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Saturday, June 28, 2008

Blame: Alan Greenspan

Friday, June 27, 2008

Oversold Bounce Time after One More Rinse

Pre-market oil is teasing $142.00 and equity futures are down. It looks like equities will have that final rinse down today that will clear the way for a tradable bottom early next week.

The Banking Index (BKX) is deeply oversold as measured by the Slow Stochastic (STO). Down momentum has been fading as measured by the MACD. A bounce is pending in the very near term.

The S&P 500 (SPX) is fast approaching support around the 1270 area. Although deeply oversold, MACD is still accelerating downwards. Any bounce would be short lived and would fall short of clearing 1330.

For a longer term take on this mess, complete with an excellent set of charts and informative commentary click here.

Thursday, June 26, 2008

LIBOR Perks Up Again...

One Week LIBOR is perking up… hinting at the re-emergence of stress in the financial system. One Month LIBOR hasn’t yet moved, so this could just be nothing but noise…

However, with rumors of Chrysler filing for Chapter 11 flying around (which they denied) and news of Goldman Sachs (GS) putting Citigroup (C) on their ‘Conviction Sell List’, I’d sell or short first and ask questions later.

U.S. Stock Futures Drop; Research In Motion, Citigroup Retreat: “Citigroup dropped 85 cents to $18 after Goldman added the shares to its “conviction sell” list.”

Related Posts:
LIBOR Liars: UBS, HSBC, Royal Bank of Scotland
ZEW Hits Record Lows, LIBOR Woes Hurting Eurodollar
Libor Poised For Shake-Up, Credibility GONE
RISE Dark Lord Libor! RISE!
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
The TED Spread, LIBOR and EURIBOR = Scary Bad

ABCP Shrivels Up, Banks Leverage Up

Asset Backed Commercial Paper (ABCP) outstanding continues to shrivel up…

Credit markets are still frozen despite the introduction of various credit and liquidity facilities (TAF, TSLF and PDCF).

Asset Backed Commercial Paper Explained

To be looking for a ‘bottom’ in banks specifically and financials in general is a mistake as long as ABCP outstanding continues to decrease. The ABCP isn’t just disappearing. As it comes due and as it can’t be rolled over, it is being placed onto bank balance sheets. So instead of de-leveraging, banks are actually forced to expand their balance sheets as the economy dives into the first consumer lead recession in decades…

Related Posts:
TAF, TSLF and PDCF Explained
Bulltrap: ABCP, and Level 3 Bombs

TED Spread, Sneaking Back Up

The TED Spread has started to sneak back up…

During this particular crisis, significant moves up in the TED Spread were followed by significant equity weakness.

Watch the TED spread here.
What is the TED spread?
Understanding the TED spread.

Related Posts:
The TED Spread, LIBOR and EURIBOR = Scary Bad

Wednesday, June 25, 2008

FOMC: Nothing But Economic Girlie-Men

"If we lose confidence in the ability and the willingness of the Fed to deal with inflationary pressures and sustain confidence in the dollar, we'll be in trouble." -Paul Volcker, May 15, 2008

Done deal.

Fed Keeps Rate at 2%, Cites `Upside' Inflation Risks (Update3) : "The Federal Reserve left its benchmark interest rate at 2 percent, ending the most aggressive series of rate cuts in two decades, as higher energy costs threaten to boost inflation."

Forget 'neutral'. This is a weak statement. Full of sound and fury signifying nothing.

"It is more or less a neutral statement, which is consistent with policy on hold pending more clarity," said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. "They are not tipping their hand for the next meeting."

What a bunch of economic girlie-men.

As I said in September 2007, We Need Another Volcker.

$200 Oil: World Economy Would Collapse

World Economy Would Collapse If Oil Hit $200, Deutsche Says: “The global economy would collapse if oil hit $200 a barrel, said the top energy analyst at Germany's largest bank.” Ummmmm. Duh! Personally, I think oil has exceeded $100 a barrel for so long now that you can safely swap ‘would’ for ‘is’… and forget about waiting for $200 oil. That isn’t going to happen, absent some kind of geopolitical debacle...

Oil Declines After Supplies Rise for First Time in Six Weeks: “Crude oil fell more than 2 percent after a U.S. government report showed that inventories rose for the first time in six weeks.

Inventories gained 803,000 barrels to 301.8 million last week, the Energy Department said. A 1.1 million-barrel drop was forecast by analysts in a Bloomberg News survey. Fuel demand averaged 20.2 million barrels a day in the past four weeks, down 2.3 percent from a year earlier, the report showed.”

The most important development is that fuel demand has dropped 2.3%. Higher prices are working… so are crashing housing prices, and the bursting of the credit bubble.

“U.S. gasoline purchases fell for a ninth straight week as record prices crimped demand, a MasterCard Inc. report showed yesterday. Consumers purchased an average 9.45 million barrels of gasoline a day in the week ended June 20, down from 9.71 million a year earlier, MasterCard, the second-biggest credit-card company, said in its weekly SpendingPulse report.”

Now factor in some serious subsidy cuts abroad as explained in Oil Drops on Subsidy Cuts in China, India, Malaysia, Taiwan and pretty soon parabolic oil will be thing of the past.

Bank of America Rapes Complacent Taxpayers

The first screenshot ‘Executive Summary’ is a clip from an Internal Bank of America Report that made the rounds earlier this week. The report is best described as a manual on “how to rape your fellow countrymen and taxpayers”.

Bank of America's Countrywide Tab Signed by Taxpayers (Update1): “Bank of America Corp.'s $3 billion takeover of Countrywide Financial Corp. will be financed by 138 million tax-paying Americans.

