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Friday, August 17, 2007

Global De-leveraging

From the Wall Street Journal (WSJ): Interactive map.

Bernanke Flinches

Bernanke flinched this morning.

Fed Cuts Discount Rate to 5.75 Percent to Ease Credit Crunch : "The Federal Reserve, in an unscheduled announcement, cut its discount rate and said it's prepared to take further actions to "mitigate'' damage to the economy from the rout in global credit markets.

The central bank reduced the rate at which it makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. It's the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman. "

Equity futures melted up on the news in a massive short squeeze.

Having covered my shorts yesterday afternoon when the first rumours of an 'emergency Fed meeting' started circulating, I now have the ammo to scale back into my shorts.

Don't get too excited. This does not help the average fatty trying to refinance his overpriced home. This does not help the maxed out consumer. This does not help the average hedgie and bank holding the toxic derivative sludge. This is NOT a rate cut. Its a DISCOUNT rate cut. This solves nothing and will be a quick 'pop and drop'.

Who wants to be exposed to headline risk over the weekend? How many dead bodies will be discovered over the weekend? Dead hedgies, dead mortgage originators and dead LBO deals? Strength is to be sold.

Yen Set for Best Week Against Dollar Since 1998 on Credit Risk: "The yen was poised for its biggest weekly gain versus the dollar and euro in almost nine years as traders dumped investments funded by loans in Japan."
Keep watching the Yen. Until the hedgies get their confidence back and start putting the Carry Trade back on, we can't have a sustained rally in equities.

Thursday, August 16, 2007

Hedge Funds Are Selling Stocks for Redemptions

Hedge Funds Are Selling Stocks for Redemptions: "Stephen Soo, an analyst at TA Securities Holdings Bhd., comments on the cause of stock declines in Asia. He spoke by phone from Kuala Lumpur.

Asian stocks tumbled today, extending a global rout with its biggest drop in three years. Malaysia's main stock index, the Kuala Lumpur Composite Index, is set for its steepest two- day decline since September 2001.

On sale of stocks by hedge funds:

"Hedge funds are dumping their positions to de-leverage. They are raising cash in preparation for redemptions from their funds. The signs are all there. They have to prepare for

redemptions'' in the U.S.

"As the situation gets worse, the hedge funds have no choice but to sell. It's a domino affect.''

The Great Carry Unwind

Fear and panic is everywhere now and we will likely see capitulation selling of everything on Friday or Monday and thereby exhaust this down leg for the time being.

Yen Rises to Highest Since 2006 as Investors Exit Carry Trades: "The yen rallied to its highest since 2006 against the dollar as investors fled carry trades after global stocks fell and companies in Australia and Canada sought emergency funds because they were unable to refinance debt."

I'm going to call this the Great Carry Unwind. The entire system is now rapidly deleveraging and the devastation this will wreak on every single asset class over the next year will be mind boggling. I'm talking from equities to commodities to houses. Everything.

Chicago Mercantile to Raise Margin Requirements Today (Update1): "CME raised margin requirements on some currency, interest rate and stock-index futures, according to a notice sent by the exchange to members."

Of course. This is how deleveraging works. First you're offside on the position, which already requires that you come up with more margin. Then the margin requirement is raised. Double whammy. It becomes self fulfilling prophesy. Let the forced liquidations accelerate...
Oil Drops as Investors Sell to Cover Equity Losses; Storm Moves: "The main reason is because of the crisis in international financial markets,'' said Wolfgang Kraus, chief energy and commodities trader at BayernLB in Munich. "Liquidity between banks is a rare commodity right now, and many speculative investors have been forced to close out positions.''
That is just one other example of deleveraging and a liquidity crisis. Everything has got to go. The baby too. Not just the batch water...
Treasuries Advance as Drop in Stocks Feeds Demand for U.S. Debt: "Two-year notes rose for a fourth day following the biggest gain in three-month bills since 1989, pushing the gap between two- and 10-year yields to the widest since May 2005."

The yield curve is steepening with incredible speed as everybody rushes for safety. This is blowing flattener trades out of the water and short dollar trades. As of quite recently, both of which were large bets put on by many a hedge fund.

Run on Treasury Bills Spurred by Subprime Contagion (Update1): "Investors are scooping up U.S. Treasury bills like few times in history as an expanding credit crunch makes it hard for companies to roll over short-term debt."

Countrywide Taps $11.5 Billion Credit Line to Boost Liquidity: Good thing the financial ninjas over at Merril downgraded this sucker yesterday... haha...
U.S. Housing Starts Dropped 6.1% to 1.381 Million Pace in July: "Builders in the U.S. started work on the fewest homes in a decade in July as the industry showed no sign of recovering from the 18-month recession.

The greater-than-forecast 6.1 percent decrease to an annual rate of 1.381 million, followed a 1.47 million pace in June, the Commerce Department said today in Washington. Building permits also fell to a 10-year low. "

Poole Says Only `Calamity' Would Justify Rate Cut Now (Update1): "William Poole, president of the St. Louis Federal Reserve Bank, said the subprime mortgage rout doesn't threaten U.S. economic growth, and only a "calamity'' would justify an interest-rate cut now."

