For the past 25 years, the trend in the world's economy has been to financilization of everything. It doesn't matter what business you have been in, some form of securitization, new financial products, hedging, derivatives, financing, or other financial intermediation has been part of your world. Those of us who actually like to create stuff have been playing second-fiddle to those whose game has been moving the financial blocks around, slicing and dicing them beyond recognition, repackaging them into incomprehensible forms, and then trying to sell them back to us.

A Financialization Orgy

That world hit incredible heights. General Motors (NYSE:GM) and Ford (NYSE:F) have become shells of their former selves, making most of their money from financing. Automobile manufacturing has become practically a sideline, something they needed to do in order to have something to finance. Even General Electric (NYSE:GE) has become much the same kind of company, slowly shedding low-profitablilty manufacturing divisions, while securing the rights to provide financing to purchasers of the products that are manufactured by others yet still bear their name. Jack Welch's success wasn't so much in making GE's manufacturing divisions better as it was in making them less relevant to GE's financial results, depending more and more on easily game-able financial business results. (Jack Welch's greatest genius may have been realizing when it was time to get out with his money intact. His jumping off the financialization train was -- in retrospect -- an early signal that it was about to run off a cliff.)

Even small companies with little financial sophistication were caught up in this. As Kevin Depew pointed out in December, little CKE Restaurants (NYSE:CKR) got caught flat-footed in a bad interest rate swap deal. Why an interest rate swap made any sense for a company in the business of operating fast-food restaurants is not clear to this relatively sophisticated investor. Hedging food costs? Maybe. But interest rate swaps? Most likely it made no sense to anybody other than the bankers who sold the deal and the auditors who were paid to tell management that it was a valid use of shareholder money. (Hint to all managers of small companies: Remember the poker axiom that if you can't see the sucker at the table, it's probably you. If you're sitting at the table with a bunch of investment bankers whose job is to create financial products, each of whom makes more in a year than the top ten earners in your company, then odds are you are the sucker.)

Most of us have been suckers. It's just taken a couple of decades for the final cards to be dealt and the reality of things to kick in.

Finally feeling something close to normal again after starting a new relationship, seeing her go away for a few weeks, refreshing my WFR Certification and cleaning up the office.

• So I see that Larry Kudlow is trumpeting "Home Sales Up!" in one of his 15 second mid-day promos on CNBC. Once again proving that he is nothing but an lying sack of shit scumbag shill for the Bush Administration who would have been fired long ago by any news organization that respected itself. If you haven't seen the real numbers, here they are courtesy of Barry Ritholtz at The Big Picture:
  • Resales increased 2% to a 4.99 million annual rate (4.89 million pace in April) [note, this is month-over-month, and May is always higher than April, so big whoopee...]
  • Median existing house price dropped 6.3% from May 2007
  • Sales were down 16% versus May 2007.
  • About one-third of total sales last month were “short sales'' that reflected foreclosures or distressed properties;
  • Banks repossessed twice as many homes in May as in the same month last year;
  • Inventory of unsold homes at the end of May fell 1.4% to 4.49 million; [again, month over month, so big deal....]
  • Mortgage Bankers Association's index of loan applications to purchase homes fell last week to the lowest level in more than five years...

  Yet from all this, Larry manages to conclude that "sales are up." Guess it just shows that if you have an agenda and are willing to pick the weakest and most irrelevant numbers, you can always find something to justify your pre-ordained point of view.

• Of course, any self-respecting news organization would have fired Jim Cramer long ago too, especially after proving himself to be a scumball liar once again, as documented in the attached video.
  
  

  Jim, all those "critics" out there aren't "missing the point," "failing to understand how to watch the show," or anything else of the sort. They're merely noting that on Friday June 13, you told your viewers that your oscilator said the bottom was in and that the trade was to buy all the weak stuff -- financials, tech, etc. -- while getting out of everything that had been strong -- energy and commodities -- then exactly one week later you told them they were idiots and weren't paying attention to the show if they hadn't done the exact opposite. Guess what Jim, I have been paying attention and there's only one conclusion: You are nothing but lying scum.

