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Friday, March 7, 2008

Still More Liquidity

Fed Boosts Lending to Banks as Credit Rout Continues (Update3): “The Federal Reserve plans to boost the amount of loans it plans to make to banks this month to offset a deepening credit crunch threatening to tip the U.S. economy into a recession.

The central bank increased the size of auctions of four- week funds to banks planned for March 10 and March 24, to $50 billion each from $30 billion previously. The Fed also said in a statement in Washington today that it will make $100 billion available through repurchase agreements.

The decision is the central bank's latest attempt to reduce the threat to the economy from banks curtailing loans to companies and households. Banks and securities firms have posted losses exceeding $181 billion since the start of last year as the impact of surging defaults on subprime mortgages rippled through world financial markets.”

Not familiar with the TAF (Term Auction Facility)? No problem. Everything you ever wanted to know about the TAF.

“Money market rates are again rising as banks hoard cash. Borrowing costs had fallen earlier in the year after the Fed, Bank of Canada and European central banks announced plans on Dec. 12 to counter the squeeze through special auctions and swap agreements.”

Uh oh. I mentioned LIBOR and EURIBOR spiking two days ago and again yesterday in Ambac ‘Bailout’: Why Bother?

Euro Rate Surges as Euribor Hits Seven-Week High (Update3): “The cost of borrowing euros for three months rose to the highest level in seven weeks, adding to evidence central bank attempts to ease a shortage of cash in the money markets are misfiring.

The euro interbank offered rate, or Euribor, for the loans climbed 7 basis points to 4.50 percent today, the European Banking Federation said. It was the biggest gain since Jan. 25. The one-week rate was little changed at 4.11 percent.

The Federal Reserve said today it will increase the amount of cash available at two auctions this month to $100 billion, citing “heightened liquidity pressures.” Money-market rates are rising as banks hoard cash after at least $181 billion in credit losses and writedowns linked to the U.S. subprime- mortgage crisis since the beginning of 2007. Credit defaults showed bank debt has become more risky than corporate bonds.”

Despite massive rate cuts and a massive liquidity injections, NOTHING has been solved.

“A joint plan by the Fed, ECB, U.K., Swiss and Canadian central banks announced on Dec. 12 had driven down borrowing costs earlier this year. The ECB injected a record $500 billion into the banking system on Dec. 18. The Fed provided $160 billion in short-term loans since mid-December in six auctions through the Term Auction Facility, or TAF.

The Fed said today it will increase the amount of its March 10 and March 24 TAF sales to $50 billion each from $30 billion each and boost them further “if conditions warrant.”. The Fed also said it will initiate a series of 28-day term repurchase agreements.”

Another sign of financial stress is the TED spread:

“The difference between what banks and the government pay for three-month loans has also indicated an increased reluctance to lend. The so-called TED spread has risen 42 basis points to 1.63 percentage point this week.”

Can you say foreshadowing? LIBOR and EURIBOR were pretty prophetic back in December… and we all know what happened in January. We WILL test the lows in all major equity indices… The Big Test is Pending.

Related Headlines:
Carlyle Group Scorched by Mortgage Fund's Stumble (Update1)
Bank Debt More Risky Than Corporate Bonds, Default Swaps Show

Thursday, March 6, 2008

Ambac 'Bailout': Why Bother?

Ambac Will Sell Half the Company in Bet That May Not Pay Off: “Ambac Financial Group Inc., the bond insurer seeking capital to salvage its AAA credit rating, will sell half the company in a bet some investors say won't pay off.

Ambac said yesterday it plans to issue $1 billion of common stock, more than doubling the number of shares outstanding. The New York-based company will also offer $500 million of units that convert to shares in 2011.

Investors had anticipated Ambac would be bailed out by banks, which would backstop a capital raising of as much as $3 billion, enough to overcome record losses on subprime-mortgage debt. Instead, the company announced it would raise half that amount in a transaction that would dilute existing shareholders, sending Ambac down 19 percent in New York Stock Exchange trading.”

The offering is so dilutive, that Ambac is selling half the company in this offering… or so. Maybe more. Awesome. Just awesome.

The market cap of Ambac is now less than $1 billion… and falling fast. Raising $1 billion just wipes out the poor bagholders still ‘long and strong’ Ambac.

The deal isn’t even backstopped. Let me emphasize that again: The banks are NOT even backstopping this. The banks have so little faith in Ambac that they aren’t putting another penny of their own capital at risk.

