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Friday, October 19, 2007

Somebody Start A SIV Implode-o-meter

The first few SIVs are unable to pay back all their debt.

Cheyne Finance SIV Won't Pay Debt as It Falls Due (Update2): “Cheyne Finance Plc, the structured investment vehicle managed by hedge fund Cheyne Capital Management Ltd., will stop paying its debts, a receiver from Deloitte & Touche LLP said.

Deloitte is negotiating a refinancing of the SIV or a sale of its assets, according to an e-mailed statement today. Cheyne Finance's debt with different maturities will now be pooled together, rather than shorter term debt being repaid sooner, Neville Kahn, a receiver from Deloitte said today in a telephone interview.

“It doesn't mean we have to go out and fire-sell any assets, quite the opposite in fact,” Kahn said. “The paper that falls due today or tomorrow won't be paid as it falls due.””

I have drawn up a letter in the same spirit that I will send to my creditors. It goes something like this:

Dear Credit Card Company/Mortgage Company/Bank

I have decided to pool together my debt of different maturities.
I will no longer be making payments as they fall due.
I trust that you will not liquidate my assets.
Thank you for your continued support and patience.

“Moody's cut the SIV's top credit ratings on Oct. 4 by as many as 12 levels to Ba3, three steps below investment grade, citing the deterioration in the market value of Cheyne's portfolio.”

To get cut 12 levels is pretty crazy. It also reveals that Moody’s ratings aren’t worth much.

Rhinebridge Commercial Paper SIV May Not Repay Debt (Update1): “Rhinebridge Plc, the IKB Deutsche Industriebank AG structured investment vehicle that has lost about half its value, is unlikely to repay all its debt.

Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to pay back debt coming due, the Dublin-based fund said in a Regulatory News Service release. Rhinebridge had $1.2 billion in commercial paper outstanding as of Oct. 5, according to Fitch Ratings.”

A mandatory acceleration event means that all of the SIV’s debt is now due. Immediately. (Good luck with that.)

“Rhinebridge, Cheyne Finance Plc and other SIVs, which borrow from the short-term commercial paper market to fund purchases of asset-backed securities, have struggled as investors retreated from all but the safest debt. SIVs have dumped about $75 billion of assets as a result, prompting U.S. Treasury Secretary Henry Paulson to organize an $80 billion bank-run fund to buy some of the securities.

In August, Rhinebridge had to sell $176 million of its assets to cover obligations, and as much $320 billion of holdings by SIVs worldwide may be dumped if the market doesn't improve.”

Liquidating even a fraction of $320 billion into a market that has gone ‘no bid’ would be devastating to say the least.

Gordian Knot's Sigma Raises $20 Million in Bond Sale (Update2): “Sigma Finance Corp., the largest structured investment vehicle according to Standard & Poor's, raised $20 million in a sale of two-year bonds.”

The headline and the first paragraph of the release sound optimistic. You may think to yourself that at least some of the SIVs are able to raise money. Maybe this will all blow over. Take a closer look…

“Sigma had more than $52 billion of senior debt outstanding in August, according to a Standard & Poor's report. The sale this week is ``part of Sigma's ongoing funding program,'' Nicholas Sossidis, who co-founded Gordian Knot said in an interview today.”

So Sigma, ‘the largest structured investment vehicle’ with $52 billion in outstanding debt was able to raise a token $20 million.

Gordian Knot: Any very difficult problem; insoluble in its own terms

A most excellent choice of name. Talk about foreshadowing.

Asset-Backed Commercial Paper Drops for 10th Week (Update3): “U.S. asset-backed commercial paper shrank for the 10th straight week, extending the worst slump in seven years and underscoring the depth of Treasury Secretary Henry Paulson's challenge to revive the market.

The short-term debt maturing in 270 days or less fell $11 billion in the week ended yesterday to a seasonally adjusted $888 billion, according to the Federal Reserve in Washington. The broader commercial paper market was little changed at $1.87 trillion.

Businesses rely on commercial paper, usually maturing in three months or less, for expenses including payroll and rent. Among them are structured investment vehicles, or SIVs, such as those run by hedge funds Cheyne Capital Management Ltd. in London and TPG-Axon Capital Management LP in New York. The SIVs sell commercial paper to fund purchases of other securities such as finance company bonds and mortgage securities.”

As long as the SIVs can’t get financing, ABCP outstanding will continue to shrivel up.
“The gap between the yield on asset-backed commercial paper and the Fed funds rate signals investors still have concerns about the short-term debt.”

Yes… and so they should.

“Investors fled asset-backed securities on concerns they may contain subprime mortgages. The retreat left some companies unable to roll over their commercial paper, forcing them to sell assets.”