Bank of America, led by Chief Executive Officer Kenneth Lewis, can use tax write-offs to pay for Countrywide, the country's biggest mortgage lender, said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who now runs his own accounting firm. Taxpayers may pick up about $5 billion of Countrywide's losses over 20 years, he said. Countrywide shareholders vote on the sale today.”

How exactly does it work?

“Miller, the top- ranked analyst in Bloomberg's latest survey of stock-pickers, estimates Countrywide will lose as much as $33 billion on bad home loans. Lewis said this month Bank of America, the biggest U.S. consumer bank, will come out ahead even if home prices drop by more than 25 percent in the next two years.

Based on Countrywide losses of $30 billion, which are less than Miller's estimate of $33 billion, Bank of America would more than recoup the entire $3 billion purchase price, Willens said.”

What a neat trick.

Bank of America (BAC) is a crafty one. Sticking it to Mr. Taxpayer seems to be BAC corporate policy. As if that wasn’t enough, this has been raged about for a good week now in the blogosphere:

Over at Market Ticker in Did Bank of America / CFC Write the Housing Bill?.
Over at Calculated Risk in BofA and the Dodd Bailout Bill.

In the end, BAC could stick taxpayers with about $300 billion in mortgage losses AND acquire Countrywide (CFC) for free. Fun times.

BOHICA dear taxpayers!

The unhappy side effects of these kinds of shenanigans are that treasury yields (and by extension all other yields) have started to rise as described in Inflation, Rates and Fed Out of Ammo because the entire US financial system has overdosed on credit as can be seen in Public and Private Debt vs GDP: The Illusion of Prosperity.

Tuesday, June 24, 2008

Public and Private Debt vs GDP: The Illusion of Prosperity

There isn't much to say.
Click on the charts, from top to bottom.

Monday, June 23, 2008

A New Kind of Entrepreneur

Billionaire Eike Batista Keeps SLR McLaren in Rio Living Room: “Eike Batista sits in the boardroom of his mining company, MMX Mineracao e Metalicos SA, overlooking Rio de Janeiro's Sugarloaf Mountain, a vitamin cocktail dripping into his left arm to stave off aging.

The intravenous bag is hanging on the pole of the green, yellow and blue Brazilian flag that stands next to the 51-year-old multibillionaire. Batista's focus isn't on the drip but on a deluge of decisions, including how to seal a $5.5 billion sale of two iron ore mines to London-based Anglo American Plc, according to Paulo Gouvea, an MMX executive who was present that January evening.”

Anybody that keeps and SLR McLaren in their living room is cool.

Seriously though, this guy is one ambitious, hard working, hard-hitting guy and the typical new breed of entrepreneur that are transforming developing economies from Brazil to China.

After these markets have fully corrected and these economies have purged their recent excesses, they will be the opportunity of a life time.

The full story is an interesting read.

Inflation, Rates and a Fed Out of Ammo

Bernanke's Inflation Cure Loses Potency as Import Costs Rise: “What's good news for U.S. businesses may turn out to be bad news for Federal Reserve Chairman Ben S. Bernanke's fight against inflation.

The surging oil prices that are raising exporters' costs to ship everything from steel to sofas to America are encouraging customers to buy more domestically made goods -- and giving the producers of those goods more room to raise their prices.

The result: As Bernanke and fellow policy makers meet in Washington this week, they may find themselves starting to lose the benefit of the flow of inexpensive imports the chairman cited in a June 3 speech as a key force holding down living costs.”

Higher energy costs result in higher shipping costs and that in turn raises the price of all those ‘cheap’ imports from abroad. This results in the substitution effect becoming a prominent factor where consumers start to buy locally. At first glance this would appear to be a positive development as outsourcing to low wage countries becomes less profitable. However, this raises the level of inflation significantly… which means market (interest) rates will also rise significantly.

Over the last twelve months, the Federal Reserve Target Rate went from 5.25% to 2.00% as Ben ‘Helicopter’ Bernanke furiously cut rates. Of the same period mortgage rates on a 15 Year Fixed went from 5.99% to 5.86%. A 30 Year Fixed went from 6.29% to 6.27% and a 1 Year ARM went from 5.54% to 6.15%.

In effect, the Fed has been neutralized by market forces. Now that the Fed rate is at 2.00%, Bernanke doesn’t have any more ammo to cut rates further. Combined with the fact that Bernanke has already swapped out more than 50% of his $800 billion balance sheet and it is now the market that will set rates in spite of what the Fed wants.

The first signs of trouble were evident in January in Fed Cuts, Rates Rise: Bond Vigilantes: “Ben 'Helicopter' Bernanke cut and he cut hard... the Bond Vigilantes came and and raised rates on everything along the curve.

The curve steepened as intended, and this will eventually help the banks. However, if yields continue to rise are simply ignore further cuts, then the strapped consumers won't see the benefits of a lower Fed funds rate. Looks like mortgage rates won't be coming down as intended...”

Then again in February in Fed Cuts Rates, Market Raises Rates: “Listen now and listen carefully: The Fed does NOT set rates. It never has and never will. It simply cannot. The Fed can barely and with great difficulty set and maintain the Fed funds target rate. That’s pretty much it. The market ultimately ends up setting all other rates. Understand that and understand it well, because that is how capitalism works.

Rates are set by the voluntary and mutually beneficial interaction of both borrowers and lenders. They settle on a market clearing rate such that both parties benefit… and the Fed be damned. Today, right now, lenders are maxed out and they have no appetite for more debt. That means they can charge a much higher rate for their money and will to discourage borrowing.”

Haha! Back to square one! Go Bernanke!

Related Posts:
Fed’s Balance Sheets Shares by Facility