Big Investment Banks Need Another 250 Billion: Bloomberg

April 29 (Bloomberg) -- JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among U.S. investment banks that may be forced to raise an additional $250 billion in capital, cut executive pay and divest some of their most lucrative assets under a bill on the U.S. Senate floor today, analysts say. (By Dawn Kopecki) Entire Story

Goldman's Defense

Goldman definitely designed products which took the other side of the bull market in real estate, but that is the way markets work. If you are a market maker, whether in the pits of Chicago, or in the offices of Goldman Sachs, you are at risk each time you put on a position. In defense of Goldman, they positioned themselves to profit from a potential break in the real estate market, the fact that they sold CDOs to anyone, including their clients, may be greasy, but well within their right to trade a given market. Their unique position to profit from the transaction as well as the trade grinds on all of us a bit, but they were ultimately at the mercy of the direction of the markets. In trading you are always a hero or a goat. Could the real estate market have continued or even accelerated its rally? Unlikely, but none of us knew the timing of the break and certainly Goldman, despite the hype, is not as smart as they would have all of us believe. Collectively it is a company of transactors, not traders, but their opportunity to profit from macro moves in the economy is a part of the financial factory they have built and our economy promotes. The fact that the market was the final arbiter of their actual trading positions is their defense.

Goldman, What A Shock

Goldman, what a shock. I guess if a Republican had been in the White House they would have seen this coming, but one would think Goldman has enough friends even in the current Administration not to have been cold cocked by the SEC announcement on Friday. The smokey intentions of possibly setting up clients to take the downside of a trade is almost inevitable when you are in the financial transaction business as Goldman is and so the great outrage displayed in the media is once again part of the performance art of today's business news industry. Goldman did what Goldman does, hiding in the middle allowing the big dogs eat while collecting fees often times when market conditions are exceptionally dangerous. They have that right. But the long tail of structured products linked from investment firms to rating agencies and finally to wake up stupid clients will certainly reveal a culpability that will be shared by all those who were seeking to stretch financial performance ultimately at the expense of taxpayers.

Greater transparency is clearly an issue which easy to talk about and hard to create. Investment firms do not want it, the Fed and Treasury have told the courts not to reveal their intervention actions, and the banks have recently stated they will take the fight to hide to what extent any of them received bail out funds all the way to the Supreme Court.

This Goldman event will guarantee passage of financial reform but with enough loop holes to allow the creative shadows to hide the next financial disaster.

Greenanke

Listening to Greenspan's testimony today provided clear evidence that the guy is clueless of how markets actually work. The Peter Principal, that people tend to rise to the level of their own incompetence, certainly can be said about the Fed. Likewise for Bernanke, who like Greenspan, has never seen an economic event that did not need economic intervention simply on the grounds that all equity market slides should be avoided. The current financial dilemma has occurred on his watch which is bad timing for him but good for all the hand outs to his genius banking buddies. Fixing this current economic mess is going to be a bit trickier than when Greenspan was running the emergency cash spuing machine each time any event looked like it might impede climbing stock markets. Greenspan is a dope and his successor is proving there is only one way to go, keep on making the same mistakes by relying on the same players to profit from the interventions while changing nothing.

Dooming Real Growth

After all is said and done, asset speculation is the only driver in fostering positive market perceptions about this recovery. The Fed, having to find some means to stem deflationary pressures, chose to provide massive liquidity to hopefully inflate asset prices which in turn would imitate real growth. While asset classes such as stocks and commodity prices have recovered, higher prices do not in themselves create enough impetus for job creation. Like Greenspan before him, Bernanke thinks whatever it takes to inflate stocks prices is the ultimate answer to economic recovery and expansion. It must be a part of the limitations of the job and the preoccupation by the Fed to create a policy which appears to be striking a balance fostering growth and fighting inflation, but is really dooming real growth and inflating assets. If there is no real job growth, nothing gets fixed and higher asset prices end up being lousy trades.

Greenspan II

Bernanke, or Greenspan II, restated in a prepared statement for the House his belief that the Fed needs to remain accommodative because of the overall weakness of the economy. This is all quite bullish of course to the market carnies who claim zero interest rates will provide all the energy necessary to unleash the true nature of the markets, up. Now without being able to identify any of the exact characteristics which will signal when the up turn in the economy will mean Wall Street needs less stealing, the Fed, made up of people who have no particular skills, bankers, claim there is a sense that current rising markets along with historically high unemployment is proof the stimulus is working. Well the unemployment part is a problem but why not take a little satisfaction in the fact that Wall Street is doing better. Why do others always have to bring everyone else down by being negative about the majority of the economy. Sure, people across the country are tapped out and would not be in as bad of shape if they had received anything near the deals of Goldman, JP Morgan, and others. The Fed would love to help out everyone but those people just do not work on Wall Street.

AAPL Risk to Value

On this chart, you want the numbers to be on the top half if you are a bull, and on the bottom half if you are a bear. In June of 2008, the bulls risked about $130 bucks being long. In December of the same year the bears risked about $80 being short. Right now a very slight edge for the bulls, still a bit of risk to the bears, but obviously much less at these levels.

Lower Lows A Trend?

Bloomberg poll states, " Among those who own stocks, bonds or mutual funds, only three of 10 people say the value of their portfolio has risen since a year ago." Now the author of the article, restates the media mantra declaring a bull market is underway.

Are we sure? From its high the DJIA declined over -54% in a 17 month fall. We now are experiencing a twelve month rally but remain over -23% off the all time highs set in October of 2007. More will follow on the Nasdaq 100 and S&P 500 but here is a chart of the DJIA lows made after rally roll overs since 1974. A rally roll over low is a low made after declines from higher highs.

It Takes Ten Years

Expertise takes time, lots of time. Nothing could be more true than designing market applications which provide trading solutions and analytic content focused on understanding risk. For those who skip around from one venture to the next, there is little hope. For those who have never committed themselves to a goal of product and application design, they must settle on being mediocre. Whether investor or high end high frequency trader, a commitment to process and design takes enormous sacrifice and a huge amount of time. The search for alpha clearly puts at peril the performance of not only large fund operations due to popular investments
which breed huge bets with processes which do no fully understand risk parameters, but even the performance of operations with smaller trading goals. The 10 year rule applies to all software and application design. If your models failed in 2008, well, it was a great test of your expertise on risk.

UPP Index

Monetizing the SP500 and NQ100 futures against our own UPP (underlying price propensity) Index suggests the year long action may be part of a bear market rally. The big break in the UPP Index begins at the end of summer 2008 where market participants were still believing the bull was still alive. However that soon changed as massive liquidations began and continued up to the spring of 2009. The Index measures price behavior conducive to prolonged upside action. For more information click.