At Craven Capital, we love days like yesterday.  Stocks down.  Volatility up.  We wake up. We pay attention.   Maybe there is an opportunity to buy the stock we like at the price we want?  Or maybe there’s an opportunity to buy back a covered call at a tidy profit…or sell a fearful investor a put on a stock that we would like to own but which is not quite at the price we’d like to own it…yet.

Dear reader…by now we should all realize that the only certainty is more uncertainty.  Accept that and you’ll rest easier.  Prepare for it and you’ll rest easier still.  Take advantage of it and you’ll be sleeping like a baby.

So…we were thinking…why would Moody’s take the hatchet to all those nice banks?

What could possibly be wrong?  Maybe we could understand the Euro banks being taken out to the woodshed because the Eurocrats have not thrown enough money at them yet.  But the US banks…my God…they must be flush with cash.  After all, Ben and the boys and girls at the Fed have thrown 4 trillion their way over the past 30 months or so.  What are they so worried about?

How about a hint….maybe it has something to do with the dirty “D” word.  Maybe the Moodys have the blues about the derivatives exposure of these banks.  So, let’s look at some big, big numbers…(these are approximations but you’ll get the message)

US GDP – 15 Trill.
Stock Market – 15 Trill.
Bond Market – 51 Trill.
Global GDP – 68 Trill.
Derivatives Market – 228 Trill. (that’s $228,000,000,000,000…a lot of zeros)

If you want to see an excellent visual representation of what all those zeros look like go to:

http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html

My friends, there is not enough money in the world to cover the notional value of all these transactions. And the way they are set up…if one topples, they all topple.  Think of two drunks leaning against each other.  While they are both supporting each other, they will not fall over…but that does mean that they are now sober.  When one falls, the other will inevitably topple over too…probably on top of the first one.  Think of the global banks..as a conga line of drunks…with Ben Benanke, the ever willing barman, ready to pour some more vodka into the punch bowl.  This party will not end well.

And speaking of Ben…is the Fed’s love affair with Goldie over?  Why…it was only a few days ago that Jan Hatzius, Goldman’s chief economist was sprouting about the imminent inevitability of QE3 in June…usually a pretty good indicator for the markets.  But Ben was buying none of this pillow talk and decided that the only fun from this FOMC meeting would be to keep playing Chubby Checker’s twist music for another six months.  Goldie was not amused and countered yesterday with a call to short the S&P.  Forget women…apparently hell hath no fury as a banker scorned.  The market responded accordingly with its precipitous drop…to our unbridled glee.

But I suspect that the Fed and Goldie will make up.  They have to.  They are so mutually dependent.  They need each other.  Where would the Fed and Treasury get all their staff from if not from Goldie.  So they will make up.  And when Jan says to expect QE3 before or at the next FOMC meeting in August, you might want to take notice.  We will.

I was thinking how sad it was that the stock market…and the much wiser bond market…and all other markets for that matter…are now totally Fed propelled.  Little things like earnings and profits don’t matter.  It’s all about the Fed.  So today…as we wait for the all wise and all knowing Ben Bernanke to opine (after all, it’s only his opinion of what is best for all of us) the market will rise or fall based thereon.  That is very silly…but that is the way of things in the world of crony capitalism when the politicians and economists conclude that they know far more than the business people actually doing business and running businesses.  Of course, you just have to tolerate C-Span for a brief dose of congressional committee hearings to realize that the reality is far different.  But such is the world we live in as the battle for the heart and soul of capitalism rages back and forth.  And rage it will…at least until the politicians are not only broke, which they are now…but also out of credit…which will surely happen…just as day follows night.  In the interim, we will continue to simply look to take advantage of what the Fed inspired (or conspired) market gives us.

As for my prediction on the Fed today?  I predict that Ben Bernanke will look nervous…because he is!

Well…at least it seems that way.  This morning I was thinking about the 120 billion euros the rest of Euroland (read….Germany and France) is giving to Spain to bail out their ailing banks.

Don’t you ever wonder where that money comes from and where it goes…and why?

Well here are the answers in very simplistic terms (remember we at Craven Capital are simple folk):

1. The money is printed (digitally at first but some is ultimately circulated as paper…that’s where the tress come in).   So this money is an accounting fiction, nothing more.  It was never the result of prudent saving or smart investing or the result of efficient manufacturing or even the conversion of something real like gold.  It is created by bureaucrats with the modern age equivalent of the good old printing press.

2. The money goes to shore up the capital reserves of banks in Spain so that they don’t collapse as their customers get scared, withdraw their savings and put them under the bed…or send them to a “safer” country…like Germany (sense a bit of a merry go round here?).

3. The banks need the money because they made stupid loans to over-extended developers who sold overpriced condominiums to investors who thought they could make a quick..or a slow buck by on-selling to another fool.  So, just like in the good ol US of A, when the value of those condominiums dropped because, quite simply, there were more sellers than buyers, the value of the bank’s underlying collateral collapsed.  The remaining developers went broke (the smart ones were long gone with their profit), the property owners defaulted, the new buyers evaporated and the banks were left holding assets that were worth a lot less than the money they had loaned on them.  The 120 billion euros will go to help fill this vacuum.

The problem is that there is still a lot more vacuum to be filled.  So, look out below…and keep a very close eye on Italy.

The good news is that there may be even better seaside bargains in Spain to come.

But if you fancy a lovely Spanish casa del mar, don’t forget that while Spain is Europe’s 4th largest economy by GDP, it has only been a real democracy for the past 35 years…after a horrible civil war in the late 30s and the equivalent of martial law thereafter.  With 50% unemployment among its highly spirited youth, anything is possible.

What’s that old saying about history repeating…or rhyming?