Slowly Building Shorts

The Bulltards tagged 1400. The falling 200 day EMA is nearby, ready to provide resistance. The SPX is now overbought on the daily timeframe (Slow STO). Volume has shriveled up, not exactly inspiring much confidence in the the rally to date. A drop to Support around 1370 is highly probable. The 1320 - 1330 area would be the next area of interest.

Volatility (VIX) has fallen to what amounts to COMPLACENCY levels in this credit crisis environment. Although technical analysis isn’t nearly as relevant on the VIX, this 20 area does appear to be an area of support.

Fannie Mae (FNM) has bounced from $18 to $35. Since then FNM has made a series of lower highs, $35, $32, $30, on declining volume. I have been shorting above $30 and have been taking some profits around $25. (I'm using puts to limit my downside risk.) I have my full position again and am looking for a break below $25 this time around. March New Home sales and Case Schiller Home Prices all showed an ACCELERATION of real estate mess.

Same goes for Freddie Mac (FRE). FRE bounced from $16 to about $34. Since then FRE has made a series of lower highs on declining volume. I have been shorting above $27 area using puts. I am now fully short again and looking for a break below the $22 area.

FNM and FRE are pretty much doomed. While they may eventually be bailed out or nationalized, the common shareholder will get ANNIHILATED.

FNM and FRE make me angry:
Sarcastic Rant on Fannie and Freddie.
Fannie Mae, Freddie Mac: The Dumbest Idea Ever
Fannie Mae: Another Shoe Drops

Goldman Sachs (GS) is happily expanding its Level 3 assets...

Yesterday I began legging into my short position. Using puts, I intend to build a short position over the course of the week. I expect the declining 200 day EMA and the $190 area to provide resistance. GS is sufficiently overbought (Slow STO) to warrant some profit taking into the $170 - $175 area in the short term.

I did the same for Lehman Brothers (LEH). I expect the $50 area and the 50 day EMA to provide resistance. LEH is no longer oversold and the same problems, namely expanding Level 3 assets, remain. I expect an initial move into the $38 - $40 area.

I did the same with Merril Lynch (MER) and Morgan Stanely (MS) for the same reasons.

That puts me short GS, LEH, MER and MS after a nice run into a credit crunch that has not abated at all. I like it. I like it a lot. These names are exposed to a ridiculous amount of risk that they cannot get off their bloated balance sheets, while SIMULTANEOUSLY facing a worsening business environment as deals dry up for them.

Citigroup (C) raised $3 billion yesterday. Common shareholders continue to get diluted. This should come as no surprise to anybody. I recently wrote that things would get worse at ShittyGroup before they could get better in: Citigroup Earnings, Downgrades and LIBOR

Late last week I began nibbling at various short positions. I should be happily short by the end of the week or early next week just in time for the next leg down.

Read these recent headlines. You don’t even have to read the articles to get in the right ‘mood’. This stuff isn’t just a temporary blip. This is real and the long run consequences aren’t going to be pretty.

Bernanke May Have to Do More to Ease Jump in Bank Funding Costs
CDOs Face Downgrades as Losses Prompt Fitch Overhaul (Update1)
More Subprime, Alt-A Mortgages May Head `Underwater' (Update1)
Rate Cut Would `Do More Damage Than Good,' Gross Says (Update2)
Deutsche Bank Says It Had First Loss in Five Years (Update3)
Countrywide Reports $893 Million Loss From Bad Loans (Update3)
GMAC Posts $589 Million Loss on Home Lending Woes (Update1)
S&P/Case-Shiller U.S. Home-Price Index Fell 12.7% (Update2)
KB Home's Broad Says Home Prices May Drop Another 20% (Update2)
Fed's Eurodollar Rates Suggests Dollar Libor May Stabilize
U.S. Home Vacancies Rise to Record on Foreclosures (Update3)
Wolfensohn `Pessimistic' as Financial Losses Rise (Update1)
Goldman, Morgan Hit Level 3 Jackpot.
Taleb Outsells Greenspan as Black Swan Gives Worst Turbulence

Getting long risky assets, such as equities, now and betting on a ‘second half recovery’ before the recession has really even started is border line retarded.

Stimulus Package: Does It Even Work?

The government mailed out the long awaited rebates. The current debate is about how big of an impact these rebates will have on the economy and when. The clear assumption is that the stimulus package is GUARANTEED to work and it is only a question of degree.

