Thursday, August 28, 2008
Incomes Flashing Clearer U.S. Recession Signal Over Last Year: “The meager gains in earnings over the last year signal the U.S. economy is in much deeper trouble than the growth estimates indicate, economists said.
Gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating gross domestic product, rose 0.3 percent in the 12 months ended in June after adjusting for inflation, according to Bloomberg calculations based on today's Commerce Department growth report. GDP expanded 2.2 percent.
“The income side of the economy, with profits down for four straight quarters and employment falling, looks like a recession,” said John Ryding, chief economist at RDQ Economics in New York.
Incomes last quarter grew 1.9 percent at an annual rate after adjusting for inflation, a little more than half the 3.3 percent gain posted by GDP, according to Bloomberg calculations. The figures showed incomes dropped in each of the prior two quarters.
The 1.9 percentage-point difference between the GDI and GDP over the last 12 months is the biggest in the post World War II era.
Corporate profits were down 7 percent in the year to June, the biggest drop since the last economic contraction in 2001, according to the Commerce Department. The government also said wages and salaries increased by $52.5 billion in the first three months of the year, $20.2 billion less than previously estimated.”
GDP readings are pretty much useless. See for yourself…
Q1 GDP = 3.3%
Recessions Often Begin With Positive GDP Data
“Export Driven” Q1 GDP Revised Up to 3.3%
It all comes down to inflation and ACCOUNTING for inflation… or more specifically, lack thereof. Even the "better than expected" Durable Goods number was nothing of the sort:
Goldman Sachs’ Jan Hatzius: Durable Goods Orders: Don’t Be Fooled by Inflation:
“Durable goods orders beat expectations with a 1.3% month-on-month increase in July. But the apparent strength is due to higher prices, not stronger activity. In fact, deflating orders by the producer price index for durable manufactured goods shows a 9.4% year-on-year drop in real orders, the worst since early 2002.
Even if we adjust for the unfavorable year-on-year comparisons that partly explain this plunge, the recent data look surprisingly similar to those seen in the runup to the 2001 recession.”
Posted by Ben Bittrolff at 1:36 PM
Posted by Ben Bittrolff at 10:00 AM
Pakistan Sets Floor on Stock Prices to Stop Plunge (Update2): “Pakistan set a floor for stock prices on the benchmark exchange, moving to halt a plunge that has wiped out $36.9 billion of market value since April.
Securities can trade within their daily limit of 5 percent “but not below the floor-price level” of yesterday's close, the exchange said on its Web site, without giving details. The Karachi Stock Exchange 100 index capped a six-day, 16 percent slump to 9,144.93. Trading starts at 9:45 a.m. local time.”
When the wheels come off, governments quickly reveal how little they actually understand economics.
The ONE thing governments are freakishly efficient at is confiscating, re-allocating and outright DESTRYOING wealth.
No force on earth can take an entire country from prosperity to poverty so quickly and so thoroughly…
Now that there are a few stresses in the global financial system, we’ll be able to see which emerging economies are actually robust and which were nothing but hype and illusion, just riding the great global credit bubble up…
So, I guess tha Karachi Stock Exchange could stay ‘lock limit down’ with no bid for days, weeks and maybe even months because prices aren’t allowed to hit levels that would clear.
This has got to be one of the dumbest ideas ever.
Posted by Ben Bittrolff at 8:01 AM
Wednesday, August 27, 2008
Moody’s is finally sniffing around ‘prime’ mortgages now…
Moody's Reviewing All 2006, 2007 Jumbo Mortgage Bonds (Update1): “Moody's Investors Service is stepping up scrutiny of all prime-jumbo mortgage securities issued in 2006 and 2007 as the surge in U.S. foreclosures spreads beyond subprime loans.
Moody's is studying its rankings on the securities after late payments started increasing more quickly in recent months, according to a statement today from the New York-based ratings company. The bonds aren't all under formal reviews for downgrades, said Thomas Lemmon, a spokesman.