• With all due respect to my buddies Toddo and Cody, Fox Business News isn't much better. Too much fluff, too many half-truths, maniuplated numbers and failures to note stuff that should be obvious to anybody who looks even halfway behind the numbers. But I guess you don't get free rides on the Citi jet if you actually think for yourself and report accordingly.
• All of which explains why on your typical day I don't do much other than running the TV with the sound off so I can see the ticker and maybe some of the scrolling headlines. Increasingly I don't even do that. It's all virtually worthless and in many cases has actual negative value.

We contine to watch economic deterioration, and continue to see people looking to solve the problems created by excessive risk in the system by introducing more and new types of risk:

On the deterioration front:

• The strawberry guy at my local farmers market has backed off last week's 25% price increase. The justification of that increase (from $12 a 3-pack to $15) was increased transportation and fertilizer costs, combined with tight supply due to a couple of dry months. Now he's backed off to $13 and is still not selling out his produce by the end of the day. It seems that even in this rarified neighborhood in West LA, freshly-picked strawberries are a luxury good for which prices can only be raised so much. And the guy growing them is most certainly getting squeezed between increased costs of doing business and consumer's willingness to do without.
• A lot less recruiters seem to be showing up to some of my regular networking events than in the past. Part of this is seasonal, as the meetings tend to attract fewer people overall this time of year. But part seems to be due to fewer openings. Also, quite anecdotally, the falloff in attendance appears to be at least partly influenced by the price of gas.
• I spoke with an old neighbor of mine yesterday afternoon. Among other things this individual "entertains gentlemen," to borrow her euphemism. Since I met her almost a decade ago, she's been one of my best economic indicators. Her business, also a luxury, is sharply down the past few months. She'll be the first to admit that she's not quite as young as she used to be, but doesn't think that's driven such a sharp dropoff. It's the economy, she says.
• While rents over the past three years are up in my little complex, my latest round of new neighbors have been able to negotiate rents downward. That hasn't ever happened, as far as I know.

Now for the new risks:

• We've got a new type of option available to retail investors today. These are designed to be easier for retail investors to understand, as they tend to replicate sports betting. Note that these provide little or no benefit for anybody who is legitimately using options for hedging or adjusting risk. They are purely a gambling vehicle.
• The House and Senate are busy passing bills that will allow the various government agencies to issue and insure even more questionable mortgages. Adding risk to the system seems preferable to letting the system work things out by allowing prices to fall. For better or worse, it won't help.
• AIG (NYSE:AIG) clearly shows us that all the risk isn't priced in.
• Citi (NYSE:C) still has no clue what they should do with their business, and still seem focused on raising capital. Why they would do this if they didn't see the risk of further writedowns is beyond me.

I think we are in the early stages of a process of reducing risk in the system, which will include taking a lot of flaky investments of all sorts out of the public markets, and forcing a lot of others to reduce their own embedded risk. More on this later.

And for the record, I was into Citi for a trade on some short-term calls, thinking they might be able to do a bit better. Out of that trade at a small loss. Now believe you can't touch these guys because they absolutely have their heads in the sand. The Sandy Weill model has been failing for a decade, it's still failing, and somebody needs to finally kill it.

-btc

No big developments today.

• Well, more and more evidence that nobody trusts government. We all know that the Fed's machinations are designed to bail out multimillionaire bankers while destroying our purchasing power, and we don't trust them. Now there's plenty of evidence that we don't trust politically motivated pandering like the Clinton/McCain "gas tax holiday" which would only make more money for gas companies while not benefitting consumers at all.

  This, I think, is a positive development. We need to be thoroughly disgusted with all these guys before we toss them out. Sadly, we'll all be hurt by waiting so long.

  As I've noted before, I think it'll be the next generation -- the generation raised on interactivity rather than passive TV watching -- that will finally take control from the people in the middle who forget who they work for.