“By proposing a sale of common shares, Ambac is reverting to a plan it abandoned in mid-January. The company announced a $1 billion sale Jan. 16, sparking a 70 percent plunge in its stock, and canceled the offering Jan. 18.”

Idiots. That $1.5 billion isn’t enough to last more than a couple months. Max. Why bother? Honestly.

That raises another interesting point: Who would bid for these shares? Who is buying ABK in this offering? The answer is probably that a bunch of ‘hedgies’ are massively short ABK and massively onside. The easiest way to get out of a short position in a dieing company, without spiking the price, is to buy their shares in an offering. I’m pretty confident a few of these ‘hedgies’ would be more than happy to take some money off the table now. Especially since the $1 billion isn’t large enough to prevent the inevitable.

The topic is more than well covered by others. Nuff said.

But first, a quick little heads up:

Money-Market Rate for Euros Climbs to Seven-Week High (Update3): “The cost of borrowing euros for three months rose to the highest level in seven weeks as the coordinated effort by central banks to revive lending falters.

The euro interbank offered rate, or Euribor, for the loans climbed 3 basis points to 4.43 percent today, the highest since Jan. 17, the European Banking Federation said. It was the biggest gain since Jan. 25.

The increase in money-market rates adds to evidence a concerted plan by central banks to promote lending and limit the fallout from the U.S. housing slump isn't working. Banks' asset writedowns and credit losses exceeded $181 billion since the beginning of 2007, data compiled by Bloomberg show. Total writedowns may top $600 billion, UBS said last week.”

LIBOR and EURIBOR went hog wild in December, and we all know what happened to risky assets a couple of weeks later…

Related Posts On Other Blogs:

Mish’s Global Economic Trend Analysis
Ambak “Bailout” Land with Big Thud
MBIA Cannot Estimate January’s Losses
MBIA Maintains Highest Rating, Pfizer Cut
S&P Sniffs Horse Hockey, Calls It A Rose

Naked Capitalism
Ambac Reverses Course, Decided Not To Split
MBIA Financials In Doubt
Monoline Death Watch: California Sells Big Unisured Issue; Marty Whitman Sounds Off

Market Ticker
ADP Unemployment Report

Related Headlines
Carlyle Fund Gets Default Notice After Margin Calls (Update5)
Peloton ABS Fund Investors May Get Nothing Back (Update2)

Wednesday, March 5, 2008

The Big Test is Pending

In my January 23rd post, Charts for the Big Bounce I put up a number of indices, S&P500, Eurostoxx 50, DAX, Shanghai Composite and the Nikkei. The bounce did indeed occur and it was ‘big’… relatively speaking. The move higher lasted for several days and resulted in several failed attempts to break out. Volume on up days was anemic to say the least. Buying power came from shorts covering, rather than from longs establishing new positions.

The bounce is now over. A test of the lows is now likely. I do not expect the lows to hold. The Yen has decisively moved higher, signaling continued risk aversion.

Non-Farm Payrolls on Friday could be the catalyst for a catastrophic move down through the lows.

Tuesday, March 4, 2008

Really Scary Fed Charts: March

In my posts Really Scary Fed Charts, Why Bernanke Will Furiously Cut and Fed CHANGES Really Scary Fed Charts, I posted some charts on the US banking system that can only be described as ‘really scary’.

Well, a new month brings new data. [EDIT: All data is sourced DIRECTLY from the Federal Reserve Bank of St. Louis.]

First the usual disclaimer: I am NOT a banking industry expert or an expert on fractional reserve banking. However, I did take my fair share of economics and finance courses and I’m definitely not retarded.

Obviously, things have deteriorated further.

Starting at the top and working my way down.
1) Total Borrowings are up from around $16 billion in December to $46 billion in February, almost a 200% increase.
2) Non-Borrowed Reserves dropped from around $25 billion in December to LESS than ZERO. I’m just going to throw this out there: That is probably NOT cool.
3) Net Free or Borrowed Reserves are around zero. While this may SEEM like an improvement, factoring the ever increasing TAF borrowings (which the Fed has removed from this data series) paints a more accurate picture. Including TAF credit, Net Free or Borrowed Reserves are approaching -$45 billion.
4) The Monetary Base has turned down. That is the monetary base is being eroded faster than it can be replaced as debt destruction continues to accelerate. The Fed is ‘injecting’ liquidity through REPO agreements. The Fed is NOT ‘printing’ money. Either way, debt destruction is exceeding liquidity injections. As I wrote in my first post:

“In the land of economics, debt and money are ‘fungible’. That simply means they are interchangeable and for all intents and purposes the same. Debt is money and money is debt. The sudden rapid destruction of debt (every write down you hear coming out of the financial sector) has the effect of destroying money. If debt is destroyed fast enough, and it will be, then you get a rather sudden contraction in money supply. This is known as DEFLATION… and it ALWAYS happens when a debt bubble bursts. ALWAYS.”