What we need is to take a look at similar countries in similar situations to see how things turned out in practice, rather than in theory.

If only we could turn to a country that had both a MASSIVE real estate bubble and credit bubble simultaneously…

If only we could turn to a country that had similar demographics, namely a large portion of the workforce nearing retirement…

If only we could turn to a country whose monetary authorities responded with massive rate cuts, liquidity injections, tax cuts and stimulus packages…

Oh wait, I got one. Can you say JAPAN?

An Overview of Japan's Economy 1985–2000

After the September 1985 Plaza Accord, the yen's appreciation hit the export sector hard, reducing economic growth from 4.4 percent in 1985 to 2.9 percent in 1986 (EIU 2001).1 The government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.

The Nikkei stock market index fell more than 60 percent—from a high of 40,000 at the end of 1989 to under 15,000 by 1992. It rose somewhat during the mid-1990s on hopes that the economy would soon recover, but as the economic outlook continued to worsen, share prices again fell. The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession—by 80 percent from 1991 to 1998 (Herbener 1999).

Real GDP during the 1990s stagnated, rising only from 428,826 billion yen in 1990 to 469,480 billion yen by the end of 2000.2 Growth has been negative since 1998. The unemployment rate rose from 2.1 percent in 1991 to 4.7 percent at the end of 2000. Although the unemployment rate may seem low by international standards, the rise to 4.7 percent is significant in Japan, given the cultural and historical precedent of lifetime employment and given that it was never above 2.8 percent in the 1980s. The official unemployment rate is also biased downward because the Japanese government offers "employment adjustment subsidies" to companies that maintain employees as "window sitters" (Herbener 1999).

The Response 1992-1995

Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan's government in poor fiscal shape. The "on-budget" government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the "off-budget" sector is included.

The Keynesian policy solution when the economy is in a liquidity trap is to have the government lend directly to businesses instead of creating liquidity in the banking system. Japan has the Fiscal Investment and Loan Programme (FILP), an off-budget branch of the Japanese government worth about 70 percent of the spending in the general-account budget. FILP gets most of its money from the post office savings accounts. Once they collect the money, the funds are allocated to borrowers through the Ministry of Finance Trust Fund Bureau and the bureau's various agencies. Much of this money is not allocated to the most efficient projects.

Politicians in the Liberal Democratic Party (LDP) run most of these government agencies. The Economist Intelligence Unit profile states that "FILP money is channeled toward traditional supporters of the LDP, such as those in the construction industry, and without proper consideration of the costs and benefits of specific projects" (EIU 2001, p. 30). Although this Keynesian approach of government direct-lending does avoid the reluctance of banks to lend, it does not aid economy recovery. Funds are not allocated according to market-based consumer preferences, but to the most politically connected businessmen. This leads to a higher cost of borrowing for those seeking private funds, further distorting the economy. Also, because the loans are often highly risky, Japan's fiscal condition deteriorates further. Once FILP and other "off-budget" debts are included, Japan's debt is estimated to exceed 200 percent of GDP (EIU 2001).

Read the full article here: Explaining Japan’s Recession

In the end it all didn’t work. The agony was prolonged and is now referred to as the Lost Decade in Japan.

Sparked by low interest rates, Japans average home value more than doubled from the early 1980's to 1990 (sound familiar?). Now, over 16 years after prices peaked, home values are still declining and are nearing the average price of 1980.

The situation in Japan then and America now are eerily similar. I would argue that America is actually worse off. The ABSOLUTE lack of personal savings is really going to hurt the team here.

I’m with Mish on this one: Stimulus Checks Already Spent

Related Posts:
Fact Sheet: The Bush Stimulus Package

Bull Markets and Busted Banks

Equities continue to find a bid pre-market with the S&P 500 over 1400.

Naturally, there is talk in the air of a new Bull market. If it weren’t so sad, it would be funny. A new Bull market would require a GROWING economy. A growing economy requires an expansion of credit and borrowing. This is NOT happening and worse CANNOT. The banks are maxed out and are desperately scrambling to find more capital just to keep from having to aggressively shed their balance sheets.

U.S. Banks' Earnings May Fall 26% in 2008, Morgan Stanley Says: “U.S. banks' earnings may fall 26 percent this year and a further 15 percent in 2009, as credit continues to deteriorate and trim profit, according to analysts at Morgan Stanley.