• One story I haven't seen mentioned in may places is the upcoming leadership transition in Saudi Arabia. (Thanks to Stratfor for pointing this one out.) If Crown Prince Mishal, the most powerful member of the royal family who is currently in Geneva for "medical tests" were to die, a lot of uncertainty would enter the system even though the nominal king still lives. That situation could make oil at $150 a barrel a reality very quickly even if the new and untested Saudi succession planning actually works. I would not be short oil right here. Not long it either, but this is just another reason you can't short.
• So, Warner Music Group (NYSE:WMG) is losing money and has to cut its dividend? I guess that says a lot about the strategy of suing your customers while simultaneously screwing virtually all the artists that you sign. I continue to be amazed at how self-serving the managements of these companies are. They will destroy their businesses rather than concede that their personal ego-gratifying empires are no longer sustainable.
• Does anybody still believe government numbers? If so, could somebody please let me know why?
• And more government lies. But a note at the end that I ultimately believe is positive, for the reasons specified above. A time is coming rapidly when people will be less inclined to believe any number that they can't touch, manipulate, react to and comment on. Imagine when the goverment has to simply publish the raw data in a framework that allows you to easily pull it apart yourself. Today the government can lie with impunity because the overall attitude is of the TV viewer: passive. But passivity is dying. By the time today's four year-olds can vote, it'll be dead completely. And so will the government's ability to lie to us.

-btc

Part of my reason for the Utah trip this past week was to attend the latest budget meeting for my property's homeowners association board. There are always some interesting tidbits in this one, as it allows me to look at the details of what's going on in an area far away from where I live most of the time. This year was no different.

• I was surprised that the maintenance increase was kept to under 5% this year. Given the costs I am seeing elsewhere, I expected it to be closer to 10%. Part of this is due to the fact that some large improvements and upgrades have been completed and won't need to be repeated for some time, and much of it due to good managament.
• Everything going to/from our property needs to be transported up a winding mountain road. Trucking and transportation is definitely getting squeezed. The increases are far smaller than one would expect given the price changes in fuel. The answer to this seems to be that on a national basis, demand is down somewhat, so fuel cost increases can't be passed on in their entirety.
• The local market though is booming. We have a tough time keeping employees and salaries are going up even at the low end. We have had to hire new supervisory personnel because the inexperienced people we are able to hire for some basic cleanup and maintenance jobs just aren't experienced enough.

  I spoke this over with my friend Nigel later and he agreed that it's an issue in Salt Lake these days. He also believes it's at the core of the problem I had at Walgreens (NYSE:WAG). In his opinion low end retail help in Salt Lake is currently a disaster because of the difficulty in hiring and retaining anybody who is any good, even part-time high-schoolers.

• All of which has me wondering whether maybe buying a small condo or other property in the Salt Lake Valley might be a good idea. I'd use it from time to time, and I suspect that the market won't get hit much from here. Besides, downtown Salt Lake has had a very nice resurgence, less of a Mormon influence than the rest of the state, and could make a nice temporary escape from the California economy if things end up as bad as they might over the next couple of years.

  Nigel thinks that's a good idea too.

It was a really nice end to the ski season, a great Sunday for the last tram at Snowbird. Now the tram is down for 40 days of major maintenance, a few chairs remain running on the weekends and my knees are ready to move on to something less damaging. It was the first time in many years that conditions were good enough for me to stick around until the last tram day and forgot the fun involved: Gaming the last tram boarding, the ride up, the "reception committee" with snowballs on the peak, the peak party, the party on "The Beach" above Lone Pine with Mt. Superior in the background, and the follow-on parties in the valley after finally making our way to the bottom.

The last tram of the season was received with a traditional fusillade of snowballs on the top of Hidden Peak at Snowbird

After everybody was kicked off the peak, the party continued out on "The Beach" at the end of the traverse. At least until the ski patrol kicked us out of there too. And somehow I missed my flight home

Now it's truly back to reality.

• I did get a call from the manager of the Walgreens (NYSE:WAG) store that I complained to on Sunday. She said the problem had been related to training and she went over things with the employee. Good enough for me, and a pretty good indication that this company does still care about their reputation. For better or worse, the labor market in Salt Lake is such that she probably doesn't have the greatest material to work with. More on that later
• I just got an invitation to the Anderson School's John Wooden Global Leadership Award ceremony (formerly known as the Exemplary Leadership in Management Award). I've commented on this one in the past, suggesting that this award tends to be really good at picking guys who are either peaking or past their peak. So it's no great surprise that this year's award goes to Howard Schultz of Starbucks (NasdaqGS:SBUX). His getting this award certainly would not give me the warm and fuzzies about owning the stock.