The housing market isn’t exactly getting any better…

SIV Concerns Trigger Worst Week for Credit in Three Months: “Credit-default swaps rose the most in three months this week as plans for an $80 billion fund to rescue structured investment vehicles failed to prevent two funds warning they may be unable to repay all of their debt.

The iTraxx Europe index of 125 companies with investment- grade ratings increased as much as 7.5 basis points to 37.25 basis points including a 2.25 basis-point jump today, JPMorgan Chase & Co. prices show. The CDX North America index climbed 8 basis points, the most since Aug. 3. The indexes measure the cost to protect against debt defaults and rise when perceptions of credit quality worsen.”

To make matters worse, the Super SIV bailout has been met with little enthusiasm from some serious players. Bill Gross at PIMCO ridiculed M-LEC… and now Greenspan isn’t exactly endorsing the project.

“Greenspan said it wasn't clear to him that the benefits to be gained from such a fund exceeded the risks, according to the report in Emerging Markets, a newspaper that is published during meetings of the International Monetary Fund, the World Bank and regional development banks.”

Could it be that the Super SIV might flop?

Philadelphia Fed's Factory Index Dropped to 6.8 (Update3): “The pace of manufacturing in the Philadelphia area cooled in October, signaling economic growth is slowing.

The Philadelphia Federal Reserve Bank's general economic index fell to 6.8, from 10.9 in September, the bank said today. Readings greater than zero signal expansion.

The report showed sales fell by the most since September 2006, orders slowed and inventories dropped. Gains in exports and lean stockpiles will keep factories running even as consumer and business spending cool, economists said.”

Weak, but leading economic indicators increased.

U.S. Leading Economic Indicators Rose in September (Update1): “The index of leading U.S. economic indicators rose in September as stock prices climbed and fewer Americans lost their jobs, a private report showed.

The Conference Board's gauge rose 0.3 percent, as forecast, after a 0.8 percent August decrease that was larger than previously estimated, the New York-based group said today. The measure points to the direction of the economy over the next three to six months.”

Unfortunately, since stocks turned in the biggest September advance since 1998 too much of the increase in the indicator is a result of equity performance… and can just as quickly be undone.

Note that the decrease in August was larger than previously estimated.

“The rise in the S&P index added 0.11 percentage point to leading indicators. Stock prices rose to a record this month.

First-time applications for jobless benefits, which fell to a weekly average of 313,300 in September from 323,200 in August, also contributed 0.11 percentage point to the leading

.Which brings me to yesterday’s claims numbers.

U.S. Jobless Claims Rose 28,000 to 337,000 Last Week (Update1): “The number of Americans filing first-time claims for unemployment benefits increased more than forecast last week, adding to concern the job market is softening.

Initial jobless claims rose by 28,000, the biggest jump since February, to 337,000 in the week that ended Oct. 13, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, gained to 316,500 from 310,500.”

Not yet a trend, but ‘biggest jump since February’ isn’t encouraging. To be fair, this data series is quite volatile.

Wachovia Net Drops 10% on Mortgage, Loan Writedowns (Update2): “Wachovia Corp., the bank that's spending more on acquisitions than its biggest competitors, reported earnings that missed analyst estimates after $1.3 billion in writedowns for mortgage-backed securities and loans for leveraged buyouts.

Net income fell 10 percent in the third quarter, the first decline in six years, to $1.69 billion, or 89 cents a share, from $1.88 billion, or $1.17, a year earlier, the Charlotte, North Carolina-based company said today in a statement. Excluding merger costs, Wachovia earned 90 cents a share, compared with the $1.04 average estimate of 19 analysts surveyed by Bloomberg.”

Another bank, another miss.

Google can’t hold up the market by itself… at least not for long...

Thursday, October 18, 2007

Bacterial Pneumonia

Turns out you sleep a lot when you have Bacterial Pneumonia. Who knew. Writing blog entries early in the morning then just isn't a priority.

Anyways, I will have a large pile of charts and a solid post after market close. Bank of America has set the trading tone thus far this morning. The financials are leading the charge lower so watch XLF. The homebuilders are also hitting new lows. These are all ill omens for the Bulltards...

Bank of America Earnings Drop on Loan Writedowns (Update3): "Bank of America Corp., the second- largest U.S. bank, said profit declined 32 percent in the third quarter, more than analysts estimated, after trading losses, defaults and writedowns cost almost $4 billion.
Net income fell to $3.7 billion, or 82 cents a share, from $5.4 billion, or $1.18, a year earlier, the Charlotte, North Carolina-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was $1.06 a share. Bank of America shares fell more than 3 percent after the earnings announcement."