Bank earnings will decline by $17 billion this year and a further $13 billion in 2009, driven by higher borrowing expenses and bad loans, analysts including New York-based Betsy L. Graseck wrote in a note to investors today. Lenders will probably cut dividends and raise capital to offset the losses, she said.

Banks are scaling back loans and raising cash amid a credit-market slump triggered by the collapse of the U.S. subprime mortgage market. The world's biggest financial firms have posted more than $300 billion in writedowns and credit losses in the past year and announced plans to raise more than $210 billion selling stakes.

Earnings may fall further if the U.S. Federal Reserve doesn't cut interest rates, Graseck wrote.”

“We are only in the 3rd inning of the credit cycle and expect it will be worse than 1990-91. Credit deterioration will accelerate and banks will raise more dilutive equity and cut dividends.” –Betsy L. Graseck

I’ve been posting some pretty scary charts on the health of the banking system. All the data was directly sourced from the Federal Reserve Bank of St. Louis. Until recently, I haven’t come across anybody else that has taken a keen interest in the matter. Finally somebody has picked up on it. Check out this great post over at the Market Ticker: The Lies And Obfuscation We Tolerate – Why?

Our banking systems "Non-borrowed Reserves" are deeply negative, implying that the banking system in the United States has no reserves at all, essentially gaining all their operating funds from The Fed after having burned through all their ACTUAL reserves!

That graph, by the way, although the latest available from The Fed directly, is out of date - the current number is $90 billion, or more than twice the total amount of required reserves in the banking system.

Banks are supposed to hold reserves in actual money against deposits, you see. That's because there is a chance you might show up and want the money you let them borrow, like your direct-deposited paycheck, and they have to be able to pay you in that event.

The amount required, in aggregate, is $40 billion as of the present time. The total shown "in reserve" is claimed to be $42 billion, again, as of the 23rd of April.

However, the "non-borrowed" amount, that is, the amount of reserves that are represented by actual deposits from customers, is negative $90 billion dollars.

In other words United States banks, instead of having $40 billion worth of deposits from people like you and me on reserve (not loaned out) instead have burned through all of that, then borrowed $90 billion more, in order to meet their reserve "requirements."

$130 billion dollars, in the hole, all-in.

And what did they post as collateral? To a large degree, dodgy mortgage-backed securities and even, in some cases, perhaps CDOs!

That's fantastic isn't it?

Is this talked about on Bubble TV? Oh hell no. Its just a good time to buy financial stocks, never mind the fact that our banks appear to be in as fine a financial condition from this report as is a subprime borrower in California who was handed an eviction notice as his house was foreclosed upon this morning!

When did this foolishness start?

At the same time the "Term Auction Facility" did.

Now you know why the "TAF" was "needed", eh? Gotta pay that light bill, plus those bonuses and dividends, since we lost all of our customer's deposited money gambling on bum mortgages written against a $500,000 house that we gave to a hairdresser making $8/hour at SuperCuts.

Never mind the other borrowings from The Fed to prop up the system. Oh no, let's not talk about the other $30 billion or so through primary (discount window) and PDCF credit. Naw, nothing to see here with the banks $130 billion in the hole .vs. what are supposed to be reserved deposits from customers, move right on along.

Are there any reserves at all?
Well, from that table it certainly appears not, eh? Negative $130 billion in aggregate (from "required" level) eh?

Can you really believe in a new Bull market while the banks are busted?

Related Posts:
Really Scary Fed Charts: APRIL
Really Scary Fed Charts: MARCH
Fed CHANGES Really Scary Fed Charts
Really Scary Fed Charts, Why Bernanke Will Furiously Cut

Bulltards Grow Complacent: VIX Drops

Yesterday’s New Home Sales data should have DESTROYED the argument that there won’t be a recession or that it will be short and shallow. I know, I know, equities didn’t seem to mind. Wait for it. Looks like the Bulltards really want to tag 1400 on the S&P 500. Volatility (VIX) has fallen to COMPLACENCY levels (in this credit crisis environment).

VIX and More:
Implied Volatility Suggests Risk in Financials at Six Month Low

The US dollar has perked up some on continued weak economic developments out of Europe. Consequently some of the fast money pulled out of commodities such as Gold and Oil.

The $120 area would appear to be 'arbitrary' resistance do to its status as a 'round number'. This makes for an interesting short opportunity around these levels.

