Insolvency of the Fannie and Freddie Predicted Two Years Ago. What Happens Next? Or How to Avoid the “Mother of All Bailouts”
By Nouriel Roubini
2008-7-11

A pretty good article from Nouriel Roubini. A choice quote below, then on to the article.

“Privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs.

Two years ago in July and August of 2006 this author first presented here his analysis of why the U.S. would experience its worst housing recession of the last 50 years, why home prices would fall at least 20%, why the collapse of mortgages would start with the “subprime” ones (a term that at that time was unknown to 99.9% of the public including most investors) andhow this housing bust would lead to a severe banking crisis and a credit crunch that would tip the U.S. economy in a recession by 2007. My timing of the recession call was off by six months – as the recession started at the end of 2007 rather than mid-2007 as then predicted – but all the other predictions turned out to be correct.

At that time this author also predicted that this housing bust and mortgage bust would lead to a bust of the two government sponsored enterprises (GSEs) in the mortgage market, Fannie Mae and Freddie Mac. Predicting the insolvency of Fannie & Freddie was the obvious logical implication of the prediction of the worst housing recession in decades. So no wonder that this week headlines are all about Fannie and Freddie being insolvent and the systemic consequences of such insolvency.

Let me now elaborate on those insolvency predictions, discuss what happens next when Fannie and Freddie go belly up and discuss why they should not be fiscally bailed out; rather - on top of wiping out their shareholders - their creditors/bondholders should also take a haircut to avoid the “mother of all moral hazard bailouts” …

As a starting point of the analysis note that the insolvency of Fannie and Freddie is no news to regular readers of this forum. In August of 2006 I wrote the following:

“the gambling-for-redemption behavior…are not the exception in the mortgage industry; they are instead the norm. There are good reasons to believe that this is indeed the norm as lending practices have become increasingly reckless in the go-go years of the housing bubble and credit boom.

If this kind of behavior is – as likely – the norm, the coming housing bust may lead to a more severe financial and banking crisis than the S&L crisis of the 1980s. The recent increased financial problems of H&R Block and other sub-prime lending institutions may thus be the proverbial canary in the mine – or tip of the iceberg - and signal the more severe financial distress that many housing lenders will face when the current housing slump turns into a broader and uglier housing bust that will be associated with a broader economic recession. You can then have millions of households with falling wealth, reduced real incomes and lost jobs being unable to service their mortgages and defaulting on them; mortgage delinquencies and foreclosures sharply rising; the beginning of a credit crunch as lending standards are suddenly and sharply tightened with the increased probability of defaults; and finally mortgage lending institutions - with increased losses and saddled with foreclosed properties whose value is falling and that are worth much less than the initial mortgages – that increasingly experience financial distress and risk going bust.

One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac. Then, the ugly scenario that Greenspan worried about may come true: the implicit moral hazard coming from the activities of GSEs - that are formally private but that act as if they were large too-big-to-fail public institutions given the market perception that the US Treasury would bail them out in case of a systemic housing and financial distress – becomes explicit. Then, the implicit liabilities from implicit GSEs bailout-expectations lead to a financial and fiscal crisis. If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to.

The main, still unexplored issue, is where the risk from mortgages is concentrated: among the sub-prime lenders (as I worried about…) or among commercial banks or among hedge funds and other financial intermediaries that purchased mortgage backed securities(MBSs) or among the GSEs (Fannie and Freddie)? Commercial banks claim that they have transferred a lot of their mortgage risk to other financial intermediaries – such as asset managers, hedge funds or insurance companies – who purchased large amounts of MBSs. But banks have still lots of mortgages on their books and, on top of it they have tons of consumer debt exposure (credit cards, auto loans, consumer credit) that may go really bad in a recession. If part of the housing risk has been off-loaded to hedge funds, the risk is not just of some of these hedge funds going bust but also their prime brokers (i.e. large investment banks) getting into trouble; counterparty risk will become serious once the hot potato of mortgage risk is pushed from one counterparty to the other. And finally, a large part of the housing risk is also in the hands of Fannie and Freddie. How much are the GSEs at risk is a complex issue…”

So, what was written two years ago has by now unfolded as predicted, including the now evident coming bust and insolvency of the two GSEs. The issue now is: what happens next to Fannie and Freddie given that they are effectively insolvent?