Defaults among homeowners “across the credit spectrum”' have soared as home prices slump, mortgage rates rise and lenders rein in debt offerings, Moody's said. “Serious delinquencies” for prime-jumbo loans in securities rose 72 percent between January and June to 1.7 percent of balances, from 1 percent, according to Moody's.”
Lookout when prime isn’t even prime...
Posted by Ben Bittrolff at 5:57 PM
A quick update on financials in general…
More bad news is pending. Earnings have already started coming out in Canada. They’ve been disappointing. I’m short Canadian financials through the Horizons BetaPro Capped Financials Bear Plus ETF (HFD.TO).
Canadian Imperial Profit Falls on Debt Writedowns (Update1): “Canadian Imperial Bank of Commerce, the country's fifth-largest bank, said third-quarter profit fell 91 percent, missing analysts' estimates, on writedowns tied to the U.S. mortgage market.
Net income for the quarter ended July 31 was C$71 million ($68 million), or 11 cents a share, compared with profit of C$835 million, or C$2.31 a share, a year earlier, the Toronto- based bank said today in a statement. Revenue fell 36 percent to C$1.91 billion.
Canadian Imperial had C$885 million in pretax writedowns linked to the U.S. mortgage market, adding to C$6.66 billion in debt-related costs since the third quarter of 2007. The writedowns and the slowest economic growth in Canada since 1992 will probably lead to the steepest profit decline in five years for Canada's biggest banks.”
This week is a busy week…
“Bank of Nova Scotia, the No. 3 bank by assets, said yesterday that profit fell 1.9 percent to C$$1.01 billion, while Bank of Montreal, the fourth-biggest bank, said profit fell 21 percent to C$521 million.
Royal Bank of Canada, the country's largest bank, Toronto- Dominion Bank, the second-biggest lender, and No. 6-ranked National Bank of Canada report results tomorrow.”
Judging by the Canadian results (remember, these banks didn’t party nearly as hard as those in the U.S.) I expect the results for this quarter in the U.S. to truly suck.
New Credit Hurdle Looms for Banks: “U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due.
At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.
The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months.
The problem highlights how the pain of the credit crunch, now entering its second year, won't end soon for banks or the broader economy. The Federal Deposit Insurance Corp. said on Tuesday that its list of "problem" banks at risk of failure had grown to 117 at the end of June, up from 90 at the end of March. FDIC Chairman Sheila Bair said her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures. She said the borrowing could be needed to handle short-term cash-flow pressure brought on by reimbursements to depositors after bank failures.
As banks scramble to pay the floating-rate notes, they could see profit margins shrink as wary investors demand higher interest rates for new borrowings. They're also likely to become less willing to make new loans to consumers and companies, aggravating economic downturns in both the U.S. and Europe.”
I don’t expect any rally in U.S. financials to last. Too many things can go wrong. For example, I’ve already heard rumors the Toothfairy vomited after taking a closer look at Lehman’s balance sheet and that the Toothfairy is now trying to walk on that deal…
I’m short U.S. financials through the UltraShort Financials ProsShares ETF (SKF).
Posted by Ben Bittrolff at 9:42 AM
Trade of The Day: Buy Freddie Paper With Fed Leverage: “We don't know who bought the Freddie notes today. But buyers of Freddie notes who have access to borrowing from the Federal Reserve would have found the decision to bid relatively easy. That's because the ability to exchange the Freddie debt for Fed cash means banks can buy Freddie debt with a huge amount of leverage, dramatically increasing the return on their capital.
Here's how it works. A bank that bought the six month notes from Freddie this morning could also bid to borrow from the Fed's Term Facility, which held an $75 billion auction today. As collateral for the borrowing, the bank could offer the newly purchased Freddie notes, for which the Fed would give them credit for 97% of their market value. Recently, the TAF pricing topped out at 2.35 percent for 28-day borrowing. So a bank buying $100 million of Freddie paper yielding 2.858% could flip it to the Fed, borrowing $97 million at around 2.4% (assuming the pricing will be slightly higher this time around).
