Mess-o-potemia

Turkey, a NATO ally, has positioned itself to invade Northern Iraq. Their military has been on the move for months now, shuffling around on the border. The activity was mostly ignored by the media because it was explained away as just ‘posturing’. It does NOT look like posturing now. (Iraqi villages on the border came under fire Sunday night from the direction of Turkey.)

Crude Oil Rises to Record on Turkey Border Tensions With Iraq: “Crude oil rose to a record above $85 a barrel as tensions on the Turkey-Iraq border increased concern that supplies may be threatened as global stockpiles decline.

Turkish lawmakers will vote this week on allowing military attacks within a year against Kurdish rebel bases in the north of Iraq, which has the world's third-largest oil reserves. Global fuel inventories fell below a five-year average last month, a period when they typically rise, the International Energy Agency said Oct. 11.”

Gates Accepts U.K. Iraq Drawdown; Marines Mull Shift (Update1): “U.S. Defense Secretary Robert Gates expressed support for the U.K.'s plan to reduce its forces in Iraq to 2,500 by next year while declining to say whether American officials would accept a further British drawdown.

During a joint news conference in London with U.K. Defense Secretary Des Browne, Gates also confirmed that U.S. Marine Corps staffers are “thinking about” a plan to pull all Marines out of Iraq and transfer them to Afghanistan.”

With everybody is abandoning Iraq as swiftly as possible and the US is ‘mulling it over’, Turkey is merely positioning itself to step into the void before other regional powers, such as Iran, can. Mess-o-potemia…

Citigroup Net Falls 57 Percent on Fixed-Income Losses (Update2): “Citigroup Inc., the U.S. bank that shook up top management last week after $6.5 billion of debt- trading and loan losses, said third-quarter earnings fell 57 percent.

Net income declined by the most in three years to $2.38 billion, or 47 cents a share, from $5.51 billion, or $1.10, a year earlier, the New York-based company said today in a statement. Profit exceeded analysts' estimates of 44 cents a share, according to a Bloomberg survey. The company told investors Oct. 1 that third-quarter earnings dropped 60 percent.”

The losses and writedowns are bigger than the company estimated even just two weeks ago.

Citigroup, Bank of America Plan $80 Billion CP Fund (Update2): “Inc., Bank of America Corp. and JPMorgan Chase & Co., the three biggest U.S. banks, agreed to set up a fund of about $80 billion to help revive the asset-backed commercial paper market, according to people familiar with the discussions.

An announcement may come as soon as today, said the people who declined to be named because the decision isn't public. The fund will buy assets from structured investment vehicles, units set up to finance purchases of securities such as bank bonds and mortgage debt.

Other banks may join the fund, which would help SIVs avoid selling their $320 billion in holdings at fire-sale prices, further roiling the credit markets, the people said. The Treasury Department in Washington initiated the talks between the banks after a shutdown of the commercial paper market left SIVs and other sellers unable to borrow, forcing sales of about $75 billion of assets.”

This fund will be called the Master Liquidity Conduit (MLEC). The fund will only buy AAA or AA (Aaa or Aa) rated securities. This is supposed to prevent a credit crunch inspired fire sale of assets in SIVs that no longer are able to roll over their short term financing.

Since investors no longer want to be bagholders, the Treasury department thinks it’s a good idea to organize this bailout. Think long and hard about this: Investors, driven by the profit motive, are no longer willing to finance the SIVs at any price. The banks, such as Citi have refused to honor the guarantees of liquidity they made to those SIVs. Why does nobody want to touch these things AT ALL?

Treasury Sales May Rise 50% as Deficit Suddenly Grows (Update2): “Sales of Treasuries may increase for the first time since 2004 as the U.S. federal budget deficit expands, jeopardizing the biggest bond rally in five years.

Government auctions of bills, notes and bonds in the fiscal year that started this month may rise more than 50 percent to $220 billion, according to UBS Securities LLC, one of the 21 primary dealers that underwrite Treasury auctions. The first decline in corporate tax revenue since 2003 increased the shortfall by 12 percent to $162.8 billion for the year ended in September, from $144.8 billion in the 12 months through April.”

The economy is slowing for real. How do we know? “The First decline in CORPORATE tax revenue since 2003…” Since these numbers lag significantly, you can be assured that this slowdown occurred many months before the August credit crunch. Factor in the recent massive drops in profitably among the largest financial firms that have announced so far this quarter, and tax revenue can only drop further.

As an aside, sales taxes are falling across the U.S. as the housing slump affects sales tax collections.

Meanwhile, over at MarkIt, the ABX indices are taking another dive. The index is defined as follows:

“ABX.HE indexes track credit default swaps (CDS) on subprime mortgage-backed securities. CDS are derivatives that provide insurance against default. Mortgage-backed securities are home loans that have been packaged up together and sold as a single security.”

The BBB and the A are the credit ratings for the instruments that make up the index.

Here is an explanation from MarketWatch (back in February): Subprime mortgage derivatives index plunges

These indices collapsed in February, and then again in July see graphs. The graphs start in July and look like they are about to go into free fall again.

The first chart is the ABX-HE-BBB- 07-2
The second chart is the ABX-HE-A 07-2

Here we go again?