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Thursday, August 30, 2007


On Monday all my charts had absolutely perfect setups and I had absolutely perfect fills. On Tuesday my trailing stops chased the market down as all equity indices went into a quiet, orderly drop. Yesterday, I died a little inside as each and every single one of my beautiful short positions was blown out. I watched my monster P&L shrivel up faster than my penis in cold water and now the charts don’t look so good anymore.

U.S. Economy Expanded at a Revised 4% Annual Rate (Update2): “The U.S. economy expanded in the second quarter at the fastest pace in more than a year as exports surged and business spending accelerated.

Growth was revised up to a 4 percent annual rate, according to a report today from the Commerce Department in Washington. The median forecast of economists polled by Bloomberg News was 4.1 percent. The economy grew at a 0.6 percent pace in the first quarter.”

This makes a rate cut damn near impossible.

Bank of England Loaned 1.6 Billion Pounds at 6.75% (Update5): “The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market.

The money lent at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower.”

Liquidity problems are still out there. But the real question is this: Was this one single institution or a number of them?

“It is a massive number, but it's important to understand if it is a single institution or a number of borrowers,” said Alan Clarke, an economist at BNP Paribas SA in London. “It's not clear if this is going to increase people's risk aversion.”

Freddie Mac Net Drops on Provision for Housing Slump (Update2): “Freddie Mac, the second-biggest U.S. mortgage finance company, reported second-quarter profit fell 45 percent after setting aside $320 million for losses from the worst housing slump in 16 years.

Net income declined to $764 million, or $1.02 a share, from $1.4 billion, or $1.93, a year earlier, McLean, Virginia-based Freddie Mac said today in a statement. Revenue dropped 4.8 percent to $2.26 billion.”

A 45% drop is pretty big. But, these numbers lag. The worst is yet to come. Wait for the rate resets later this year. The consequences of those resets are going to be brutal.

Goldman, Wall Street Firms' Estimates Cut by Lehman (Update2): “Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.”

Classic. Analysts at the top of their game. Again.

H&R Block May Close Loan Business as Losses Double (Update1): “H&R Block Inc., the biggest U.S. tax- preparation company, may stop making new loans through Option One Mortgage Corp. to revive a planned sale of the unit after losses more than doubled.

H&R Block may sell just Option One's loan-servicing business to hedge-fund manager Cerberus Capital Management LP, which agreed in April to purchase the entire subsidiary, the Kansas City, Missouri-based company said today in a statement. The deal may also fall apart, H&R Block said.”

Looks like this deal might be in serious trouble… and there are about $300 billion in deals still pending…

U.S. Stocks Retreat; Goldman, Merrill, Wal-Mart Lead Decline: “U.S. stocks fell on concern rising credit costs will reduce profit at securities firms and slow the economy's six-year-old expansion.”

Yes, that would make sense. Cheap, plentiful credit was the fuel for this expansion. Worse, it was also the oxygen. Reduce it significantly, and no amount of growth from India or China will ‘soften’ the blow. (Especially since enough of their growth is export based, that a recession over here will put the brakes on pretty hard over there too.)


Anonymous said...

Great analysis. I little piece of me dies everytime you call a bear market.

Ben Bittrolff said...

Thanks. I'm not a perma-Bear. I call it the way (I think) it is. I combine fundamental macro analysis (hence the links to important financial and political developments) with technical analysis (hence the charts). I look for high probability setups, strap on my helmet and pull the trigger.

We are in a bubble. Last time it was tech. This time it is credit. This one is far larger and far worse. Just like last time, the average fatty will rage when you tell them their overpriced stocks have to be revalued. Just like last time nobody believes in ECONOMIC CYCLES anymore and just like last time things will be 'cheap' all the way down.

Trade very carefully. Volatility (in both directions) will stay elevated and even rise further before this all shakes out...

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