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Thursday, January 10, 2008

Capital One, Freddie Mac, Money Markets and Hammers

Its ‘hammer time’. Yesterday the markets staged an impressive recovery from the lows around 2:30 PM. The result was a rally in excess of 1% on all the indices and a powerful ‘reversal’ candle on all the charts. The Hammer candle.

Capital One Cuts 2007 Profit Forecast on Loan Losses (Update3): “Capital One Financial Corp., the largest independent U.S. credit-card issuer, reduced its full- year profit forecast by about 20 percent because of swelling loan losses in a weakening U.S. economy.

The company expects 2007 profit of about $3.97 a share, down from a previous forecast of about $5. The decline was caused by about $1.9 billion of loan-loss provisions and $80 million in legal reserves in the fourth quarter, McLean, Virginia-based Capital One said in a statement today.

Capital One dropped 3.5 percent in German trading to $41.85. Chief Executive Officer Richard Fairbank said last month that a slowing economy may cause bad debts to exceed $5 billion in 2008. Fallout from the collapse of the U.S. subprime mortgage market has led to more than $97 billion of writedowns and loan losses at the world's largest financial companies, eroding earnings and stock prices.”

Futures were doing fine before this came out pre-market. This is just another piece of evidence that the consumer isn’t doing well.

Freddie Mac's Strength Rating May Be Cut by Moody's (Update5): “Freddie Mac, the U.S. mortgage company that reported its biggest loss last quarter, may be downgraded by Moody's Investors Service because the damage from loan defaults could be worse than the ratings company expected.

Moody's said it may lower Freddie's financial strength rating from A-, the second-highest grade. The McLean, Virginia- based company's top Aaa senior long-term debt rating and the Prime-1 rating for its commercial paper or short-term IOUs won't be cut, Moody's said.

Chief Executive Officer Richard Syron has attempted to shore up Freddie Mac's finances by selling $6 billion of preferred stock, slicing its dividend in half and reducing its mortgage assets by $30.9 billion to $701.4 billion in the three months to Nov. 30. The government-chartered company may need to take similar steps again, Moody's said.”

In the end this little bit of tinkering won’t make a difference. Fannie and Freddie both have trillions of dollars sitting on a capital base of about $30 to $30 billion each. At some point the government will end up having to prop up both these guys.

Credit Default Swaps in Freddie were active early this morning, rising again…

Citigroup Gains on WSJ Report of Foreign Investment (Update2): “Citigroup Inc. rose in Germany and Japan after the Wall Street Journal reported that the biggest U.S. bank is seeking as much as $10 billion from foreign investors as mortgage-related losses deepen.

Merrill Lynch & Co., the largest brokerage, also is in talks with investors and may get $3 billion to $4 billion, the Journal said earlier today, without citing any sources. Citigroup has already received about $7.5 billion from Abu Dhabi and Merrill said last month that it's raising as much as $6.2 billion from Singapore's Temasek Holdings Pte. and New York-based money manager Davis Selected Advisors LP.

Banks and securities firms in the U.S. and Europe have turned to Asian and Middle Eastern governments for about $34 billion to prop up balance sheets battered by writedowns from the collapse of the U.S. subprime market. New York-based Citigroup and Merrill want to secure additional financing before they report the extent of their fourth-quarter losses next week, the Journal reported.”

When this mess finally settles out, Asia and the Middle East will end up owning a serious chunk of the American financial system.

Money-Market Rates Fall as Bank Action Eases Crunch (Update1): “Money-market rates fell for a ninth day, stoking optimism a squeeze on short-term credit is abating after central banks injected a record amount of emergency cash into the system.

The three-month euro interbank offered rate, or Euribor, dropped 1 basis point to 4.59 percent, the European Banking Federation said today. It was at a seven-year high of 4.95 percent on Dec. 12, when policy makers announced a concerted drive to defuse the logjam in interbank lending. The comparable pound rate fell 5 basis points to 5.6 percent, the lowest since April 2007, the British Bankers' Association said.

A surge in borrowing costs has eased since central banks responded to about $100 billion of losses at financial institutions on securities linked to U.S. subprime mortgages. Citigroup Inc. is seeking as much as $10 billion from foreign investors as its mortgage-related losses deepen, the Wall Street Journal reported today.

Rates “continue to drop due to the aggressive bank- liquidity injections and expectations of falling interest rates,” a Citigroup team led by Tom Fitzpatrick, New York-based global head of currency strategy, wrote yesterday. “It remains to be seen how successful the central bank injections will be but the initial signs are certainly quite encouraging.”