5) Despite lower rates, Household Financial Obligations (debt) as a percentage of Disposable Personal Income are still at historic highs. Can you say ‘crushing burden’?
6) The trend is not your friend. Personal Savings have been trending down for years now and have been ‘skipping’ around ZERO. A ZERO Personal Savings rate is NOT what you want to see on the eve of a GIANT financial CRISIS.

I probably don’t have to spell out to you what these charts mean for the global economy and your investments. Bottom callers in general will be come extinct. Those calling for specific bottoms, in financials and real estate for example, will become extinct first.

In US Banking System Teetering on the Brink of Collapse, Mike Whitney took my charts and analyzed them further.

“Some critics say that he just wanted to throw a lifeline to his fat-cat investor buddies on Wall Street by providing more liquidity for the markets. But that's not it, at all. The fact is, Bernanke had no choice. He's facing a challenge so huge and potentially catastrophic; that cutting rates must have seemed like the only option he had.”

We’ve had our Minsky Moment. Now go act accordingly.

Related Headlines:
Citigroup May Need Cash as Losses Mount, Dubai Says (Update2)
Dollar Falls Against Yen on Bets Fed Will Lower Rate 0.75-Point
Asset-Backed, Commercial-Mortgage Spreads Met `Ebola' (Update4)
Auction Supply `Tsunami' Portends Municipal Losses (Update3)

Monday, March 3, 2008

More Ghost Towns

Vacant Homes in U.S. Climb to Most Since 1970s With Ghost Towns: “Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973. Partially completed developments reduce revenue for cities and towns and hurt businesses, said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies. Rising foreclosures and falling property values may cut tax revenue by more than $6.6 billion for 10 states, including New York, California and Florida, the U.S. Conference of Mayors said in a November report.”

About 370,000 new homes are for sale because people who initially contracted to buy them backed out, according to estimates in a Feb. 15 report from analysts at New York-based CreditSights Inc. An additional 216,000 homes are under construction, according to Commerce Department data.”

Houses are just piling up and the builders are still rushing to finish all the projects they’ve already started. So supply is still increasing as demand is cratering. Finding the new market clearing price will take a while because real estate prices are sticky downwards.

“In January 1973, the number of finished new homes for sale was 97,000, when the U.S. population was about 212 million, according to the U.S. Census Bureau. In December 2007, 197,000 completed homes were on the market and in January 2008 there were 195,000. The current population is 303.5 million.

Home prices may fall at least 8 percent nationwide and by as much as 26 percent from the third quarter of 2007 before hitting bottom, according to a Feb. 13 report from New York- based Deutsche Bank AG analyst Karen Weaver, the firm's global head of securitization research.”

But we can guess what market clearing prices are RIGHT NOW as evidence mounts through auction results.

“The company auctioned 450 properties last year for $170 million at prices 85 percent to 90 percent less than the homes' listings.”

Scared? You should be. Surprised? You shouldn’t be.

On July 5th, 2007 I wrote about the huge over supply of real estate in Spain in my post Ghost Towns? In Spain? I ended that post with, “The UK is next…”

I thought it was obvious, so I didn’t say anything about the US. In case anybody was still expecting a bottom soon followed by a quick rebound, this should dispel that fantasy.

Ghost Towns Appear in Spain as Decade-Long Boom Ends (Update2): “Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see.

The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the Housing Ministry started keeping records. Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry.

New and existing house prices will drop by 20 percent from now through 2009, Bernardos estimates. The country built an average of 432,411 houses per year from 1996 to 2005, more than France and the U.K. combined.”

Auto, Home Buys `Won't Happen' as Rates Don't Budge (Update1): “Consumers like Valerie Jacobsen aren't getting much of a break on borrowing costs even after five months of interest rate cuts by the Federal Reserve.