Taunting the trading Gods like that is always a brilliant idea. Right now Mr. Market is thinking, "Ah calamity eh? I could totally do that..." Mr. Poole, get out the ketchup, cuz you're gonna have to eat those words for sure.

Wednesday, August 15, 2007


Expect more pain today.

Yen Rises to 4 1/2-Month High Against Dollar on Subprime Losses: Currencies are on the move as massive amounts of liquidity is re-arranged around the globe. The Carry Trade unwind is in full force now. High yield currencies are dropping fast as the hot money is pulled out to repay loans in low yield currencies. The safe haven bid is back and the US dollar is feeling the love.

Emerging-Market Stocks, Currencies Drop as Subprime Woes Mount: Everywhere everyone has suddenly come to the same conclusion: "We've been drastically underpricing risk. Doh." Now everyone is doing the same thing at the same time, reducing their risk exposure.

Sentinel Management Group Halts Client Redemptions (Update5): When money market funds implode, you should be very very concerned. Well to be precise, you should have been concerned back when you first discovered a money market fund that had ridiculous yields....

To make matters worse, Sentinal is used by the hedgies to park their cash until they need it. Its a money market fund for hedge funds. Guess what? They need the money. Desperately. That was supposed to be their source of liquidity...

Coventree Seeks Emergency Funding for Second Day (Update5): Canada's largest non-bank issuer of asset backed commercial paper failed, again, to roll over their debt. Coventree could be Canada's first investment bank casuality...

Subprime-Infected Funds Drive Demand for Dollars (Update2): The dollar is no longer the currency you love to hate. Now, it's the currency you can't live without. Such is the power of the safe haven bid.

Countrywide Cut to `Sell' at Merrill; Bankruptcy Seen Possible: This is a perfect example of why analysts should be shot. Cut to Sell after a 40% decline. Way to go. Genius.

U.S. Consumer Prices Rose 0.1% in July; Core Rate Gains 0.2%: CPI was in line. Nothing to see here. Traders have other fun things on their collective plates anyways...

U.S. MBA's Mortgage Applications Index Rose 3.4% Last Week: This one always cracks me up. The talking heads on bubble vision view this as 'bullish' and a sign 'that there is demand for homes'. Ridiculous. Applications are rising simply because people are applying, getting rejected and re-applying. People are scrambling to re-finance.

What happens when there is only one exit and everybody wants to get out?
I think I know and its going to be glorious.

Tuesday, August 14, 2007

PPI, Trade Deficit, Wal-Mart and Home-Depot.

U.S. Producer Prices Rise 0.6% in July; Core Rate Rises 0.1%: Total PPI rose 0.6% (consensus 0.1%) in July, led by a 2.5% jump in energy prices. The more closely-watched core rate rose just 0.1% (consensus 0.2%), but the year/year rate now stands at 2.3%.

U.S. Trade Deficit Unexpectedly Narrowed in June (Update1): The Trade Deficit unexpectedly narrowed in June to $58.1 bln (consensus $61.0 bln).

Wal-Mart Posts Profit Below Estimates, Cuts Forecast (Update2): Wal-Mart Stores Inc., the world's largest retailer, said second-quarter profit rose less than analysts anticipated and lowered its earnings forecast after the company cut prices on thousands of back-to-school items.
Full-year profit will be as much as $3.13 a share, the company said today, less than the $3.16 analysts had estimated.

Home Depot Net Income Falls 15% on U.S. Housing Slump (Update3): Home Depot Inc., the world's largest home-improvement retailer, said profit fell 15 percent and revenue dropped for the first time in four years after a U.S. housing slump reduced demand for appliances and remodeling.

The company also said today that it's evaluating market conditions in preparation to buy back as much as $22.5 billion in shares, adding a note of caution to its repurchase plans.

The Bulls Had It All Yesterday...

Monday, August 13, 2007

Housing Busts and Hedgefund Meltdowns

Returning to Normal

Fed Funds at 5 1/4%, Matching Central Bank's Target
ECB Adds Cash for Third Day, Says Market Normalizing
It looks like things are stabilizing and starting to return to normal. Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash. We will see in at 9:30 AM if the Fed will have to inject more money.

Goldman Global Equity Fund Gets $3 Billion in Capital
Goldman injected another $3 billion into its Global Equities Opportunities Fund after it lost $1.4 billion. The fears of continued forced selling by some of these funds seems to be receding on this news.

U.S. Retail Sales Rose 0.3% in July, Beating Forecast
Fears that retail sales were collapsing appear to be unfounded.

" The 0.3 percent increase followed a revised 0.7 percent decline the prior month that was smaller than previously estimated, the Commerce Department said today in Washington. Purchases excluding automobiles climbed 0.4 percent after falling 0.2 percent. "