Clay Shirkyon's piece entitled "Gin, Television and Social Surplus" on his Here Comes Everybody blog intrigued me when quoted by Barry last week, and even more so when I finally got a chance to read it in its entirety yesterday.

The most revealing point he makes is a simple one about his four year old daughter, who interrupted her DVD-watching to look for the television's missing mouse:

Here's something four-year-olds know: A screen that ships without a mouse ships broken. Here's something four-year-olds know: Media that's targeted at you but doesn't include you may not be worth sitting still for. Those are things that make me believe that this is a one-way change. Because four year olds, the people who are soaking most deeply in the current environment, who won't have to go through the trauma that I have to go through of trying to unlearn a childhood spent watching Gilligan's Island, they just assume that media includes consuming, producing and sharing.

I came back to this article later in the day, after reading another article about Hollywood whining. This time it's Jeffrey Katzenberg whining about the fact that theater's haven't rushed to adopt new 3D movie technology, and for that matter, even plain old digital projection technology.

Well, it's been a really good ski season. While Snowbird is still going strong through May (and likely for at least a couple of weekends in June, leading to a likely July 4th blowout) the time has come to leave the winter relationships and the snow behind and get back to reality, including this blog. I get one final weekend up ahead of me, but thoughts have already moved on.

• During Howard Stern's winter hiatus, I switched my Sirius clock radio to CNBC and kind of stopped listening to him for a while, going straight from bed to CNBC or one of the other financial channels on TV. I recently swtiched back and have noticed that my trading has improved markedly. I'm making less trades but also making much better ones. I think losing the financial TV noise has been good for me. I'm now back to Stern through the morning, only occasionally dropping the muting on TV for something that looks particularly interesting.
• It's yet another example of the fact that the central theme of Blink really works. Our minds tend to respond better when confronted with the key pieces of information and less extraneous noise that merely clutters our thoughts.
• I got a pretty crazy email the other day, apparently taken from a messageboard somewhere. The essence of this email is that a guy with equity in his house and good credit was thinking that it made sense to take out a home equity loan for the full amount of available credit, and put it into a CD that he had available to him at a similar interest rate. His rationale was that if the bottom really fell out, he could then walk away from the house and retain most of the equity that had been "taken out."

  This struck me as completely nuts.

  First, he failed to note that in California (where I believe he was), a home equity loan taken out after purchase is considered a "recourse" loan, meaning you can't necessarily walk away and mail in the keys. The lender can come after you. Historically they haven't, but I suspect that as conditions get worse, they will start doing this to people who walk away from their homes out of convenience rather than financial hardship.

  Second, he fails to note that Fannie and Freddie have noticed this. Fannie has published new guidelines saying -- in effect -- no new mortgages to anybody who has defaulted in the past five years, unless there were extenuating circumstances, in which case the rule is three years. (Thanks to Mish for several of these tidbits). In either case, our "smart" investor is likely to miss out on a buying opportunity a couple of years out if he executes this strategy.

  Third, the debt forgiveness is taxable unless you are insolvent at the time. Since this guy would have the cash in the bank, he won't be able to take advantage of the break the IRS gives to truly insolvent individuals. He'll owe regular income tax on any amount foregiven if he walks away.

  Fourth, part of the rationale is that he has an investment vehicle that will provide returns that match his interest cost on the loan. But for how long? Most home equity loans reset pretty frequently. And I know of few investment vehicles that will guarantee sufficient returns to make this work once rates reset.

  Finally, he's really unlikely to follow through. There are some people who truly treat their homes as mere financial assets. Most don't though. It's nice to plan and to think of everything as being financialized these days, but most people don't actually follow through. Putting together a plan that he's unlikely to follow through on seems silly. If he is really so unattached to his house, and really thinks the market is likely to decline in the coming years, then why doesn't he just sell now instead of going for all the financial engineering?

  I think this is another example of the kind of thinking that is going to disappear really quickly as real risk re-enters the system.

