Damn! How do they KNOW?
These traders are either real financial ninjas (not probable) or they have access to dirty, secret insider info (most probable)...
From Bloomberg on August 13th: U.S. Options Index Climbs as Bank and Brokerage Shares Tumble:
"The most-active options on Sallie Mae were those giving the right to sell the stock at less than half the current price.
Sallie Mae put trading rose to almost quadruple the 20-day average as the largest U.S. educational lender lost 3.3 percent to $15.69. The most-active contracts, which give the right to sell the shares at $7.50 by January 2010, added 3 percent to $1.70."
From Bloomberg on August 19th: US Equity Movers:
"SLM Corp. (SLM US), the student lender known as Sallie Mae, tumbled 14 percent to $13.32."
That's it. No other explanation. Just that SLM got pwned.
Lets take a closer look at option activity. Well, what a surprise? Sallie Mae Put Open Interest looks just like that of Lehman... which looks just like that of Bear Stearns.
Open Interest in the Jan 09 10 Puts is 79 461 contracts. That is massive.
We do know Fannie Mae and Freddie Mac are screwed. We know they recklessly piled on the risk and we know they can't survive on their own. We know a bailout is imminent.
Maybe we haven't been paying enough attention to Sallie Mae. It would appear that ALL GSE's engorged themselves with bad credit.
Hey Sallie Mae! How you doing?
"Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE). The company began privatizing its operations in 1997, a process it completed at the end of 2004 when the company terminated its ties to the federal government." (SallieMae)
Related Post:
Lehman Put Open Interest: Just Like Bear Stearns
Tuesday, August 19, 2008
Sallie Mae: Suspicious Put Open Interest
Swap Spreads, Bank Failures: Worst is Yet to Come
So despite the largest and most aggressive rate cutting campaign in history and despite a full alphabet soup of new, fancy liquidity measures, swap spreads continue to rise…
Can you say, “Uh oh! Something somewhere is about to go KABOOM?!”
Oh, and Libor traded at 2.81 percent today and that approaches the widest levels attained last August when the wheels came off Bear Stearns…
The difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the Libor-OIS spread widened to 78 basis points. That’s a lot and the worst level since May 2nd.
Five-Year Swap Spread Tops 100 on Risk Aversion: Chart of Day: “Interest-rate derivatives are showing that investors are preparing for another round of turmoil in credit markets amid renewed concern that the U.S. will have to bail out Fannie Mae and Freddie Mac.
``Risk aversion is continuing in the market,'' said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., a unit of France's largest bank. ``These firms really may very well be closer to insolvency than we thought.''
The CHART OF THE DAY shows the five-year interest rate swap spread rising above 100 basis points in the past year ahead of the unwinding of structured investment vehicles, the collapse of Bear Stearns Cos., the seizure of IndyMac Bancorp Inc. and now mounting concern that the two-largest U.S. mortgage finance companies may need to be propped up by the federal government. The spread is the premium charged over Treasury yields to exchange floating for fixed-rate payments.
The U.S. plans to recapitalize Fannie and Freddie with taxpayer money if they fail to raise enough equity from private investors, Barron's said on Aug. 16, citing a person in the Bush administration it didn't identify. Treasury Secretary Henry Paulson, who on July 31 received authority from Congress to help the companies if needed, has said a bailout won't be necessary.
The five-year swap spread traded at more than 104 basis points late yesterday. The spread moved above 100 on July 17 for the first time since March, then retreated later in the month. The spread peaked at 116 basis points on March 6, the most since at least 1988, when Bloomberg began compiling data.
Swap spread movements usually reflect changing perceptions of credit risk and expectations of Libor. Swap rates are higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as the London Interbank Offered Rate, or Libor.”
What? Why? How could this be?
Large U.S. Banks May Fail Amid Recession, Rogoff Says (Update2): “Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.