Jacobsen, 30, wants to refinance her 7.25 percent first and 8.5 percent second mortgages into one loan at a lower cost. To cut the payments enough to recoup her $3,000 in closing costs, she needs a rate well below 6 percent. She wasn't ready when costs dipped in January and now they're back at levels that make her plan too expensive, the Austin, Minnesota, resident says.

“Rates I'm seeing aren't really mimicking what the Federal Reserve is doing,” said Jacobsen. “I'm wondering why that is.””

Stop wondering. I can tell you why that is.

First, lenders have started to realize that you’re a far greater credit risk than they first anticipated. Turns out you’re willing, eager even, to pile on ridiculous levels of debt to the point where just servicing that debt is impossible. Therefore, lenders are now correctly pricing in YOUR financial irresponsibility. (Did you really think it was free?)

Second, lenders have finally realized that they’ve been just as irresponsible. With their swollen balance sheets they are now desperately trying to reduce their exposure. The easiest way to do that is for them to price themselves OUT of the market on the margin.

Third, inflation expectations have increased drastically. Therefore, longer yields have snuck higher in spite of the Fed cuts. I would even argue that long yields have increased specifically because of the Fed cuts. The annihilation of the dollar is going to spike the price of those Made in China Jeans and those Made in Taiwan Plasma screens.

“Trying to spur lending and avert a recession, the Fed has chopped 2.25 percentage points off its benchmark rate since September. Wariness among lenders and fears of inflation are keeping mortgage and auto loan rates close to or above levels before the central bank began easing, while credit-card issuers are tightening their standards.

The slippage between the Fed's rate cuts and consumers' ability to borrow or reduce loan costs is weakening the central bank's ability to stimulate the biggest part of the economy, consumer spending. It accounts for more than two-thirds of goods and services output and stalled for the second consecutive month in January after adjusting for inflation, the Commerce Department said today.”

Related Headlines:
Auction Supply `Tsunami' Foreshadows Deeper Municipal Losses
Bush Deficit at Record as Treasuries Deter Pensions (Update1)
Dollar Falls to 3-Year Low on Speculation Debt Losses to Spread

Related Posts:
Fed Losing: rates Rise Again
Fed Cuts Rates, Market Raises Rates
Crude Hits $100, Equities Freak

Sunday, March 2, 2008

Financial Ninja Favs: February

In case you missed them, here are YOUR favourite Financial Ninja posts for the month of February:

1) Really Scary Fed Charts, Why Bernanke Will Furiously Cut
2) Fed CHANGES Really Scary Fed Charts
3) Fact Sheet: The Bush Stimulus Package
4) Fannie Mae, Freddie Mac: The Dumbest Idea Ever
5) Simply Insane

As far as the first two posts goes, they will be updated now that the February numbers are out. I can’t imagine that the situation improved.

I’ve collected some scary facts and figures regarding stimulus packages. I can tell you right now that stimulus packages give the tiniest of boosts for the shortest amount of time and then create the worst kind of long run economic hangovers. Pick a country. Any country. Same results.

In the short run, the prices of risky assets will continue to primarily trade off of developments, or the rumours of developments, in these names:

· Fannie Mae (FNM)
· Freddie Mac (FRM)
· Ambac (ABK)
· Citigroup (C)
· Bank of America (BAC)
· Countrywide (CFC)

To simplify, watch how these indices behave:

· Bank Index ($BKX)
· Mortgage Finance Index ($MKX)
· Dow Jones Transportation Average ($TRAN)
· Volatility Index ($VIX, $VXN)
· US Dollar Index ($USD)
· Japanese Yen Index ($XJY)

Bottom line: Economic conditions are deteriorating the world over... and the pace is accelerating. Bottom callers will get annihilated.

Now for the good news: This is not the end of the world. While YOU may have grown fat and complacent, economic cycles have always existed and always will. Sometimes the amplitudes of these cycles can be greater or smaller. This is one of those times when the distance from peak to trough will be positively MASSIVE. But, as always, the beauty of capitalism lies in its nature. It is the most dynamic and adaptive system out there. Period. Recoveries, despite any interventions, will occur when they are supposed to. That is to say, once the excesses have been flushed and the weak hands have folded through the process of creative destruction. Not before. Then from a strengthened base the next ‘Golden Era’ is launched, where the previous economic peak is not only eclipsed, but easily doubled and trebled.