Tuesday, October 16, 2007

Super SIV? Super Bailout!

The news of the Super SIV bailout scam coupled with new record oil prices less than impressed traders and heavy profit taking was the result.

Oil Rises to Record on Concern Turkey May Attack Northern Iraq: “Crude oil rose to a record near $88 a barrel on concern Turkey may attack Kurdish militants in Iraq and disrupt oil shipments.

Turkish Prime Minister Recep Tayyip Erdogan said he expects the country's parliament will tomorrow approve a possible military incursion into Iraq, holder of the world's third-largest reserves. Iraq today announced plans to sell 6 million barrels of Kirkuk crude that's shipped through a pipeline from its northern province.”

Today we have another scary oil headline. It does look like Turkey is deadly serious.

Turkish Dollar Bonds Decline on Concern of Conflict With Iraq: “Turkish bonds fell the most in almost six weeks on growing concern lawmakers may authorize the military to pursue Kurdish militants in Iraq.

The government's resolution would empower Prime Minister Recep Tayyip Erdogan to order a possible military strike within a maximum period of one year.”

Paulson Credit Push Earns Jeers From Free-Marketers (Update1): “U.S. Treasury Secretary Henry Paulson's plan to shore up asset-backed commercial paper is drawing criticism from free-market advocates, who say it risks shielding banks from the consequences of poor decisions.

Paulson's team brokered negotiations between the country's biggest banks that led to the creation yesterday of a fund to help revive the asset-backed commercial paper market. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to establish the fund after a month of talks with Treasury aides.”

Like all bailouts, it creates a moral hazard problem. I'm unhappy with situations like these.

D.R. Horton's Orders Fall 39 Percent on Mortgage Woes (Update2): “D.R. Horton Inc., the second largest U.S. homebuilder, said orders fell 39 percent in the fiscal fourth quarter as banks restricted lending.

Orders for the period ended Sept. 30 dropped to 6,374 from 10,430 a year earlier, the Fort Worth, Texas-based company said today. The value of houses ordered declined 48 percent to $1.3 billion and the cancellation rate was 48 percent.”

No bottom in sight. Not even close. In fact the housing market has deteriorated pretty dramatically, particularly in the last couple of months.

“The reduced availability of certain mortgage products such as Alt-A loans and tighter underwriting guidelines has reduced the pool of available homebuyers.”

Most of these mortgage products will never be available again at all, or with much greater scrutiny. Either way, ‘the pool of available homebuyers’ has been significantly and PERMANENTLY reduced by these tighter credit conditions. So unless the lenders go back to lending wildly again, residential real estate prices won’t snap back for many long years.

Bernanke Says Housing to Remain `Drag' on U.S. Growth Into 2008: “Federal Reserve Chairman Ben S. Bernanke said the housing industry's contraction will be a “significant drag” on U.S. growth into next year, though evidence of a broader impact on spending is limited.

Nothing new here.

Cambridge Place Limits Fund Redemptions, Cuts Fees, Person Says: “Cambridge Place Investment Management LLP, the hedge-fund manager that lost its European investment chief last week, is restricting withdrawals and reducing fees after subprime-related declines, a person with knowledge of the matter said.

The London-based firm is limiting redemptions from its flagship SCF 1000 Fund, which is down 16 percent this year, and the SCF 500 Fund, said the person, who declined to be identified because the information is private. Cambridge Place also plans to limit withdrawals from the SCF 1500 Fund, the person said.”

The hedgies are still struggling.

Ericsson Falls to 3-Year Low as Profit Misses Target (Update3): “Ericsson AB, the world's biggest maker of wireless networks, dropped as much as 29 percent to a three-year low in Stockholm trading after saying third-quarter profit and sales trailed its forecasts.

Chief Executive Officer Carl-Henric Svanberg said lower demand for network upgrades in North America and Europe hurt margins and fourth-quarter revenue may decline. Svanberg, who told investors on Sept. 11 that industry growth was “strong,” said today he was “humble, concerned and disappointed.””

Heads up: Ericsson is down 25% pre-market. IBM and Intel report after the close today.

Please spend some time reading up on the new Super SIV as it is very important development and will have long run consequences. Here is some quality analysis:

Mish Super SIVs - A Fraudulent Attempt at Concealment
Nacked Capitalism The Smoke and Mirrors SIV Rescue Plan
Zeitenwende Wall-Street plant Notfall-Fonds
Calculated Risk Musical SIVs
WSJ Deal Journal A Bailout for Citigroup?
Lee Adler The Worst Is Over ?
WSJ Opinion House of Paulson?
Paul Kasriel MLEC - Trying to Turn a Sows Ear into a Silk Purse

Monday, October 15, 2007


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?