The conventional answer is that their shareholders get fully wiped out but that their creditors (those holding the $5 trillion of these agencies’ debt and their other liabilities) are made whole as the U.S. government cannot afford reneging on the implicit guarantee of the liabilities of Fannie and Freddie and it cannot risk a collapse of the mortgage and housing market that defaulting on part of the liabilities of Fannie and Freddie would imply. Unfortunately, the conventional wisdom may turn out to be right; but it could also turn out to be wrong.

First notice that, as discussed previously in this column, the farce that Fannie and Freddie were “private sector” firms was obviously a farce as investors always expected that the liabilities of the two GSEs would be eventually backed by the U.S. government. And in spite of the decade long rhetoric by Fed, Treasury, the Bush administration, conservative government-bashing hawks and a slew of other regulators that Fannie and Freddie were private firms, that investors should not assume that they would be bailed out if these firms turn out to be insolvent and that the moral hazard deriving from perceptions of an implicit guarantee should be stomped as hard as possible, the reality was different: these were effectively public institutions – not private ones - used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.

To minimize the financial cost of this farce the administration should stop pretending that these are private institutions and go ahead and take them over and nationalize them since they are going to bail them out anyhow. The financial costs of this farce include the $50 billion of subsidy that the GSEs bondholders/creditors are receiving every year as the spread of the agency debt over Treasury is now close to 100bps (100bps on $5 trillion of liabilities is equal to $50 billion). Today the market prices the debt of the GSEs as if there is a meaningful probability that – once bankrupt – these firms will be treated as private firms and their bondholders will take a loss. But if the government is going to bail them out - because the consequences of a capital levy on their bondholder will destroy the mortgage and housing markets - the government should at least make this implicit liability (the guarantee of the $5 trillion debt of the GSEs) explicit and thus save the U.S. taxpayer that $50 billion subsidy that is given every year to the creditors/bondholder of Fannie and Freddie. An implicit liability that is not made explicit is the worst of all worlds as fat cats on Wall Street and around the world get a 100bps spread relative to safe Treasuries ($50 billion subsidy) on their holdings of agency debt and they know they will be anyhow bailed out if Fannie and Freddie go bust. Saving those $50 billion will not make Fannie and Freddie solvent as their insolvency hole is too big to be filled but it would at least reduce the fiscal bailout bill – that could be as high as $200-300 billion – that their insolvency and government takeover will imply.

Leaving aside now the “positive” issue of how the government will deal with the insolvency of Fannie and Freddie, let us consider the “normative” question of not what it is most likely to be done (an issue that involves more politics than sound economics) but rather what should be done in an ideal world? The simple answer is that we need to limit as much as possible the moral hazard of a bailout of Fannie and Freddie. Such a bailout of the creditors/bondholders of the two GSEs would result in the “mother of all maoral hazard-laden bailouts” in terms of its size and consequences. And such a bailout is neither necessary, appropriate nor desirable.

Of course most of Wall Street, domestic and foreign investors and Congress are already screaming and begging “Bail us out, bail us out!” as their $5 trillion holdings of agency debt will take a significant hit if the insolvency hole of the GSEs – after the shareholders are wiped out – is filled not with public bailout money but rather with an haircut on the bonds held by Fannie and Freddie creditors. On top of bondholders not wanting to take a hit almost every politician – including McCain that in a former life was one of the shamed and corrupt members of the Keating Five club when he facilitated the S&L scam – is now clamoring for a bailout of Fannie and Freddie under the argument that not rescuing them would lead to a collapse of the mortgage and housing markets. But these screams of “the sky will fall” if we don’t rescue Fannie and Freddie are vastly exaggerated and incorrect for a number of reasons.

First, notice that the hit that bondholders will take will be limited in the absence of their bailout. With a debt/liabilities of about $5 trillion and expected insolvency – as of now and in the worst scenario of $200 to $300 billion – the necessary haircut is relatively modest: either a reduction in the face value of the claims of the order of 5% (if the mid-point hole is $250 billion) or – for unchanged face value – a very modest reduction in the interest rate on their debt after it has been forcibly restructured.