• While I'm on the topic of financial TV, it's nice to see that Cody's doing well at FBN. I can't claim to be a real fan of the show (nothing personal, I don't like most finance TV shows), but he's definitely making his mark, often in interesting ways. Must say, this is still one of my favorites.

• And it's too bad that Herb is moving on, though I understand his desire to do something different and he assures me that he will still occasionally be appearing on CNBC. Might actually have to put the volume up for that one, and catch Howard on the repeats.

  Best of luck in your new adventure Herb!

A few weeks ago I noted that I had encountered the term "Voluntary Simplicity" during an Anderson School-sponsored career options exercise.

The MBA Indicator

That's 12 people, in the most image-conscious city on the planet, all of whom have had significant business success, who in fact went to school to get ahead in business and who are used to 60-70 hour workweeks, all of whom are looking at their lives and thinking that maybe wanting less and having less could be a better way of living.

There's been more and more evidence that this idea could be a force in the economy in the coming years

Isn't it funny
How a bear likes hunny.
Buzz! Buzz! Buzz!
I wonder why he does?

Hard not to have Bear on the brain today, with the weekend's events just past. While Winnie may have been the "Bear of Little Brain," it seems that the collective brains of Bear Stearns were even less capable in the end. Winnie, at the very least, was trying to get at some sweet honey when he fell out of the tree and got prickles in his nose.

What will the guys at Bear use as an excuse? They were looking for innovative ways to avoid reserve requirements on lending tons of money to people who couldn't afford to pay it back?

I'd rather have had the honey.

Thanks to DealBreaker for posting this one.

-btc

Been an interesting couple of days here, but I'm certainly looking forward to my next disappearance to Utah.

• BelowTheCat II (aka the big, black, furry guy) had developed the habit of pawing at my LCD screens, including the four above my desk and the big Sharp AQUOS in the living room. He goes nuts when Cramer is on, but really freaks out at Larry Kudlow's antics and starts pawing like he wants to kill. Smart cat.
• On that note, Barry offers a good translation from Kudlowish to standard English. And I should note that those who have met him in person at Milken Institute events tend to agree that his off-camera persona really is different, unlike Jim Cramer whose persona on TV is real...
• I met Prince Andrew last night. In the course of brief conversation I called him "dude." Probably should not have done that, but to his credit he did laugh and point out that he had been called far worse.
• Toddo's call for buying Apple (NasdaqGS:AAPL) calls with the stock around $120 yesterday was spot on the money. I'm in the same trade and feeling like this one has some legs to it despite already being up significantly in the face of a mostly down market. Tight stop around the $115 level in the stock.

My Utah sweetie tweaked her back/shoulder a couple of weeks ago. I think the situation is catching, Did the same thing a couple of days ago and haven't been able to sleep well for a couple of nights as a result. If I seem delerious, it's because I am.

• Barry is spot on about the sheer stupidity of credit agencies now saying that maybe they need to have some kind of a "warning label" on various derivative crap products that they rate:

  WARNING: THESE BONDS HAVE BEEN RATED AAA BY A MAJOR RATING FIRM. THESE RATING FIRMS HAVE PROVEN THEMSELVES TO BE CLUELESS, MONEY-LOSING INCOMPETENTS IN EXCESS OF A TRILLION DOLLARS IN LOSSES. THEY WERE PAID HANDSOMELY BY THE BOND UNDERWRITER, AND ARE HOPELESSLY COMPROMISED. PURCHASERS OF THESE BONDS ARE ADVISED TO IMMEDIATELY KILL THEMSELVES, THUS SPARING THEIR LOVED ONES EMBARRASSMENT IN THE FUTURE. ALSO, THESE BONDS MAY LOSE VALUE. I JUST WET MYSELF MERELY THINKING ABOUT THIS PAPER. WHILE PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RETURNS, YOU SHOULD BE AWARE THAT PAST PERFORMANCE ALSO SUCKED. DONT BLAME US IF YOU LOSE ANY MONEY, AS WE HAVE NO IDEA WHAT THE F$#@ WE ARE DOING ANYWAY. REALLY, YOU ARE ON YOUR OWN.

