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:
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…
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.
“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.
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.
The Financial Ninja is a collection of my thoughts and opinions about current economic and market conditions. These are not buy and sell recommendations. Use your head and do your own research. This is a forum to stimulate discussion and debate.
I started trading during the tech bubble when I was still in high school. My trading has financed my education and I have since completed a BA in Economics and an MBA with a concentration in Finance. I have worked as both a proprietary equity and fixed income derivatives trader.