Things continue to stabilize in the credit markets. After eight straight days of declines, the major equity indices put in a bottom yesterday. They all look set to bounce. The failure of a bounce to materialize would lead to rapid deterioration in the markets as panic selling ensues.

Wednesday, January 9, 2008

Countrywide and Bankruptcy Rumours

Yesterday was dominated by Countrywide bankruptcy rumours and by AT&T announcing ‘softness’ in their consumer section. Let’s see what today brings.

Countrywide Loses Most Since 1987 on Funding Concern (Update5): “Countrywide Financial Corp. dropped the most since Black Monday in October 1987 in New York trading on speculation that it needs cash to continue operating its mortgage business.

Investors drove Countrywide shares down 79 percent last year on concern the company was suffering from a cash shortage. The company tapped emergency credit lines and got a bailout from Bank of America Corp. as the worst housing slump in 16 years fueled bets that Countrywide might seek bankruptcy court protection.

Bank of America, the nation's second largest bank, invested $2 billion in Countrywide in August. The preferred shares it acquired can be converted into common stock at $18 each and pay a 7.25 percent dividend, according to a regulatory filing at the time. Based on Countrywide's share price today, Bank of America's investment has lost 70 percent of its value. That excludes a $36.25 million quarterly dividend the lender was obligated to pay Bank of America, regulatory filings show.”

Well, the consequences of Countrywide’s bankruptcy would indeed be serious and far reaching. The absence of the largest provider of residential mortgages in the US would leave one massive gaping hole.

These rumours of bankruptcy are probably premature. That’s not to say it won’t happen…

As an aside, the $2 billion investment by Bank of America is now worth 70% less. I would not want to be the guy responsible for that decision…

Countrywide Says Mortgage Loans in December Exceeded Forecasts: “Countrywide Financial Corp., the biggest U.S. mortgage lender, said home loans in December were a better-than-forecast $24 billion.

“Our fourth quarter ended with a number of positive operational trends,” President and Chief Operating Officer David Sambol said today in a statement the Calabasas, California-based company distributed through PR Newswire.”

That’s actually pretty solid.

AT&T Drops Most in 5 Years on Consumer `Softness' (Update2): “AT&T Inc. dropped the most in almost five years in New York trading after Chief Executive Officer Randall Stephenson said slowing economic growth led to ``softness'' in the home phone and Internet businesses.

The shares fell 4.6 percent, helping to spark a broader decline in U.S. stocks, after Stephenson said AT&T is disconnecting more home-phone and high-speed Internet customers for failing to pay their bills.”

This is a direct consequence of the jump in foreclosures.

“The disconnects in the home-phone business, which accounts for about a fifth of sales, have put more pressure on Stephenson, who became CEO in June. Last year, he relied on the popularity of wireless handsets such as Apple Inc.'s iPhone to fuel growth, helping to make up for losses of home-phone customers.

AT&T lost 468,000 primary home-phone lines in the three months ended in September, Stephenson's first full quarter since taking the CEO job. The company ended the third quarter with about 32 million primary residential phone lines, a 3.9 percent decline from a year earlier.”

Basically it was the CFC rumours and the AT&T announcement that unleashed the sellers yesterday.

CDO Sales Fall First Time in Three Years, Morgan Stanley Says: “Sales of collateralized debt obligations fell for the first time in three years as surging U.S. subprime mortgage defaults prompted investors to buy only the safest debt, according to Morgan Stanley.

CDO sales fell 10 percent to $453 billion in 2007 from a year earlier, Morgan Stanley analysts, including New York-based Vishwanath Tirupattur, wrote in a report published yesterday. This is the first time issuance of the securities, which repackage assets such as mortgage bonds and buyout loans, declined since 2003, the analysts said.

It was the worst year for CDO downgrades as 4,389 securities had their credit ratings cut, according to Morgan Stanley. More than 76 percent of the downgrades were on CDOs made up of bonds backed by assets.”

CDO sales should continue to fall through 2008. This should result in a tightening of credit and a general reduction in liquidity.

Tuesday, January 8, 2008

Technology, Intel and a Bounce

Gold Climbs to Record on Higher Oil Prices, Weakening Dollar: “Gold rose to a record as higher crude oil and a weaker dollar spurred demand for the metal as a hedge against inflation.

Gold is off to its best start to the year since 1980. Oil rose to a record $100 last week, U.S. warships were confronted by Iranian boats over the weekend, and the dollar today fell against 15 of 16 major currencies.

"The U.S. dollar is weakening and oil has picked back up,'' said David Thurtell, a metals analyst at BNP Paribas SA in London. ``There are a lot of supportive reasons to buy and not many reasons to sell.''