• This follows up Barry's earlier revelation, that Moody's was considering a pretty radical downgrade.
• I'm not especially political, but I must confess to being at least a bit excited that a guy like Obama could make it so far. And not only because he was just three years ahead of me at Columbia and we probably bumped elbows in the library at one point or another during my freshman year.
• All this education and I still think I'd be happier as a ski/mountain photographer.
• I did have fun at a winter camping seminar at the local REI. And ran into more people I think I have things in common with than I have anytime since getting back from my last Utah trip.
• Yeah, I know. I need to get the fuck out of L.A.

Going to try to sleep a bit now.

-btc

Well, the ISM numbers are in and they're crap. Markets are tanking worldwide.

• Cramer's blog is only available to subscribers, but this headline pretty much sums things up for the day: Market Turns to Drugs After Jobs Number.
• Housing Futures are currently suggesting that I should plan on staying in my current rental for at least another 12-18 months and can expect to buy 15% lower when the time finally comes.
• Of course, that assumes I stay in LA. A dubious proposition at best. But the expectations for the national picture aren't all that different.
• Am I the only one who thinks that -- the Giants win notwithstanding -- the current flood of stadium and arena construction in New York has got to be a sign of a long-term Wall Street top? (Citi Field, New Yankee Stadium, New Meadowlands stadium, Barclays Center, and Red Bull Park, adding to Prudential Center which was completed last year.)
• Am I the only one who thinks it's weird to vote at a lifeguard station? And where they hell did David Hasselhoff and Pamela Anderson disappear to?
• I've been going through a bit of a lifestyle/work choices exercise courtesy of Anderson School Alumni Career Services. I noticed that on a survey about life and career goals we were given last night one of the choices is "Voluntary Simplicity." I've taken this kind of survey before and never seen that one as an option, certainly not when the audience is top business school grads. Maybe Kevin is on to something?

• I hope Waterford didn't make too many of these ugly things.
• You Don't Know Slack
• Following up on yesterday's comments, I note that Jeff Matthews updated his Shareholder Letter You Should, But Won’t, Be Reading. The follow-up comments are worth a read:

  Coke, P&G and many others that week and in weeks subsequent to the Crash of ’87 used the substantial cash on their balance sheets to take advantage of the market dislocations that caused even the good stocks to be sold with the bad, and cannily bought their own stock back at deep discounts to its inherent worth.

  Why then, were there no share buy-backs announced yesterday?

  Could it be that the Great Private Equity Cash Robbery of 2007, in which previously healthy companies either “cleared” their balance sheets of cash—to use the euphemism employed by Steve Odlund, the Chief Cash Clearer at Office Depot—by buying back their own stock at bull-market peaks or faced the prospect of having it cleared for them by the Private Equity Cash Robbers?

I am probably one off the few who does not care about the Super Bowl one bit. I have it on in the background with the sound off only so I can know when it's time to get out to dinner and beat the rush. It's halftimee, some band is on and I've had some thoughts:

• Herb is on to something here. But this is just the tip of the iceberg. Over the past decade, companies have been forced into engaging in more and more unnecessary financial engineering by those who have proposed that:

  a) Cash is a bad thing to have
  b) If you're going to have cash, you should maximize the return, regardless of whether you truly understand the risks.

  I doubt that this is the first big company that should have known better that will have to come clean in the same way.

• Smaller companies already have had to come clean. Here's Kevin Depew's note about CKE Restaurants (NYSE:CKR) last earnings release:
  

  Increasingly, earnings for these companies are only tangentially related to their core business. For many of these companies, say, a restaurant operator, or a network equipment seller, how its "business" is going is only a sideshow. Many companies today are essentially hedge funds masquerading as businesses.

• Many of these companies, like the afformentioned CKE are just the suckers in the game. As the old poker adage notes, there's always a sucker, if you can't figure out who it is, it's you. When you're the CFO of a relatively small fast-food chain with $10-12m in earnings every quarter, which is borrowing money to buy up stock and is getting sold on complex derivative investments, then you are the sucker. Period. The investment bankers and consultants selling you on this crap are going to eat you alive.