``The worst is yet to come in the U.S.,'' Rogoff said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''
Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''
Oh. Gotcha. The worst is yet to come…
Come on... did you REALLY think the greatest credit bubble EVER would end with JUST a 20% decline in real estate and stock prices?
Related Posts:
Credit Crunch, Bank Failures, Moral Hazard and Adverse Selection
Regional Banks: Dead Men Walking
More Evidence of Pending Deflation
Via Naked Capitalism and the Telegraph, the evidence for a sudden, deflationary sucking sound continues to mount:
More Evidence of Sharp Contraction in Money Supply (Not for the Fainthearted):
“We had written in mid July that money supply in the US, as measured by M1 and M2, had been contracting for several months. Eurozone M1 growth had also fallen to near zero growth levels, and M4, the broadest measure of money in the UK, had actually dipped into negative growth territory.”
The Telegraph story that highlighted this development provided additional detail:
"Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc...Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. "Credit liquidation has begun," he said."
I recommend reading the entire post.
Monday, August 18, 2008
Equities: Bear Wedge, Overbought, Looking Weak
Oil peaked at $147 (grey, area) and equities (SPX, candle) hit bottom. It is clear, that the fuel for this rally in equities is the decline of oil prices specifically and commodities prices more generally. Unfortunately, the Bulltards have misunderstood (again). A declining commodity complex is not 'good for the consumer' (although that is true in the longer term). In this case, right now, commodity prices are signaling a serious and sudden halt in GLOBAL ECONOMIC GROWTH. Ultimately this is BEARISH for those very same equities currently rallying...The last TWO up days have been unable to recover the value lost over last TWO down days. In an 'uptrend' up days typically more than recover the value lost over the previous down days.
Sure, it IS August, but volume on this rally is as pathetic as on the last one. We all know how that ended. With equities now overbought (Slo STO), a rotation DOWN in prices is pending.
The S&P 500 is forming the same rising Bear Wedge... only this time there isn't nearly as much enthusiasm. With the Fed donecutting and bailouts pending, there really isn't much left to pump up the debt fueled behemoth of a U.S. economy.
The NYSE McClellan Oscillator (NYMO, line) is currently massively overbought. However, prices haven’t kept pace. The NYSE Composite Index (NYA, grey area) has barely 'bounced'. This is one hell of a divergence. On the last rally, both moved UP in tandem. Not so this time. This is foreshadowing significant future (soon) equity weakness...
The NYSE Composite (NYA, candle) has not bounced this time around as much as the S&P500 (SPX, grey area). Last time around, both moved up in lock step. The NASDAQ Composite (not shown) has rallied even harder. Without participation by the NYSE, there is no confirmation. The hedgies are just shuffling money around... from one sector to another without committing NEW money. Therefore, rallies are not sustainable. Sell STRENGTH.
Bernanke Opened Pandora's Box
Looks like Bernanke opened Pandora’s Box…
Bernanke Tries to Define What Institutions Fed Could Let Fail: “Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes.
In the year since credit markets seized up, the 54-year- old Federal Reserve chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac.
The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.”
Bernanke crossed a line that even serial bubble blowing Greenspan refused to cross.
“Under Bernanke's predecessor Alan Greenspan, the Fed drew a clear line against using its portfolio to influence specific markets. An internal study published in 2002 warned that “the favoring of specific entities” might “invite pressure from special-interest groups.””
So what happened IMMEDIATELY after Bernanke crossed that line?
“Just three days after the Fed approved a loan against Bear Stearns securities, Pennsylvania Democratic Representative Paul Kanjorski and 31 other lawmakers sent Bernanke a letter asking him to open the discount window to nonbank education-loan companies. Bernanke refused.
The 2002 study said such pressures “could pull the Fed into fiscal debates” and “compromise its objectives” for monetary policy: keeping employment high and inflation low.””
There you have it. Down the slippery slope we go… it won't be long now before irresponsible politicians will be happily commiting the Fed's $900 billion balance sheet to prop up their faviourite failed pet projects.
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