At the end of the day, a credit desk could buy $100 million of Freddie debt for just $3 million down. On that $3 million, the desk would receive a 17.7% annualized return, or 8.8% over six months, for paper that is thisclose to being explicitly backed by the Treasury Department. Not a bad deal at all.”
Fun fun fun.
This is EXACTLY what had to happen. That is how liquid markets work. Market participants will find and arbitrage all ‘free money’ away.
In this case it didn’t long and the end result is this: PROFITS are PRIVATIZED and LOSSES are SOCIALIZED.
You see, if this trade goes bad enough, the Fed would just call in the collateral. In this case, for this trade to implode, Fannie and Freddie would have to implode. That also means the collateral would implode. The Fed would then get stuck both bailing out Fannie and Freddie AND holding a pile Fannie and Freddie paper that got ‘put’ to them as collateral.
The Fed would then just turn around and demand the Treasury expand THEIR balance sheet. The Treasury would in turn issue more debt. At the end of this donkey chain is the poor (literally) U.S. taxpayer who gets bent over and rammed…
This will all happen. It almost has to. I bet it happens so quickly and so suddenly the taxpayer will be left confused wondering, “Did I just get raped?”
For WallStreet right now, this is the BEST TRADE EVER. All upside and no downside.
Posted by Ben Bittrolff at 8:10 AM
Tuesday, August 26, 2008
The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share.
In related news, Lehman has agreed to sell all of its level III capital, including CDOs, ABSs, pet rocks, baseball cards, slightly used condoms, and credit default swaps written by MBIA and Ambac. Lehman’s level III capital will be acquired for 150% of its face value by Tinkerbell, who will carry it off to Neverland to be fed to a crocodile. Lehman is financing 90% of the acquisition at an interest rate that has not been announced; Tinkerbell’s up-front payment consists of a handful of pixie dust, three crickets, and a bullfrog. Analyst Dick Bove estimates that the bullfrog could eventually be transformed into three princes and a pumpkin coach. The deal gives Lehman no recourse to any of Tinkerbell’s assets other than the Level III capital. If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.
Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”
Meanwhile, the SEC has announced an investigation of mean, evil, bad short-seller David Einhorn. While out for a beer with a friend, Einhorn reportedly suggested that the Tooth Fairy does not exist and that wishing upon a star is not a wholly reliable price discovery mechanism. Christopher Cox, chairman of the SEC, said, “Vicious rumors attacking the Tooth Fairy will not be tolerated. Our entire financial system and indeed the American way of life depend on the Tooth Fairy and wishing upon a star. How else could one value level III capital appropriately?” The SEC is reportedly planning to set up re-education camps for short-sellers.
Posted by Ben Bittrolff at 8:39 AM
Last Friday a bank in Kansas was the ninth bank to fail this year in the U.S.. We know a couple German banks and a U.K. bank failed early in the crisis. We also know a couple bigger Swedish banks are on the rocks…
Watch the failures spread…
Danish Central Bank to Take Control of Roskilde Bank (Update3): “The Danish Central Bank will take control of Roskilde Bank A/S to avert a financial “contagion” after mounting loan losses drove the lender into insolvency and a private purchaser couldn't be found.
The central bank and a group of Danish financial companies will provide Roskilde 4.5 billion kroner ($890 million) in cash and assume 37.3 billion kroner of debt, Roskilde said in a statement yesterday. The bank was suspended in Copenhagen trading today, after falling 88 percent from a peak in April 2007.
“We wanted to secure financial stability in Denmark,” central bank Governor Nils Bernstein said at a press conference in Copenhagen today. “The alternative would have been that Roskilde went bankrupt and that would have resulted in a considerable contagion throughout the financial sector.””
Central banks all over the world seem to operate out of the same damn play book. In trading, we call this averaging down into a LOSER. This is the fastest and most efficient way to blow your account.