Second, a 5% haircut is much smaller than the 75% haircut that the holders of Argentine sovereign bonds suffered in 2001-2005, much smaller than the haircuts that holders or Russian and Ecuadorean debt suffered after those sovereign defaults, and much smaller than the 30% haircut that holders of corporate bonds suffer on average when a corporation goes into Chapter 11 and its debt is restructured. So why should Uncle Sam – i.e. eventually the U.S. taxpayer – pay that $250 billion bill when investors in the U.S. and around the world can afford it? The same investors are getting a fat subsidy of $50 billion a year (whose NPV is much bigger than $250 billion) for holding claims that now provide a 100bps spread above Treasuries and are under the implicit guarantee of a full bailout.

Third, of the two options we need to pick one: either we formally guarantee those claims and start paying the Treasury yield on that debt saving the tax payer that $50 billion subsidy; or if we maintain the subsidy a credit event in the form of a small haircut because of insolvency would be the fair cost that such investors pay for earning the extra spread over Treasuries.

Fourth, while the haircut would reduce the market value of such agency debt and inflict mark to market losses to investors such losses are already priced by the fact that the widening of the agency debt spread relative to Treasuries – from 10bps to about 100bps – has reduced the mark to market value of such agency debt. So, in the current legal limbo of insolvent GSEs whose debt is however not formally guaranteed the persistence of the spread would lead to those $250 billion mark-to-market losses regardless of a formal default, restructuring and haircut on that debt. We may as well resolve that insolvency and restore the positive net worth of the GSEs by doing the haircut.

Fifth, a haircut on the debt of the GSEs does not need to destroy their business, the mortgage market or the housing market. The best debtor is a solvent debtor that has restructured and reduced its unsustainable debt burden: that is why firms coming out of a Chapter 11 process that reduces their debt burdens are viable businesses ready again to produce goods and services in a viable and profitable way. The worst thing that can happen to the GSEs is to remain as zombie comatose insolvent institutions whose debt burden is not restructured and who are barely propped by an implicit government lifeline. Do we really believe that GSEs with unrestructured debt kept alive in a zombie government “conservatorship” (the solution now most likely preferred by the U.S. administration) could function properly and continue their service of supporting the mortgage and housing market? Lets instead clean them up first and make them financially viable – after an out-of-court Chapter 11 style debt reduction – so as to ensure that they keep on providing the public goods that they are alleged to give.

Sixth, the existence of GSEs and the implicit subsidy that they provide to the housing sector and mortgage market is a major part of the overall U.S. subsidization of housing capital that will eventually lead to the bankruptcy of the U.S. economy. For the last 70 years investment in housing – the most unproductive form of accumulation of capital – has been heavily subsidized in 100 different ways in the U.S.: tax benefits, tax-deductibility of interest on mortgages, use of the FHA, massive role of Fannie and Freddie, role of the Federal Home Loan Bank system, and a host of other legislative and regulatory measures.

The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.

And these MacMansions and the broader sprawl of suburbian/exurban housing are now worth much less – in NPV terms – not only because of the housing bust and the fall in home prices but also because: a) the high oil and energy prices makes it outrageously expensive to heat those excessively big homes; b) households living in suburbian and exurban homes that are far from centers of work, business and production that are not served by public transportation are burdened with transportation costs that are becoming unsustainable given the high price of gasoline. So on top of the housing bust that will reduce home values by an average of 30% relative to peak high oil/energy prices make the same large homes in the far boonies of suburbia/exurbia worth even less – probably another 10% down – because of the cost of heating palatial MacMansions and because of the cost of traveling dozens of miles to get to work in gas guzzling SUVs. Thus, it is time to stop this destruction of national income and wealth that a cockamamie decades long policy of subsidizing the accumulation of wasteful and unproductive housing capital has caused.

So, all the above economic arguments and the need to control the moral hazard from the activities of the GSEs suggest that the creditors/bondholders of Fannie and Freddie should not be made whole, i.e. bailed out, once the insolvency hole of these institutions emerges. The optimal policy response would be to have such creditor take a haircut that is financially affordable and substantially desirable from a social point of view. The cost of borrowing for the GSEs after such haircut will be certainly higher but that is an outcome that is economically desirable: it will induce less unproductive and subsidized accumulation of wasteful housing capital.
Will this optimal policy solution - an haircut for bondholders - be undertaken? Most likely not as the political economy of housing, mortgages and of “privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs. But the financial costs of this financial crisis – the worst since the Great Depression – are mounting so fast that any bailout will become fiscally extremely expensive.

