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Wednesday, September 5, 2007

Now Or Never

I’m short now. I used the strength of Friday and Tuesday to build my positions. For a while there we got into ‘oh shit’ territory yesterday but prices backed off. I did not want to see a close above 1490 on the S&P, and when it looked like we might tag 1500 I started to squirm a little. Today we need to turn south or the Bear case becomes almost impossible to defend. As it stands the charts aren’t so pretty. Downtrends have been violated and possible Inverted Head and Shoulder formations have been spotted in most indices. It is now or never.

Good thing then that we’ve got a few problems brewing:

BOE Eases Overnight Rate, Doesn't Aid 3-Month Costs (Update1): “The Bank of England offered to provide additional cash to reduce “unusually high” overnight interest rates and said it shouldn't be expected to take additional action to reduce three-month borrowing costs.”

Basically banks in the U.K. have refused or are unable to lend to each other, sending overnight rates screaming higher.

“This is the first time the U.K. central bank has taken steps to ease a squeeze in credit markets after the collapse of the U.S. subprime mortgage market made banks reluctant to lend to each other.

““They've done the minimum to make sure markets keep functioning without creating moral hazard,” said Tom Vosa, director of economic research at National Australia Bank in London, who used to work at the Bank of England. “They've essentially told banks that three-month rates aren't something they have to deal with. Those will return to normal when banks decide there aren't any more dead bodies out there.””

Moral hazard is a huge problem and the man to blame is Greenspan. The BOE is really trying to eliminate this problem and has therefore taken a pretty tough stance. I personally believe Bernanke is doing the same. He worked with Greenspan and learned the same lessons. Unlike Greenspan he currently has a clean slate. Take these issues into consideration and good lagging economic numbers and it becomes far less likely that Bernanke will cut rates in September than the market currently thinks…

MGIC, Radian Cancel Merger, Citing Market Conditions (Update1): “MGIC Investment Corp. and Radian Group Inc. ended merger talks, saying “market conditions” had scuttled a deal that would have combined two of the three biggest U.S. mortgage insurers.

“Both MGIC and Radian believe it is in their best interests to remain independent companies at this time,'' the insurers said today in a joint statement.””

Translation: We can’t raise cheap bling to finance this ridiculously priced merger.

Lehman Sees `Material Hit' to Europe Investment Banks (Update1): “European investment banks will take a “material hit” to earnings from writedowns associated with securities related to U.S. subprime loans, Lehman Brothers Holdings Inc. analysts said in a report.

The analysts are predicting post-tax writedowns of at least 15 percent to 25 percent of banks' “annualized level of first-half 2007 net profit,” they said in a report. Disclosure by European investment banks about their subprime-related assets, collateralized debt obligations, leveraged lending obligations and asset-backed commercial-paper conduits “ranges from the bad to the non-existent,” the analysts wrote.

Investment-banking divisions may see a 40 percent revenue decline in the second half, compared with the first six months of the year, as income from credit fixed-income trading drops and debt issuance and merger and acquisition activity slows, they said in the report.”

Read that carefully. We are talking double whammy here. First, we can expect serious declines in revenues. Second, we can expect serious losses on current investments and commitments.

Commercial Real Estate in U.S. Poised for 15 Percent Price Drop: “U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.

“People aren't willing to do deals right now,” said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., which has arranged financing for real estate purchases including the Lipstick Building in midtown Manhattan. “The expectation is that prices will come down.””

Pay attention to this. The credit contagion is spreading…

“Commercial mortgage rates have climbed as defaults rose in the subprime part of the residential real estate market. About six months ago, a 30-year commercial loan with 5 to 10 years of interest-only payments would have cost the borrower about 120 basis points more than the yield of the 10-year Treasury note. A similar loan would now cost about 160 to 200 basis points more than the 10-year Treasury's yield of 4.6 percent, data compiled by New York-based Cushman & Wakefield Sonnenblick Goldman show.”

What does that mean? What are the consequences? Well, foreclosure signs aren’t just for houses…

“The slump has ensnared New York developer Harry Macklowe, who may have to sell assets to pay back $3.4 billion of short- term debt. Macklowe bought seven Manhattan office towers from Equity Office in February for $6.7 billion concurrent with Blackstone's takeover of Zell's Equity Office.”

Simply put: This is a global margin call on EVERYTHING. This is how credit bubbles unravel.

ADP Employer Services Says U.S. Added 38,000 Jobs (Update1): “Companies in the U.S. added the fewest jobs in August since June 2003, a private report based on payroll data showed today.

The 38,000 increase was less than forecast and followed a revised gain of 41,000 for the prior month that was smaller than previously estimated, ADP Employer Services said.”

The most important number will be Octobers Non-Farm Payrolls report because that will include the first effects of the credit crunch that really got into full gear in August.

Global Economic Prospects `Less Buoyant,' OECD Says (Update3): “The Organization for Economic Cooperation and Development lowered its forecasts for economic growth and said they may be reduced further as borrowing costs rise following the collapse of U.S. subprime mortgages.

“Downside risks have become more ominous,” Jean-Philippe Cotis, the OECD's chief economist, said today in Paris.”

The damage is starting to become undeniable. Come to think of it, I haven’t heard the word ‘contained’ in while…

ABN Amro's Moute Cuts Stock Holdings on `Tip of Iceberg' Fears: “ABN Amro Asset Management's Francois Moute, one of Europe's best investors in U.S. stocks, started preparing for hard times more than a year before markets slumped in July.

Since early 2006 he has slashed his net holdings of shares from 85 percent of assets to 60 percent, the lowest he's allowed. Almost one-quarter of his $343 million U.S. Opportunities fund now bets against indexes. The only equities he is buying are those of U.S. commodity companies selling in emerging markets, such as oil-service provider Schlumberger Ltd.”

Some of the more nimble Financial Ninjas out there aren’t exactly surprised by the current turmoil and have long been positioned to benefit.

Nepal rocks: Airline sacrifices goats to appease sky god.
“The snag in the plane has now been fixed…”


Tom said...

Quite possibly the best post so far. I saw that goat article and simply thought, Ben must read this too. If you find the S&P soaring, perhaps a quick rending of a cheap yet "god approved" farm animal may ease your woes.

Ben Bittrolff said...

Who needs stop losses when a quick sacrifice to the 'trading gods' is all it takes?

I'd stay away from the goats and sacrifice a bull cuz I'm short. Also, its probably easier than sacrificing a belligerent bear...

"The snag in your portfolio has now been fixed..."

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