I've been in Utah a lot, enjoying the incredible powder this season, as well as a bit of a winter romance. Thus, I've been offline.

• Noticed this one in the LA Times a few days ago. Trying to tap into home equity? We'll see The most incredible quote in the whole story was this one:

  "We didn't deserve this," Thaleia Georgiades, a real estate agent in El Dorado, Calif., said Thursday, two days after she and her husband, a builder, learned that their Countrywide credit line had been frozen.
  
  "When you are self-employed, that's the money you count on to bridge the gap during tough times. And this is a particularly tough time in both the building and housing industries," Georgiades said.

  I can remember when the advice to entrepreneurs was that you had to have a year of money in the bank to survive on when things were slow. To accomplish that you had to scrimp and save when times were good and not spend it all. Today, it seems that the word "money" has been confused with "debt." I mean, get real! Two people whose incomes are leveraged to real estate are counting on the equity in their real estate to bail them out during tough times, when real estate -- by definition! -- is screwed? Do people have brains anymore?

• John Succo at Minyanville has been noting this same problem -- the confusion of debt for savings -- for some time. But I've never seen it quite so clearly called out by the statement of a random individual outside the government or Wall Street. This is actually fairly scary.
• Mish commented on this same article more extensively.
• It should be noted though, that this has been going on for months, with no official announcements until recently. New lines have not been extended and older ones have been killed off for even the slightest misdeed, missed payment, etc. Moving to cut off credit lines that are in good standing does ratchet things up a notch.
• Kudos to Barry for pointing out that sometimes Cramer can be right, and that our government more often than not is wrong. For the record, Cramer was right on this from the beginning, and called out the obvious investment implications and socially negative consequences.

As I sit here in the bar at Snowbird, many things come to mind:

• Isn't it amazing that Utah Hwy 210 (aka "Little Cottonwood Canyon Road") is the most avalanche-prone road in the country, despite being only eight miles long?
• Isn't it even more amazing that I've never been caught in one of them? (And yes, I'm one of those nuts who sometimes wears an avalanche beacon in the car...)
• How is it that Larry Kudlow can go on TV every day and sloganize the benefits of free-market capitalism, then simultaneously demand that the government and it's agencies -- like the Fed -- do something to save the economy? I thought the idea of a free market is that the government butts out?
• What is it with me and female river guides anyway?
• Does anybody really believe that Angelo Mozillo didn't know exactly what he was doing when he sold all that Countrywide (NYSE:CFC) stock?
• Why don't any of my friends in LA want to ski when the conditions are so good? Do I need new friends?

-btc

Can't help but point this out after hearing Larry Kudlow yap on again and again about how the "Goldilocks Economy" is alive and well.

Let's remember, that Goldilocks was a thief who was breaking and entering to steal somebody else's food.

The owner of the food that was neither too hot nor too cold was a bear.

So maybe, just maybe, being a bear isn't all that bad an idea if you're looking for something that's "just right."

-btc

Looks like a quiet one this year, with many friends out of town and me planning on being away next week.

• One of the things that has annoyed me to no end about the endless rounds of attempts to bail out mortgage lenders is that for the most part they got themselves into this trouble and deserve to go down for it. The LA Times details how those banks did nothing to even attempt to identify even the most obvious fraud rings. While certainly those who perpetrated the fraud deserve jail, the banks that should have been smart enough to detect it certainly don't deserve a bailout from public funds, or for that matter the assistance of any branch of government. As Taleb's fictional character "Fat Tony" notes, the banks are usually the perfect marks.
• On the menu for New Year's Eve is some home baked chicken, a nice Rosenblum Zin, and a bottle of 1989 Veuve Cliquot Reserve that has been in storage for some time. After that, perhaps a couple of hours at my local bar, which will be open to us natives after dinner, at about 10:30. In the meantime, the Law and Order marathon is keeping me busy.

There have been a couple of interesting items discussing auto loans the past few days:

• The situation in car loans may be even worse than in mortgages. Some lenders are offering as much as 200% of a car's value with little to no downpayment, in order to allow people to trade in their already underwater car loans.

  And just as the horse disappears over the horizon, the usual suspects have arrived to question the condition of the barn door lock: This month, S&P reviewed its ratings on $113.5 billion in auto loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."