This nervous whining about systemic risk and ‘financial contagion’ is insane. Absolutely insane. By bailing out retarded banks you guarantee an immediate increase in systemic risk and the longer run, permanent increase in systemic risk.
Anybody out there want to start a bank with me? The plan would be to act really really recklessly. When our bets pay off, we can give ourselves the kind of bonuses that would make even gods blush. When our bets blow up we can just claim ‘market failure’ and ‘regulatory failure’. We then threaten the world with financial Armageddon and demand an immediate bailout, preferably the kind that doesn’t wipe out the value of our common shares…
Posted by Ben Bittrolff at 8:22 AM
Monday, August 25, 2008
As Fannie Mae (FNM) and Freddie Mac (FRE) hurtle towards oblivion, the only play being considered can be summed up as: SOCIALIZING THE LOSSES.
Man am I ever glad I'm not a U.S. taxpayer...
At issue is $36 billion of preferred stock issued by Fannie and Freddie. Under several versions of widely discussed rescue plans for the mortgage giants, the US government would take a new preferred stake in the companies, subordinating or perhaps wholly eliminating the existing preferred. Critics of Fannie and Freddie believe such a move would be necessary to punish excessive risk taking by the companies and avoid creating additional 'moral hazard.'
The situation is complicated, however, by the large share of preferred stock held by regional banks, many of which are viewed as possible candidates for failure in these credit crunched times. As the Financial Times reported over the weakened regional banks and US insurers hold the majority of Fannie and Freddie's outstanding preferred stock. The Fed has begun advocating against wiping out these shares, saying the threat to stability of the banks is greater than the 'moral hazard' argument, a source familiar with the matter says.
"The fear is that this bailout, if done in a punitive manner, could be costly, resulting in even more bailouts," the source said.
Last week Moody's cut Fannie and Freddie's preferred stock ratings from A to Baa3 on based on the uncertainty of how they would be treated in a rescue plan from the Treasury. That move could add to the need for the Treasury to take action soon, before banks are forced to report write-downs on the value of these lower-rated preferred shares. At the same time, the new pressure from the Fed to avoid wiping out the shares may stall an agreement on what form the intervention should take."
Posted by Ben Bittrolff at 6:38 PM
You don’t want to hear that China is considering a stimulus package… Not at all. That definitely means things are much worse than expected both in China and global scale.
This should be a giant warning sign that even the most stubborn Bulltard can’t ignore…
China considering 370 bln yuan economic stimulus package – report: “China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter.
The report said said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts.
The plan received initial approval from the Central Leading Group on Economic and Financial Affairs, a body under the State Council, but further details will be finalized by the finance ministry and other government departments.
Last week, JP Morgan said in a note to clients that the Chinese government is considering a stimulus package of 200-400 bln yuan in tax cuts and capital and housing market stabilization measures.
As a result, the benchmark Shanghai Composite Index closed up 178.81 points or 7.63 pct at 2,523.28 on Wednesday.”
Posted by Ben Bittrolff at 4:00 PM
Freddie, Fannie Failure Could Be World `Catastrophe,' Yu Says: "A failure of U.S. mortgage finance companies Fannie Mae and Freddie Mac could be a catastrophe for the global financial system, said Yu Yongding, a former adviser to China's central bank.
"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. "If it is not the end of the world, it is the end of the current international financial system.""
The Chinese are getting a little feisty as their losses continue to mount.
"China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack."
Well, sitting on a $376 billion time bomb just ticking away would make just about anybody more than a little nervous.
I bet Hank Paulson and Ben Bernanke are staring at a Chinese dictionary surprised to be translating certain choice curse words and threats...
""The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He didn't explain why he held that view."
I know why he held that view. You see, that is the view of the Chinese government, and the command came from up high to make crystal clear that the powers that be would not tolerate any loses...
Translation: China says BOHICA* U.S. taxapayers!
*Bend Over Here It Comes Again
Posted by Ben Bittrolff at 12:25 AM