Monday Market Manipulation – Goldman’s CIT Bonanza

Well, it looks like they "fixed" everything over the weekend.

By fixed, of course, I mean like Tony Soprano fixing the race results as opposed to any actual improvement in the economy.  Nonetheless, these fixes come much easier to the Gang of 12 than actually doing anything to promote a healthier economy.  Heck sometimes G12 members don't even WANT the economy to improve.  Take CIT, for example.  Our pals at Goldman Sachs structured a deal to "save" CIT with a $3Bn rescue package.  Interestingly, that structure put the taxpayers on the hook for $2.3Bn if CIT fails but it PAYS Goldman Sach $1Bn if CIT files Chapter 11. 

Surely you say, Goldman Sachs would never screw the government and US Taxpayers out of $2.3Bn "just" to make $1Bn for themselves?  Of course they wouldn't…  Goldman, in fact stands to make BILLIONS for themselves because this little government-sponsored rescue scam bought CIT just enough time on life support to allow Goldman Sachs to form GS Loan Partners, a $10.5Bn fund, that will make "senior secured loans to companies" just like the ones CIT will no longer be able to provide (now that Goldman has "failed" to fix them after consulting CIT and seeing their books, including client files).  According to Goldman's GS Partners web-site: 

Our focus is on originating loans for mid- to large-sized leveraged and management buyout transactions, recapitalizations, refinancings, financings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. We will also make opportunistic purchases of senior secured loans in the secondary market.  We target high-quality companies with $500 million to $10+ billion of enterprise value; leading market positions; high barriers to entry; well-regarded management teams; and stable, cash generative businesses.

Let's not forget that Goldman IPO'd CIT with $5.8Bn of sucker investor money (pocketing a huge fee) and last year got a huge payoff for advising CIT on the sale of its Construction Finance business at the bottom of the market just months before GS predicted that sector would be turning around.  GS then rode to the rescue and got the government to put CIT on life support while Goldman raised $10.5Bn behind the scenes to create a competing operation that could cherry pick CIT's top clients leaving taxpayers to pick up the tab for all the toxic crap that is left after Goldman skims the cream into their new operation.  Game, set and match – nice job GS! 

I'm not going to tell you to get mad, I'm not going to tell you to write your Congressman because you never do.  I'm only going to point this nonsense out as it goes by so that we can get better at identifying these scams at the early stages, when there's good investment money to be made!  The Goldman/Government rescue package took CIT back from under $5 to over $10 last year and what a great shorting opportunity that was! 

In the broader view, we have very little market data this week with ISM Service today (still contracting), Consumer Credit on Thursday along with our joke of a Treasury Budget where the economy can celebrate a month where we break the $1.5Tn mark in 12 month debt.  This breaks our prior official record (not counting this year) of "just" $700Bn last year and, before that, heck, we were lucky to go $400Bn in debt in a single year.

What might be alarming (to a population of people who understand finance and are not already completely numbed to the horror of the situation) is that this incredible increase in government outlays is going hand in hand with the worst drop in Federal Receipts EVER.  Why should this particular data point get us more worried than the other 100 scrary data points?  Well since LAST YEAR, which was not a good year for tax collections in the first place.  Total State Taxes are down 8.2%, State Sales Taxes are off 4.8%, State Personal Income Taxes are down 13.6% and State Corporate Income Taxes have dropped 10.9%.  That is in addition to a MASSIVE drop in Federal Tax Revenues:

State and local government employ SEVEN TIMES more workers than the federal government and form the backbone of the U.S. safety net. In 2006 state and local government spent about $2.1 TRILLION on domestic programs (including grants) compared to $1.7 Trillion for the feds, according to the Rockefeller Institute. States provide medical coverage for about half of the nation’s poor children, maintain almost all the roads and hold more than 90% of criminals.

As we know from past and recent experience.  State and local governments tend to shut down suddenly.  Unlike the Fed, they can't just print more money whenever they need it but – like the Fed, they CAN go out to raise money and what we are about to have soon is the $1.9Tn overspending Federal government having to compete, through interest bidding, with another $1Tn of state and local bonds that will be floated at much higher rates. 