Indeed, my initial estimates of $1 to $2 trillion dollars of losses from this financial crisis did not include the bailout of Bear Stearns’ creditors, the bailout of the GSEs bondholders, the fiscal costs of the Frank-Dodd bill, the fiscal costs a severe U.S. recession that is mushrooming an already large fiscal deficit, the fiscal cost of bailing out – a’ la Bear Stearns - the last four remaining major independent broker dealers (as the time for such independent broker dealers is now gone as – given their wholesale overnite funding - they are subject to bank-like runs much more severe than for banks), the cost of bailing out the Federal Home Loan Bank system (another GSE system that pretends to be private and that has been happily propping up or bailing out – to the tune of hundreds of billions of liquidity support – illiquid and insolvent mortgage lenders). Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it.

Thus, soon enough, if we fiscalize all of these losses the U.S. may fast lose its AAA sovereign debt rating and eventually end up like an insolvent banana republic. It is thus time to put a stop to the coming “mother of all bailouts” starting with a firm stop to the fiscal rescue of Fannie and Freddie, institutions that have behaved for the last few years like the “mother of all leveraged hedge funds” with their reckless leverage and reckless financial activities.

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BuzzPal - The World Is Your Party, got it’s first press mention today:

• PDF (English translation by Google)
• On realtid.se (Swedish)

The article is about the new generation of Swedish startups and Seedcamp, which is basically the European version of Ycombinator. BuzzPal may be participating in Seedcamp, coming to it based on the suggestion of Anders Fredriksson, one of last year’s participants. Anders is a friend and contact here in Gothenburg. Thanks, Anders. -Chris

See BuzzPal.com for more info and our contact form.

PS: Some people say “congratulations” to me and BuzzPal on this news, and we thank them for the support, but we remind ourselves that this is just another turn on our long, winding road. Getting mentioned as a hopeful is one thing, offering a great user experience is something else. And that is our aim. We are at the beginning of our journey, and we have many miles to go before we sleep. Thank you for your support.

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Here we are, the third trading day after my previous market update:

Friday posted an intra-day reversal to the upside, after setting a new low for the move. The reversal came on the highest volume since the prior intermediate-term lows. But, the VIX did not spike as high. Does it mean we need more fear before we get a tradable bear market rally?

As show on the charts above…

…now the VIX has spiked high enough. What we’ve got now is day #1 of what may indeed be a “real” rally (as opposed to a failed rally attempt). The confirmation, if/when it occurs, will be a follow-through day, traditionally around the 4th to 10th day of the rally attempt.

Note: The rally attempt actually started during the day on Tuesday, when a new low was made during the session and then the market reversed and closed strong on the highest volume since the previous tradable lows. However, even though the volume was the highest since the previous lows, it was lower than both of them. Part of that is the normal seasonality (lower volume) that comes with summer vacations.

PS: The long position I put on a few days ago is (currently) sitting pretty. It was highly leveraged, too. I went long out-of-the-money call options, without an offsetting short call option to neutralize the time value decay. This is the most levered option position you can take. I only do it on rare occasions and in small quantities. Also only when I see the possibility for a large and rapid move. So far so good, but nothing matters until a position is closed. No counting chickens until they are hatched, especially with volatile positions like this one.

PPS: BuzzPal - The World Is Your Party, got it’s first press mention today: PDF (in English) and online (in Swedish) today. The article is about the new generation of Swedish startups and Seedcamp, which is basically the European version of Ycombinator. BuzzPal may be participating in Seedcamp, coming to it based on the suggestion of Anders Fredriksson, one of last year’s finalists, Tablefinder. Anders is a friend and contact here in Gothenburg.

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Interesting article from the Wall Street Journal. Great for buyers. Bad for sellers with noise or other nuances.

In most markets, home buyers have the upper hand these days. That often means they have greater negotiating power when it comes to price or the ability to squeeze out extra perks from sellers.

But on occasion, they will ask a seller for even more, a request that will help get to know the home better. They will ask to sleep over.