Gold for immediate delivery rose as much as $17.84, or 2.1 percent, to $876 an ounce in London, exceeding the previous record of $868.89 set Jan. 3. The metal traded at $874.90 as of 12 p.m. in London. Gold for February delivery rose as much as $16.80, or 2 percent, to $878.80 an ounce on the Comex division of the New York Mercantile Exchange.

The metal last reached an all-time high in New York in 1980, when the dollar was weakening, oil prices were rising and the U.S. and Iran were at loggerheads. U.S. Navy warships were approached by Iranian ``fast boats'' in the Straits of Hormuz on Jan. 6, the U.S. Defense Department said yesterday. The straits are the sea route for about a quarter of the world's oil.”

Aaaah, those silly Iranians: “I am coming at you; you will explode in a couple of minutes.”

That is one of the geopolitical catalysts that, should it snowball, would light a fire under crude. However, this kind of saber rattling is nothing new and as long as it doesn’t evolve it can generate trading opportunities.

U.K. Retail Sales Gains Slow, HBOS House Prices Fall (Update3): “U.K. retail sales rose at the slowest pace since March 2006 and house prices declined for the first quarter in seven years, adding to the case for the Bank of England to cut interest rates again.

Revenue at stores open at least 12 months increased 0.3 percent from a year earlier in December, the British Retail Consortium said in London today. Home values fell 0.8 percent in the fourth quarter, the first drop since 2000, according the HBOS Plc, the country's biggest mortgage lender.

Signs of slower economic growth prompted the Bank of England to reduce the benchmark interest rate from a six-year high last month after borrowing costs rose because of the collapse of the U.S. subprime-mortgage market. Retailer Next Plc says business is already slowing, and HBOS said today the Bank of England will need to cut rates twice more this year.”

Nothing unexpected there.

Citigroup May Take $16 Billion Subprime Writedown, Merrill Says: “Citigroup Inc. may post a larger loss than previously estimated because the biggest U.S. bank may have to take a $16 billion writedown in the fourth quarter, Merrill Lynch & Co. analyst Guy Moszkowski said.

New York-based Citigroup may post a loss of $1.43 a share in the fourth quarter, almost twice the previous estimate of 73 cents, Moszkowski wrote in a note to clients today.

Writedowns at Bear Stearns Cos. and Lehman Brothers Holdings Inc., whose fiscal year ends a month earlier than Citigroup in November, suggest ``substantial deterioration in the value of the underlying securities as well as some hedge breakage,'' Moszkowski wrote.

``Further, overall fixed-income trading results were abysmal at all most November year-end firms and likely worsened in December,'' he wrote.”

The first quarter of 2008 is going to be pretty nasty.

Monday, January 7, 2008

$100 Oil? $200 Oil!

Oil $200 Options Rise 10-Fold in Bet on Higher Crude (Update2): “The fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of the year.

Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. The contracts, the cheapest way to speculate in energy markets, appreciated 36 percent since early December as crude futures reached a record $100.09 on Jan. 3.”

While that may indeed occur, I believe it would take a geopolitical event to act as a catalyst now. The economic slowdown in the US and Europe can no longer be denied or glossed over. The only thing left to debate is the severity of the slowdown. Arguments now revolve around how long the recession will take and how deep it will cut. This will ultimately adversely affect the price of all commodities including crude.

When oil tagged $100 it was less than enthusiastically. It actually took several tries and quite some time intraday. $100 also did not suck in any new buyers. I’m short @ $99.50 with a tight stop. My first profit target is around $92.50 and then my second around $90. A pullback even to $90 would not dent the long run Bulltrend.

The MACD did not confirm the move to $100 and prices are now overbought.

Oil Falls on Forecast of Record-High Temperatures in East U.S.: “Crude oil fell for a third day on forecasts for temperatures near record highs for this time of year in the eastern U.S., cutting demand for heating fuel.

Temperatures may be as much as 30 degrees Fahrenheit above normal from the Great Lakes to the Atlantic coast through Jan. 9, according to forecaster Accuweather. Oil fell more than $1 a barrel on Jan. 4 on concern that energy demand will slow after U.S. unemployment rose to a two-year high.”

This warm spell also helps.

“Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures in the week ended Jan. 1, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 87,046 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 34,199 contracts, or 65 percent, from a week earlier.”

Yet another reason to go the other way. When oil hit $100 it didn’t unleash a short covering burst and it didn’t suck in new longs because the shorts aren’t in big positions yet and the longs looked maxed out.