Commodity price strength will ANNIHILATE the already MORTALLY wounded U.S. economy...

March New Homes sales show that things are getting worse FASTER. Sales volume has all but collapsed. Prices are starting to collapse. Combined this has resulted in a new record 11 months of sales inventory.

This means more foreclosures, more write downs and more big fat losses for both consumers and the entire financial complex.

New-Home Sales in the U.S. Plunge More Than Forecast (Update2): “Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off.

Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades.”

Calculated Risk:
More on March New Homes Sales
March New Homes Sales, Lowest Since 1991
Architecture Billings Index Falls to Record Low Level

Paper Economy:
New Homes Sales: March 2008

More cracks appearing…

Spanish Unemployment Rate Jumps the Most in 15 Years (Update2): “The unemployment rate in Spain, once an engine of European job creation, jumped the most in 15 years in the first quarter to a three-year high as the building market contracted.

The jobless rate rose to 9.6 percent from 8.6 percent in the fourth quarter, the Madrid-based National Statistics Office said on its Web site. The last time the rate increased that much was in the first quarter of 1993, when Spain most recently slipped into recession. The number of unemployed rose 13 percent, or 246,000, to 2.1 million people, the report said.

The global credit shortage is exacerbating the contraction in the Spanish real estate market following the construction boom that saw almost five million homes built in the past decade. Home sales fell by more than a quarter in the year to January as banks withheld credit from potential buyers.”

With a jobless rate of 9.6%, Spain won’t be able to maintain BUBBLE home prices. The crash in real estate prices that is still to follow will cripple the Spanish economy for many years. Those that don’t walk away from their mortgage debts will spend the rest of their lives paying down the debt. This will obviously adversely affect consumption spending. Those that do walk away will be free to start over, but the losses will then be immediately transferred to the banks. Crippled banks will then tighten credit conditions, squeezing the economy further still.

“Spain's economic growth will slow to 2.4 percent this year compared with 3.8 percent in 2007, the Bank of Spain said this month. The International Monetary Fund says the growth rate will be 1.8 percent, less than half of last year's pace.”

Already growth and growth estimates are dropping rapidly.

“Europe's fifth-biggest economy created more than half of all new jobs in the euro region in the five years through 2006 as record low interest rates and surging construction fueled a virtuous circle of consumption and hiring. Now that process has gone into reverse as banks shut off funding to homebuyers and a glut of properties is depressing home prices. Mortgage lending fell 28 percent in the year to January.”

Spain created more than half of all the jobs created in the Euro regions over the last five years. BUT, the vast majority of these jobs were in the real estate and construction industries. Poof! They will be gone just as quickly as they came. Instant recession.

“Around 800,000 homes built in the past four years remain unsold, according to Bloomberg calculations based on data from the Housing Ministry and Sociedad de Tasacion SA, a real estate valuation company. Cesar Oteiza, director of operations at Idealista.com property web site, says there may also be as many as 300,000 second-hand homes for sale.”

The number of unsold homes, relative to the population of Spain, is at astronomical levels. There now really are ghost towns in Spain…

“This is brutal. That this can happen while the economy is still growing around 2.5 percent is really worrying.” -Jose Luis Martinez, a strategist at Citigroup Inc. in Madrid.

“Spain's getting hit from all sides. This is still the early stages, and unemployment is picking up pretty quickly already.” -Dominic Bryant, an economist at BNP Paribas SA in London

Related Posts:
Slow Motion Housing Crash: UK, Spain
More Ghost Towns
Ghost Towns? In Spain?
UK: Definitely The Next Important Victim

RISE Dark Lord Libor! RISE!

RISE Dark Lord Libor! RISE!

Libor to Rise as Banks Stay Wary, Derivatives Signal (Update1): “Interest-rate derivatives are signaling that the rate banks charge for loans in dollars in London may rise further as financial institutions remain reluctant to lend.

The difference between the rate of three-month loans in London relative to the overnight index swap rate, known as the Libor-OIS spread, is 89 basis points, just below the year high of 90 basis points reached on April 21.

The London interbank offered rate, or Libor, for dollars climbed to a seven-week high amid speculation the global credit crunch prompted lenders to manipulate the rate to prevent their borrowing costs from escalating. The British Bankers' Association said last week it will speed up a review of the process by which money-market rates are set daily and ban any member providing misleading quotes.”