As reality programs such as TLC’s “Date My House” and HGTV’s “Sleep On It” show buyers spending a considerable amount of time — and sometimes an entire night — in homes they are considering, some buyers in the real world are getting the chance to do the same.

It isn’t something being agreed to by droves of sellers, but it is a new tactic that some are considering, said Pat Skiffington of Keller Williams Classic Realty in Orlando, Fla. He is arranging for a prospective buyer to stay overnight in a downtown Orlando condo.

Mr. Skiffington wouldn’t recommend it for every home. The Orlando condo is a good candidate because the prospective buyers don’t live in the area, and experiencing what the downtown is like at night might sway them to make an offer, he said.

Any seller who attempts this also should consider that while letting someone stay in your home can spotlight the positives, “it can also punctuate the negatives,” he said. Plus, even if the buyers decide they love the home after staying there, it might not be enough.

Just ask Jeri Moran, a real-estate broker who had people stay over in her second home in the Blue Ridge Mountains in Georgia. The buyers love the home, but haven’t made an offer.

“They’re sitting on the fence,” said Christy Reece, her agent with Keller Williams Realty Mountain Properties in Blue Ridge, Ga. “The house is wonderful, and they even fell in love with it further once they stayed there. But it comes down to people, in our market, thinking that prices will continue to come down.”

Even if setting up an extended showing isn’t doable, home sellers can take away some tips from shows like “Date My House,” said the host, Bob Guiney. “It’s such a huge thing to be able to hang out in a house,” he said. But, he added, it is most important to “think about selling your house like thinking about going on a first date.”

In one episode, the best feature was the outdoor space, said Mr. Guiney. By playing up that property’s barbecue and pool area in the backyard — and allowing the buyers to experience it — they got a sense of what it would be like to live there.

From the buyer’s perspective, there are other opportunities to spend more time in the home than doing it in one large chunk. Mr. Skiffington said that nowadays buyers are averaging between three and four showings of a home even before an offer is submitted.

Buyers can visit the home at different times of day to get a sense of neighborhood noise, said Elizabeth Blakeslee of Coldwell Banker Residential Brokerage in Washington. She recommends talking to the neighbors.

Those who are interested in having a buyer stay in their home overnight should think about the possible consequences, said Ms. Blakeslee.

Structuring a short-term contract to give the home a test drive probably wouldn’t be that difficult, said Neil Garfinkel, a real-estate attorney and partner with the New York firm of Abrams Garfinkel Margolis Bergson LLP. “My first phone call would be to my insurance company,” he said. “The second would be to my attorney, who could help structure the transaction.”

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This essay is a “must read,” which is a phrase I can’t remember the last time I used. It’s 15 pages and I can’t even give it a proper introduction, you simply must read it, IMHO. And then ideally do something. I leave it to you to decide what. Here is the link to an introductory article on the NYT website, where you can find other links. And here is a link to the essay by Erik Camayd-Freixas.

Some excerpts and then on to the article:

• It dawned on me that, aside from their Guatemalan or Mexican nationality, which was imposed on their people after Independence, they too were Native Americans, in shackles.
• Several men and women were weeping, but two women were particularly grief stricken. One of them was sobbing and would repeatedly struggle to bring a sleeve to her nose, but her wrists shackled around her waist simply would not reach; so she just dripped until she was taken away with the rest. The other one, a Ukrainian woman, was held and arraigned separately when a Russian telephonic interpreter came on. She spoke softly into a cellular phone, while the interpreter told her story in English over the speakerphone. Her young daughter, gravely ill, had lost her hair and was too weak to walk. She had taken her to Moscow and Kiev but to no avail. She was told her child needed an operation or would soon die. She had come to America to work and raise the money to save her daughter back in Ukraine. In every instance, detainees who cried did so for their children, never for themselves.

The emotional content is just the introduction, then he gets into legal issues, strategies, etc. Includes comments from a judge and others involved in the legal system.

The reason I say we need to do something is that our government is violating basic principals, the Golden Rule, and we cannot stand for it. Why? Because the government IS us and we don’t treat people this way. Do we? Is that who we’ve become? Can you see the future under that scenario? It’s not pretty.