In member chat this weekend we discusses a very nice play on higher rates by playing TBT, which is an ultra-short ETF on the 20-year Treasuries (they lose value when rates go up) and we can take a vertical call spread on them buy buying the 2011 $35 calls for $11.20 and selling the 2011 $43 calls for $7.  That puts you in the $8 spread for a net cost of $4.20 with $3.80 of upside of 90.5% if rates rise enough to keep TBT at the same price it is today ($43.40).  If you have a variable rate interest loan, this kind of spread can give you a nice hedge against an increase in rates.  Meanwhile, at 10:30 this morning the Fed hands over another $50Bn under TAF, which effectively let's people like Goldman Sachs put up crap assets in exchange for virtually no-interest loans that they can use to manipulate the stock market.  This money is distributed bi-weekly, just in case $50Bn sounded light to you…

In a great interview by our own Ilene with Mad Hedge Fund Trader this weekend, he explains why Proshares Ultra Short Treasury Trust (TBT) is one of his favorite ETFs: "As the supply of government bonds increases exponentially, their eventual collapse is inevitable. All Ponzi schemes must come to an end, and the U.S. government is no exception."

A bomb exploded outside a UN office in Pakistan this morning but it happened AFTER the Asian markets had closed and minutes before the EU markets opened so the Hang Seng kept their 100-point in 20 minutes "recovery" to put up a + 53 for the day so congratulations to all who worked so hard to paint the numbers over in Asia this morning.  Despite some very brave efforts, they could not get the dollar to hold 90 Yen this morning and the Nikkei just couldn't stand it anymore and fell 60 points after lunch to finish down 57 at 9,627, now 10% off the Aug 31st high. 

Europe is flat ahead of the US open as the Socialist Party takes power in Greece.  Unlike last week's victory by Germany's conservatives, expect to hear no mention whatsoever of Greece's elections as it doesn't match the premise that capitalism is triumphing as the solution to all the world's ills.  George Papandreou, leader of the winning Socialist party, Pasok, told supporters  "We bear a great responsibility to change the course of the country."  To tackle an unemployment rate of 9% and what is expected to be Greece's first recession in 15 years, Pasok has vowed to pursue a €3 billion ($4.4 billion) stimulus program. It has pledged to raise taxes on the wealthy and clean up endemic corruption in the public sector.

In another act of creeping Socialism,  UK regulators dug into bank profits by tightening liquidity rules, seeking to increase the safety of the U.K. banking system but will hit banks' profits by requiring them to hold a pool of high-quality assets, such as government bonds, rather than using the cash to invest in riskier but higher-yielding assets.  According to the FSA Director: "We must learn the lessons of the financial crisis and we believe that implementing tougher liquidity rules is essential to ensure we are in a better position to face future crises." The new rules will also require regulated firms to develop better systems and controls which allow them to operate on a self-sufficient basis while also having to report their liquidity positions more frequently and in more detail than previously, to the FSA.

As I mentioned on our Weekly Wrap-Up, we went into the weekend fully covered on our long index hedges as we have come to expect shenangians into the weekend.  I also posted a comment early this morning that we need to remain VERY cautious because we know it’s all BS manipulation.  The fact that we know this is BS won’t stop the markets from going higher on low volume, especially with the crap I’m seeing thie morning where the Pound was jammed back to $1.60 and the Euro hit $1.465 even though the Yen "fell" back to 90 to the dollar and oil was pumped up over $70 with gold back at $1,007.  So, "amazingly" the dollar was strong against the Yen when the Nikkei was open despite being very weak in Europe.  That kind of meddling (probably by Japan, not GS) makes for a very dangerous investing climate. 

Watch gold, oil and copper to give you a real sense of the economy and the critical levels to watch in the markets are: Dow 9,535, S&P 1,032, Nas 2,070, NYSE 6,668 and RUT 586, which are the expected bounce zones off our 5% rule.  To the downside we have the full 5% (off the recent highs) rule points and 50 dmas lining up Dow 9,450, S&P 1,020, Nasdaq 2,030, NYSE 6,650 and Russell 580.  Unless we hold above those levels with some confirming volume, we are very likely to see an additional 5-7.5% move to the downside.