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The Cockroach That Ate Manhattan

By Jeff Clark
Tuesday, December 1, 2009

Nothing ruins a good meal like the vision of a cockroach scurrying across the table.
In the financial markets, debt is a cockroach. Debt is an ugly, six-legged insect that feasts on rubbish and carries disease.
One cockroach is an inconvenience – a minor nuisance that can be handled with one well-timed thump of a shoe. But as anyone who has ever had the misfortune of watching a cockroach scamper across the kitchen floor will tell you, there's never just one.
On Wall Street last year, we discovered the same debt-ridden cockroaches that devoured Lehman Brothers had also infested Bear Stearns, Countrywide, Merrill Lynch, AIG, and nearly every other financial firm in existence. The infestation threatened to topple the global financial markets. So the leaders of Wall Street's most influential firms called in the exterminators – the U.S. Treasury and the Federal Reserve Board.
But rather than implementing measures to pare down debt, shore up balance sheets, and get rid of the pests for good, the exterminators simply threw a couple of pastrami sandwiches into the cupboard beneath the sink and then duct-taped the cabinet doors shut.
"That'll keep 'em busy for a while," Chairman Bernanke figured. "We won't see those disgusting little pests again."
And it worked. For the past several months, nobody has worried about the cockroaches. Wall Street feasted on higher stock prices. Banks were free to ignore the true value of their nonperforming mortgage loans. And every time a cockroach stuck its antennae through a crack in the floorboard, the Federal Reserve Board shot a little Cheese-Whiz into the crevice and held back the swarm.
Until last Thursday, that is.
As Americans celebrated Thanksgiving by stuffing themselves with turkey, cranberries, and sweet potatoes, and watching the Detroit Lions lose another football game, Sheikh Mohammed of Dubai noticed a cockroach scurrying across the gold inlaid floor of his palace dining room. "This isn't good," he must have thought to himself. "I must call the best exterminator in Abu Dhabi to take care of this."
The best exterminator in Abu Dhabi saw the success Chairman Bernanke had here in the United States, so he threw a couple of pastrami sandwiches into the cupboard and duct-taped the cabinet doors shut.
Stock markets around the world rallied on the news.
But what happens weeks or months from now when there's not enough Cheese-Whiz to fill the crevices?
Too much debt led to the destruction of Drexel Burnham in 1990. It led to the collapse of Argentina's economy in 2001. The debt cockroach devoured Iceland in 2008, and it almost wiped out most of Wall Street earlier this year.
You can't solve a cockroach infestation by throwing food at the little buggers. It only makes them stronger. And you can't solve a debt crisis by lending more money. It only delays the inevitable default.
Sadly, the cockroaches are back on Wall Street. And this time, they're hungrier than ever.
Best regards and good trading,
Jeff Clark

In The Daily Crux
Market Notes
High-quality corporate bond rally continues... LQD touches fresh high.
Indian carmaker surges... Tata Motors spikes 25% to new high in November.
Amazon extends gains... mega online retailer hits another high, rocketing 160% higher this year.
Earnings today... Shanda Interactive, Staples.
Market Watch
Symbol Price
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%

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