The Shame of Postville, Iowa
2008-7-13
New York Times Editorial

Anyone who has doubts that this country is abusing and terrorizing undocumented immigrant workers should read an essay by Erik Camayd-Freixas, a professor and Spanish-language court interpreter who witnessed the aftermath of a huge immigration workplace raid at a meatpacking plant in Iowa.

The essay chillingly describes what Dr. Camayd-Freixas saw and heard as he translated for some of the nearly 400 undocumented workers who were seized by federal agents at the Agriprocessors kosher plant in Postville in May.

Under the old way of doing things, the workers, nearly all Guatemalans, would have been simply and swiftly deported. But in a twist of Dickensian cruelty, more than 260 were charged as serious criminals for using false Social Security numbers or residency papers, and most were sentenced to five months in prison.

What is worse, Dr. Camayd-Freixas wrote, is that the system was clearly rigged for the wholesale imposition of mass guilt. He said the court-appointed lawyers had little time in the raids’ hectic aftermath to meet with the workers, many of whom ended up waiving their rights and seemed not to understand the complicated charges against them.

Dr. Camayd-Freixas’s essay describes “the saddest procession I have ever witnessed, which the public would never see” — because cameras were forbidden.

“Driven single-file in groups of 10, shackled at the wrists, waist and ankles, chains dragging as they shuffled through, the slaughterhouse workers were brought in for arraignment, sat and listened through headsets to the interpreted initial appearance, before marching out again to be bused to different county jails, only to make room for the next row of 10.”

He wrote that they had waived their rights in hopes of being quickly deported, “since they had families to support back home.” He said that they did not understand the charges they faced, adding, “and, frankly, neither could I.”

No one is denying that the workers were on the wrong side of the law. But there is a profound difference between stealing people’s identities to rob them of money and property, and using false papers to merely get a job. It is a distinction that the Bush administration, goaded by immigration extremists, has willfully ignored. Deporting unauthorized workers is one thing; sending desperate breadwinners to prison, and their families deeper into poverty, is another.

Court interpreters are normally impartial participants and keep their opinions to themselves. But Dr. Camayd-Freixas, a professor of Spanish at Florida International University, said he was so offended by the cruelty of the prosecutions that he felt compelled to break his silence. “A line was crossed at Postville,” he wrote.

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Just time for another quick update, which comes two trading days after my previous post.

Sure enough, the engulfing candle I highlighted marked an end to the previous day’s one-day-wonder snapback.

As you can see, this chart goes back six months, covering the two most recent intermediate-term lows, on a reasonable amount of panic, as indicated by the volatility index, with momentum oscillating below it.

Friday posted an intra-day reversal to the upside, after setting a new low for the move. The reversal came on the highest volume since the prior intermediate-term lows. But, the VIX did not spike as high. Does it mean we need more fear before we get a tradable bear market rally? Or is the VIX not going to spike as high as the last two times, perhaps because people have built up a tolerance to the fear drug? Feel free to comment. Cheers!

PS: I did two 1-day trades last week, one that caught the bounce up, one the caught the engulfing down. Friday at the close I put on a tiny long for the fun of it.

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See this slideshow for the others.

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Just a quick post to note the major volatility ever since the Cubes (NASDAQ: QQQQ) two weeks ago reversed intraday and then gapped down and closed at a new low for the move. Yesterday’s big up day and today’s big down day, basically an engulfing candle, are quite interesting. As I noted last week…

…I’m on sniffing the market for fear, but it’s not really there yet. Stay tuned!

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Sunday, Susanne, Birgitta, and I took a day trip up to Lidkoping to visit Birgitta’s cousin. We also drove around the area where Birgitta’s grandparents were from (the gravestone is theirs).

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Johan has been bought this boat last summer and has been restoring it all winter. It is sweet! A classic. The other old wooden boat you see is a friend of Johan’s boat. It’s almost 100 years old and is completely restored. I think he just put it up for sale (I think around $100,000). And before you ask about the dog, Otto, no we didn’t slip him a space cake, he’s just happy.

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These first three pics and this concert video (”Radio Nowhere”) are from the Gothenburg Post, which gave the show a perfect 5-lighthouse rating. I do too, but I was scared for a few minutes when they opened up with “Born in the USA” and the sound quality was horrible. But they tuned it up fast and it was loud, crisp, and clean for the rest of the 3-hour concert (9:00 to midnight).

Below are pics from our pre-party BBQ at Martin and Anna’s place and then my concert photos, some of them blurry and probably should not have been posted, but screw it, here they are!

Happy FOJ everyone! I might update this post later with an original (but low quality) video clip or two. Cheers.

PS: Here’s a link to yesterday’s post and pics about how we got our Bruce tickets (camped out in December).

UPDATE #1: NEW VIDEO CLIP: Here’s one of the video clips I shot (will post more later if any good). Depending on how sentimental [or empathetic] you are, this one might tug your heart strings, the way it did mine.

UPDATE #2: NEW VIDEO CLIPS: 4th of July, Asbury Park (Sandy).

UPDATE #3: NEW VIDEO CLIPS: Out in the Street.

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Yes, Mr. “Born in the USA” is doing his American Independence Day show here in Gothenburg, Sweden, and Susanne and I are going (it’s her birthday present from me). Before the show, 18 of us will gather at Martin and Anna’s place for a BBQ and some pre-partying. Looks like it’s going be a perfect day weatherwise, perfect blue sky and 25-30 degrees Celsius. That is the ultimate summer weather in Sweden, it does not get any better. (more text and images below)

First time I ever saw Bruce was the first time I was ever in Sweden, and that was the summer of 2003, after my oldest and best friend’s wedding in Austria. The weather was same as today and Bruce was playing a sold out show (his concerts sell out in minutes here, same as in the USA). Well, we went for the miracle anyway. You never know unless you try and it is better to try and fail than not try at all. So we went down to the stadium, walked up to the ticket window, nobody even hear it, asked we could buy a ticket, she looked at us and said… yes! (great seats, too)

This time, we didn’t leave it to chance: A friend (Andreas) and I camped out over night for tickets back in December (the pics you see here). Yes, you can buy tickets online and over the phone in Sweden, but if you try that they might sell out before you get through. That would have been the case here since the concert sold out in like 15 minutes, a new record in Sweden.

It was fun. I haven’t camped for tix since back in the day. Best time was 1986 camping in front of Commander Salamander (a cool punk rock kinda store in Georgetown) for tickets for the Grateful Dead with Bob Dylan, and Tom Petty and the Heartbreakers at RFK.

I met a real cutie (Avri from Wilson High School) in the line and then randomly bumped into her and her boyfriend at the show. She wound up leaving with me to go pool hopping at Somerset. That was the a good summer of fun, friends, motorcycles, fishing, swimming, and more. Wow, one of the best now that I think about it.

Will there ever be a summer like that again or is it only possible when you’re a teenager? Most people say you must be a teenager to have a summer like that, but I disagree. I think it’s a choice you make, a choice of how you view the world and people that determines your universe of possibilities and actual experiences. Choose life. Make it sweet, and I don’t mean just for yourself, make it sweet for someone else, as many living and not yet living creatures. Ok, sorry for getting mushy, that “summer of ‘86″ talk got going (but it is what I think). Cheers!

Warning: There there’s a puker in action here (and the cleanup crew). It’s all part of life on the line. That guy was a trooper, too. Totally undaunted. I thought he’d go pass out, but he just cracked another beer and continued festivating as if nothing happened. Hat tip, dude.

UPDATE: Here’s a link to my post-concert blog with pics and video from the concert.

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Time for a quick market update: Last time I posted on this was May 12th (see here), when I thought that the rally from the March low was probably just a classic relief rally and that that rally had probably run it’s course. As the chart above shows, that turned out to be correct.

Now we are back near, at, or below the March low, depending on what stock and what index you are looking at. What that means is…

…that a rally attempt may develop soon. Indeed, that is what seemed to happen on Monday this week, but it appears that attempt failed yesterday. That’s not surprising for many reasons, which, unfortunately, I don’t have time to get into this morning (got to get some work done). The key point is that sentiment has not yet gone negative enough. People have not yet panicked. That is what I am listening, watching, smelling for.

PS: The chart abouve is a 3-year weekly of the Spyders (S&P 500 ETF: SPY). Number 1 shows the break of an up trendline, 2 is a failure to make and hold a new high, 3 is a breaking of the low at point 2, 4 is a retest of the now well-established support/resistance area I highlighted, this time from below, and 5 is where we are now.

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