  Not only that, but the terms on some of these loans have moved out to as long as seven years, meaning that the loan will quite likely outlast the car.

  Those most directly impacted are obvious: Ford (NYSE:F) and General Motors (NYSE:GM), both through the impact on their finance arms and because -- lets face it -- these ridiculous loans are part of the reason they've been able to sell as many cars in the first place. Tightening credit will mean that F = GM = Toast.

  This will also impact independent auto loan companies, to different degrees depending on their lending policies.

• Minyanville has a slightly different take on the situation, noting that auto loan performance does not necessarily track mortgage performance. They suggest that the losses in subprime auto lenders like Consumer Portfolio Services (NasdaqGM:CPSS) and Americredit (NYSE:ACF) have been overblown.

Following up on earlier comments about retail, I just ran into my friend with the gift store at the one local bar that was open Christmas Eve.

Her business is at roughly 50% of where it was last year. And she's already been experiencing some returns. That usually doesn't happen until after New Year's.

Her feel is that it's been a completely lousy year for specialty retail, even at the high end.

-btc

Lots going on this week:

• Adding to my comments on retail a couple of days ago, I stopped by Best Buy (NYSE:BBY) yesterday to pick up a couple of essentials. It seemed quite slow for a pre-Christmas week evening. Their latest earnings report notwithstanding, I think this is a further sign of things being very slow. Still, I wouldn't short them. Might consider a paired trade against Circuit City (NYSE:CC). As Macke notes, you don't want to short the leader in a business, regardless of what you think of the macro picture.
• It's nice to have sorted things out so that I can go back to my regular bar again on weekends. And quite a weekend it was. Met somebody quite nice on Friday. Then discovered how really wonderful one of my neighbors is on Saturday. The only fly in the ointment was the woman I've been most interested in lately deciding to show up there on Saturday with her girlfriends just as I was making the new connection...

I spent about an hour this afternoon listening to a friend and allowing her to cry on my shoulder for a bit.

She runs a little boutique store which until the past six months has been very successful. It sells all manner of interesting little gifts and expensive trinkets that tend to do very well on LA's west side. In her 10 years of operation, Christmas has always been a great time, even during the 2000 bust.

This year, she hardly has any traffic at all. Her Christmas sales are at 25% of where she expected them to be.

By Fil Zucchi on Minyanville's Buzz and Banter (which requires a well-worth-it subscription):

Boom Boom almost did the right thing. Had it spared us the pandering 1/4 point begged for by financial speculators, he would have finally shown the kind of stones that will be needed to guide us out of the current mess. Equities do not like it one bit, as well they shouldn't; the wimpy move is likely to worsen the credit environment and the financial markets as a whole could be in for a year-end pasting. So why do I suggest the Fed did the almost right thing?

Because one cannot devalue its way out of a gigantic pile of debt. Companies, many companies, need to fail, go away forever, and allow those who have a business existing to once again prosper not on the back of borrowed money, but on the strength of real demand, rather than demand generated by a need to circulate make believe money.

Had the Fed figured this out in 2001, by 2003 we would likely have forgotten the then recession. Instead it decided to try to fool everyone into believing that we could borrow our way into a permanent plateau of prosperity.

-btc

For the past year or so, I've found that the number of companies looking for contract employees and consulting services has dropped off significantly compared to the number that wanted to hire me to full time project management positions.

Recently, I've noticed this has reversed.

Typically, this is a sign of reduced willingness to commit to hiring, and perhaps a weaker employment market.

Obviously, I'm just a very small sliver of overall employment, and a fairly high-end one as well. I'll be following up with a few recruiters I know to try to get a better understanding of what's going on a bit further beneath the surface.

-btc

Another recent post from the ongoing discussion of Herb's latest piece on Marketwatch, which gets to the crux of how so much garbage could have gotten into the system, and how the supposedly smart people running the banks could have allowed so much of it on their books:

Unless they commit actual crimes, the people making these decisions get to keep their huge bonuses even when it becomes obvious that the “profits” they generated were fleeting and easily reversed by events that all the auditors and rating agencies said were unlikely.