline to $100 per barrel might give us another 20% gain in stocks. If oil rises another 20%, we’ll see $150 per barrel. With today’s optimistic market, that may not be taken seriously either. Maybe another 14% gain. Right now, the only thing that seems to matter is the prospects for lower oil. However, that optimism has been going on for months and as it relates to oil prices - it has been wrong. With each increase in oil, a 20% pullback gets us back to levels from just a few months ago when we were also hoping for a 20% reduction. Some day all this will catch up with us.

Last August and September, Asset Backed Commercial Paper was at the forefront of the beginning credit crisis. I wrote about it quite often. The media covered it- not very well - but they covered it. The Fed and Treasury department created programs to deal with it. Then around New Year, the ABCP actually increased a bit and many people were quick to suggest that this was evidence that the worst was behind us and the ABCP market was stabilizing. I disagreed but nonetheless, the media and investors stopped worrying about ABCP in favor of other things like Bear Stearns. From last year’s peak until the end of 2007, ABCP shrunk from about $1.2 trillion to $780 billion. Despite no one apparently caring since the ABCP supposedly bottomed in January, we’ve shrunk by another $57 billion. I guess some people might suggest that less ABCP is a good thing since there is less to hurt us with. Others suggest that more ABCP is a good thing since this means that there is more liquidity and an appetite for investor risk. But where did all the stuff go? At first, it went onto bank balance sheets. Then on May 2, I guess that wasn’t good enough or maybe the banks had too much of what they never wanted in the first place. So Bernanke to the rescue by allowing “AAA-rated” ABCP to be offered as collateral in the Term Securities Lending Facilty (TSLF).  So let’s say the auto loan, student loan and credit card ABCP starts to ramp up again.  This does not mean that credit quality from the borrowers has improved.  All it means is that the Fed’s balance sheet is opened up to take on as much of this crap as they can create.

Last August, Canada froze $32 billion in its Asset Backed Commercial Paper market and developed a plan to convert the 30-to-90 DAY paper into longer term notes that will mature within 9 YEARS. You might wonder why it might be wise to term it out over 9 years if you believe the worst of the global credit crisis is already behind us. You might wonder whether there will be any new 30-90 day ABCP issued in the next 9 years. You might wonder how an economy can survive without short term liquidity via commercial paper. Or maybe none of those questions seem interesting. But take the time to read through the coverage of Canadian Judge Campbell’s decision to delay approval of the plan because of the right to sue for fraud. It seems that the banks don’t want to be subject to lawsuits or be accused of selling ABCP to investors after apparently representing the investments as “safe” or “liquid”. Given that the ABCP was so unsafe and threatened the meltdown of the Canadian banking system/financial markets/economy that they had to freeze it for the past 9 months, “safe” seems like a questionable sales pitch. Given that it has not traded for 9 months, “liquid” seems like a questionable sales pitch. Given that after all this time and after “the worst of the global credit crisis” is claimed to be behind us, you might think it would be possible to avoid a meltdown via fire sale prices on these assets. But that is what is feared if the plan is not approved. I admire the Judge. I can only imagine the pressure he has to do what American politicians/regulators do and cave in for the sake of the common good. If he just signs off and agrees that investors cannot sue for their losses due to fraud, Canada could just move merrily along.  On the other hand, it appears that Judge Campbell may actually have some courage and desire to protect the investors who were potentially misled and maybe even punish anyone who is guilty. If this situation was in America, I suspect Bernanke would create a new lending facility and allow everyone to go home happy - something like allowing the crappy ABCP to be used as collateral and exchanged for Treasury notes. It will be interesting to watch how Canada resolves this issue.

Fannie’s decision to lower downpayments is idiotic but not surprising. Our credit crisis was partially brought on by a Fed that kept rates too low so as part of their hair of the dog philosophy, Bernanke tried solving it by lowering rates into negative real rate territory once again. The American economy has burdened itself to the point of a recession with overconsumption fueled by excessive consumer debt (mortgages, credit cards, et al). So as part of our government’s hair of the dog philosophy, the administration created this ridiculous fiscal stimulus scheme and have given consumers money in the hopes they will consume even more. We have a housing / mortgage crisis because people didn’t put enough equity into their homes and so it really shouldn’t be a surprise to anyone that Fannie decides that it would be a great idea to solve this crisis with more of the hair of the dog philosophy and allow people to purchase homes with almost no equity. BRILLIANT! And it is important to note that this decision was done either with the support of or with the suggestion of our politicians. This is a policy decision pure and simple. These guys are convinced that it is wise to do more of what got us into trouble with the hopes that it will slow home price declines or maybe even prop up weak markets. Good luck with that.

I won’t remind you about my warnings that the central bankers have taken on dangerous collateral in their desperate attempt to fix the credit crisis.  I won’t even bother suggesting that they created a significant moral hazard problem.  They have.  But don’t listen to me….just read this article from the FT.  Thanks Thomas.

Since many financial stocks have huge losses negative earnings, it’s tough to use some of the common valuation metrics like Price-to-Earnings. Lately, the crowd that loves to repeatedly proclaim that the worst of the credit crisis is behind us have spent more time excusing the absence of a trailing PE and focusing even more than they usually do on the forward projections of earnings. Nevermind that last year their forward earnings estimates actually turned out to be this year’s huge losses. So since we don’t have historical PE’s anymore and since the forward PE’s are questionable for anyone who isn’t an ignorant optimist, I’ve been thinking about a new valuation metric specifically for the financials. It’s called the Price-To-Capital Raised ratio. After all, investors have embraced the idea that a financial company can announce huge writedowns and somehow that means proof that the kitchen sink has been thrown in(again.) And more importantly, if you announce $10 billion in losses and then simultaneously promise that you are going to raise $10 billion in new capital, that is being looked at as a double-whammy of bullishly ignorant optimism. Nevermind that the new capital raise may have conflicted with prior promises that the company didn’t need any more. Nevermind that the new capital is highly dilutive to existing shareholders and being priced at ridiculously expensive preferred interest rates. In honor of all this nonsense, I am proposing the Price-To-Capital Raised Ratio - just take the market capitalization and divide it by the capital raised in the past year. For example, Citi has a market cap of $121.5 billion and it has raised about $44 billion recently. That makes for a PCR ratio of 2.76. Interpretation is up to you. If you don’t mind dilution and you think the worst is behind us, then a really low PCR ratio would be ideal. If you are a long term holder of a stock, looking at a low PCR will be somewhat painful. It’s all based upon your perspective. And if you really want to get crazy, just do some projections of future capital raises so you can come up with a forward PCR. Actually, I am just kidding about all of this. It’s all bullshit. But to me, so is the concept of believing that losses do not matter or that the worst is behind us or that needing to raise capital is actually a good thing.