Despite every attempt to bring Libor down, the banks continue to both hoard and need cash. The Fed, in all its brilliance, is offering to do more of the same.

“The persistence of banks' need for cash and increase in Libor rates has triggered speculation that the Federal Reserve will increase, for the third time, the amount it loans through its Term Auction Facility, which is known as TAF. The Fed has auctioned a total of $360 billion in temporary funds through TAF since its debut in December. This month, both TAF auctions were for $50 billion each in 28-day loans.

The rate at this week's TAF was 2.87 percent, or 82 basis points above the minimum bid set by the Fed, the highest spread to date. An increase in the spread signals a rise in demand for funds in the banking system.

The TAF auction rate was 3 basis points below one-month Libor for dollars at 2.90 percent, after the prior auction's rate was 10 basis points above one-month Libor, sparking heightened attention on Libor. The rates for a collateralized loan, as are TAF funds, are typically lower than those that are offered without it, as with Libor, given the maturity is the same.”

What the Fed should be doing is emphasizing and enforcing TRANSPARENCY. This it is not. It is because the banks don’t trust each other, and rightly so, that they are feverishly hoarding and refuse to lend to one another. You see, each bank knows its own books and knows the accounting tricks its using, such as tossing bad positions into the Level 3 asset bucket. Knowing just how precariously everything is balanced in house and just how fake all numbers for public consumption are, the banks rightly assume their peers are just as messed up. What you have is a Mexican stand off. Nobody moves. Until the banks can figure out who among them is actually legitimately solvent, Libor will stay elevated.

This also has knock on effects…

“Use of Eurodollar futures, which are based on predictions for Libor rates, as a bet on expected changes in Fed interest- rate policy has waned amid the questions regarding Libor rates, according to Credit Suisse Securities USA LLC, one of the 20 primary dealers that trade directly with the Fed.

Eurodollar futures open interest, or the total number of futures contracts that have not been closed, liquidated, or delivered, declined by 21 percent since the end of January, according to CME Group data. It fell 4.7 percent for the week ended April 18, after the BBA announced it was monitoring banks involved in the Libor process, from the end of the prior week.

Eurodollar futures, which trade in price terms, settle to three-month dollar Libor at expiration. The settlement price is derived by subtracting the Libor rates from 100.”

“Libor uncertainty has led to a large-scale deleveraging in the Eurodollar complex. Over the past week, the decline in open interest has been dramatic as the problems with Libor have become more publicized.” -Dominic Konstam, head of interest-rate strategy at Credit Suisse

We trade Eurodollar (ED) futures here at CFT Financials in a big way. All day, everyday. Some of our traders are complaining loudly. “Where did all the size go?”
Others are loving it. Less competition you see. There are more opportunities as certain moves are now more pronounced because there is nobody there to take the other side. We’ve also noticed a conspicuous reduction in the “Quants”. Maybe blindly running the computers in this credit crunch resulted in some outsized losses. Or maybe there isn’t enough liquidity for these programs now. Either way, quite a few computers aren’t trading anymore.

More importantly, things have gotten WORSE, not better. So this is far from over.

The Eurodollar (XED, candles) contract prices off of Libor (LIBOR, green). We know Libor is elevated and rising (that would be falling on this chart). The market is taking back Bernanke's rate cuts. Since this is happening in the short end of the curve, you won't yet have noticed the effects on the 'real economy'. Wait until mortgage, car loan and credit card rates all start to rise as well...

Since LIBOR is THE determining factor in most floating rate, variable rate, option ARM and any other crazy credit product out there, you know now that rates and rate resets are going to be suddenly and unexpectedly higher in the very near future.

The S&P 500 (SPX, candle) is back at the 'break point' of 1400. The declining 200 day EMA has almost caught up as well. This 1400 area will act as formidable resistance. With the residential real estate market continuing to deflate and with the commercial real estate market yet to deflate... with the consumer completely crippled... with job losses set to accelerate... and with the entire financial system mortally wounded...

ANY pop above 1400 would have to be temporary...

Now for some comic relief:

Ambac May Raise More Capital After Reporting Loss (Update1): “Ambac Financial Group Inc., the bond insurer that raised $1.5 billion last month, may be forced to seek more capital after it lost money for the third straight quarter.”

Hahahahaha…

Monoline Related Posts:
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Ambac Gets Crushed, Another Bank Wobbles
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble