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Friday, August 31, 2007

I Love Bernanke!

I love you man.

No bailout from Bernanke.

Bernanke Says `Will Act as Needed' to Limit Credit-Rout Impact: "It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,''

Finally. Somebody with BALLS and DISCIPLINE.
Again: Bernanke is NOT Greenspan.

Text of Fed Chairman Bernanke's Address to Jackson Hole Meeting

Bernanke is NOT Greenspan

Today is the big day. What will Bernanke say? I have to say it again: Bernanke is NOT Greenspan.

President Bush stole some of Bernanke’s thunder when he started babbling about a possible subprime bailout package. Traders got a little giddy early in the morning and started spiking futures higher across the board.

First Bush: Bush to Expand Government Role to Deal With Subprime (Update3): “President George W. Bush will today announce steps the administration says will help people with subprime mortgages keep their homes.

Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates, according to an administration official, who spoke on condition of anonymity.”

This is a terrible. The only thing guaranteeing a non-performing loan will accomplish is that the losses will be transferred from the homeowner to the generic taxpayer. I intend to write in depth on the economic implications of this at a later date. Bottom line: This was tried in Japan when their credit and real-estate bubble burst. It did nothing but prolong the agony. Non-performing loans tied up massive quantities of bank reserves and ruined their balance sheets for ten years. This made it impossible for financial institutions to provide ample credit to those who deserved it. The consequences were deflation and economic stagnation.

The Bush plan is explained very well here: Bush Moves To Aid Lenders

Barclays Rescues $1.6 Billion Cairn Capital Debt Fund (Update3): “Barclays Plc, the U.K.'s third- biggest bank, will help rescue a $1.6 billion debt fund run by London-based asset manager Cairn Capital after it was unable to raise money in the credit markets.

Barclays's securities unit will provide a loan to refinance the fund's asset-backed commercial paper as it falls due, the London-based bank said today in a statement. The fund owns U.S. securities mostly backed by home loans.”

Uh oh. Barclays now too. Throwing good money after bad has a terrible crowding out effect. In this case, as financial institutions are forced to pump up the balance sheets of various lenders it ties up their capital. This makes it unavailable to worthy lenders seeking funds for PRODUCTIVE investments. The consequences to the economy can be massive and have been massive in the past. Again, this is exactly what happened in Japan.

Deutsche Bank Shuts Credit-Trading Unit in London (Update1): “Deutsche Bank AG, Germany's biggest bank, is disbanding a London-based team of traders that made wrong-way bets on credit-markets using the firm's money, said a person familiar with the situation.”

Most financial institutions are now starting a retrenching process as they recalculate and reduce their VAR. Yet again, we are talking about long run consequences: “Getting rid of a whole team implies getting rid of a strategy and the earnings going forward,” said Lakhani, who rates Deutsche Bank stock “hold.”

Lone Star Cuts Offer for Accredited to $214 Million (Update2): “Lone Star Funds cut its takeover offer for Accredited Home Lenders Holding Co. by 44 percent to $214 million, after the subprime mortgage company fired 60 percent of its workers and stopped making new loans.”

No surprise here. Expect this kind of re-pricing to become a trend.

Mergers Slow From Record Pace to Least Busy Month in Two Years: “Mergers and acquisitions slowed from a record pace as turbulent credit markets eroded investor confidence and led to the worst month for takeovers in two years.”

Despite the slow down, mergers and acquisitions are still at ridiculously elevated levels in frequency, size and premiums.

Britain's Housing Lenders Tighten Subprime Credit (Update1): “U.K. lenders responsible for 12 percent of the nation's mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit.”

I cannot say this often enough: Its not JUST the US. The credit bubble is GLOBAL. The U.K. is just a few months behind on the timeline.

“There are some lenders who have pulled their current product range and not announced any new ones,” said Ray Boulger, senior technical manager at Charcol Ltd., Britain's biggest online mortgage broker. “Others have put up rates until they get little or no business.”

This is capitalism. This is how capitalism evolves. New fancy financial products were created, employed, tested and now the data is pouring in. Economic agents are no rapidly studying this data and adjusting their assumptions, terms and conditions. In this case the most probable outcome is that most of these products will cease to be available at all to most borrowers because the risk of these products had been UNDERESTIMATED and therefore UNDERPRICED.

“U.K. consumers shoulder a record 1.35 trillion pounds in debt, the highest per capita among the Group of Seven nations. Mortgage lending hit a record in July, rising 13 percent over the year even as the Bank of England raised its benchmark interest rate to the highest in six years.”

What happens when you have debt levels like that and financial institutions have decided to take a step back? Equity indices putting in new record highs is definitely NOT what happens.

“The Financial Services Authority, Britain's securities regulator, last month said it had studied 485 subprime loans and found that more than half were awarded to customers who were not required to provide evidence of their income. And with almost half the loans, the brokers involved failed to adequately assess the ability of borrowers to pay.”

Sound familiar?

For fun: China kung fu monks seek apology for ninja affront: I would totally have ninja-ed them monks. Like they'd even stand a chance... :P

Thursday, August 30, 2007


On Monday all my charts had absolutely perfect setups and I had absolutely perfect fills. On Tuesday my trailing stops chased the market down as all equity indices went into a quiet, orderly drop. Yesterday, I died a little inside as each and every single one of my beautiful short positions was blown out. I watched my monster P&L shrivel up faster than my penis in cold water and now the charts don’t look so good anymore.

U.S. Economy Expanded at a Revised 4% Annual Rate (Update2): “The U.S. economy expanded in the second quarter at the fastest pace in more than a year as exports surged and business spending accelerated.

Growth was revised up to a 4 percent annual rate, according to a report today from the Commerce Department in Washington. The median forecast of economists polled by Bloomberg News was 4.1 percent. The economy grew at a 0.6 percent pace in the first quarter.”

This makes a rate cut damn near impossible.

Bank of England Loaned 1.6 Billion Pounds at 6.75% (Update5): “The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market.

The money lent at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower.”

Liquidity problems are still out there. But the real question is this: Was this one single institution or a number of them?

“It is a massive number, but it's important to understand if it is a single institution or a number of borrowers,” said Alan Clarke, an economist at BNP Paribas SA in London. “It's not clear if this is going to increase people's risk aversion.”

Freddie Mac Net Drops on Provision for Housing Slump (Update2): “Freddie Mac, the second-biggest U.S. mortgage finance company, reported second-quarter profit fell 45 percent after setting aside $320 million for losses from the worst housing slump in 16 years.

Net income declined to $764 million, or $1.02 a share, from $1.4 billion, or $1.93, a year earlier, McLean, Virginia-based Freddie Mac said today in a statement. Revenue dropped 4.8 percent to $2.26 billion.”

A 45% drop is pretty big. But, these numbers lag. The worst is yet to come. Wait for the rate resets later this year. The consequences of those resets are going to be brutal.

Goldman, Wall Street Firms' Estimates Cut by Lehman (Update2): “Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.”

Classic. Analysts at the top of their game. Again.

H&R Block May Close Loan Business as Losses Double (Update1): “H&R Block Inc., the biggest U.S. tax- preparation company, may stop making new loans through Option One Mortgage Corp. to revive a planned sale of the unit after losses more than doubled.

H&R Block may sell just Option One's loan-servicing business to hedge-fund manager Cerberus Capital Management LP, which agreed in April to purchase the entire subsidiary, the Kansas City, Missouri-based company said today in a statement. The deal may also fall apart, H&R Block said.”

Looks like this deal might be in serious trouble… and there are about $300 billion in deals still pending…

U.S. Stocks Retreat; Goldman, Merrill, Wal-Mart Lead Decline: “U.S. stocks fell on concern rising credit costs will reduce profit at securities firms and slow the economy's six-year-old expansion.”

Yes, that would make sense. Cheap, plentiful credit was the fuel for this expansion. Worse, it was also the oxygen. Reduce it significantly, and no amount of growth from India or China will ‘soften’ the blow. (Especially since enough of their growth is export based, that a recession over here will put the brakes on pretty hard over there too.)

Wednesday, August 29, 2007

Bear Raid

Equity indices dropped surprisingly easily yesterday…

U.S. MBA's Mortgage Applications Index Decreased 4% Last Week: “Mortgage applications in the U.S. declined to a four-week low as the rate on one-year adjustable loans jumped by the most ever.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan fell 4 percent last week to 615.2 from 641.1. The group's purchase and refinancing gauges each decreased for a second week.”

I don’t particularly like this Index because I believe it is almost useless. Marginal borrowers scrambling to find last minute financing will apply for multiple mortgages because they will get turned down several times. This index overstates mortgage applications. The Bulltards (my new favourite term for a certain breed of market participants that was coined by Tim Knight of The Slope of Hope) parade high mortgage applications as a ‘bullish’ sign for housing and the economy without understanding why rising mortgage applications may actually be a sign of WEAKNESS.

“Banks may be jacking up short-term rates to dissuade buyers from choosing riskier mortgages as defaults on subprime loans climb. The housing slump will worsen as banks restrict credit availability and falling real-estate prices prevent owners from tapping home equity for extra spending money, economists said.”

Yeah, that’s right. The banks don’t necessarily want your risky business right now. They have to look inwards and tend to their wounds first… and that might actually take quite a while.

Cheyne May Liquidate Commercial Paper Unit on Losses (Update1): “Cheyne Capital Management Ltd., whose Queen's Walk mortgage bond fund reported losses in June, may be forced to sell assets backing a $6 billion commercial paper program after a global credit market rout.

The Cheyne Finance LLC fund has been selling investments and has enough cash to repay commercial paper due through November, London-based hedge fund company Cheyne Capital Management said in a statement. Standard & Poor's cut Cheyne Finance's ratings yesterday, citing the deteriorating market value of its assets.”

The commercial paper market is still locked up. Forced liquidations will therefore continue.

““We will see more names fall by the wayside,” said Tom Jenkins, an analyst at Royal Bank of Scotland Group Plc in London. “The sales will look increasingly distressed.””

Fed Put Inflation Skepticism Above Credit Concern (Update5): “Federal Reserve officials put aside concerns about the rising cost of credit at their Aug. 7 meeting because they weren't convinced a slowdown in inflation would last, minutes of the gathering said.”

I brought it up in yesterday’s post, pre-market: Bernanke is NOT Greenspan. We’ve had a regime change. This regime now has the wisdom NOT to repeat the mistakes made by Greenspan and must still establish its inflation fighting credibility. Therefore, they will not cut to bail out the FINANCIAL MARKETS, even in an election year. They will cut to bail out the ECONOMY. We are nowhere close to that point… yet…

China to `Actively' Take Measures to Curb Inflation (Update2): “China's deputy central bank governor Su Ning said the authority will “actively” take measures later this year to stabilize inflation after prices climbed.

“The People's Bank of China has been closely monitoring current rising inflation,” Su told reporters at a press conference in Beijing today. “So far the measures we've taken to curb price increases have shown some effect.””

With inflation at a 10 year high, and the public pouring everything they own into equities, this is still too little to late. Judging by the price action of Chinese equities, I would say it is almost safe to argue that the economy has already overheated. The blow off top is pending... if we haven’t had it already (See charts: FXI).

China Urges Companies to Avoid Speculation on Stocks (Update3): “China's securities regulator is urging companies to rely less on gains from the stock market after a rally in the benchmark index this year increased the share of corporate profits coming from equity investments.

About 12 percent of earnings were derived from share market windfalls in the first quarter and the ratio may be surging, Qi Bin, head of research at the China Securities Regulatory Commission, said in an interview in Beijing.”

Why does this sound familiar? Oh yeah. Right. The Tech Bubble. Dotbomb A bought shares in Dotbomb B. Both marked to market as equities raged and reported the profits. Bulltards said, “Lookit those rock solid earnings. This stock is cheap.” Those that noticed that these ‘earnings’ weren’t sustainable quietly filed out the side door.

Same shit. Different pile.

Tuesday, August 28, 2007

Perfect Charts

All the charts I’m looking at are just perfect right now. Almost beautiful. All the major indices bounced into resistance around declining trendlines, declining 50 day EMAs, or declining 200 day EMAs after barely completing 61% Fibonacci retracements. All the bounces were completed on low volume and financial indices bounced the least. Low yield currencies, like the Yen, have pulled back and closed important gaps on the charts. The high yield currencies, such as the Australian dollar, have all bounced out of deeply oversold territory and into important resistance. Everything is ready now for the second leg down. Time to test the lows…

A few catalysts of course would help:

U.S. Stock-Index Futures Fall; Citigroup, Lehman Shares Decline: “U.S. stock-index futures declined after Merrill Lynch & Co. analysts said tighter credit markets will hurt earnings at banks and securities firms. Citigroup Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. fell after Merrill lowered its recommendation on the shares and cut its profit estimates for this year and next.”

About time… and duh… of course ‘tighter credit markets will hurt earnings.’ Analysts are always too late.

German Business Confidence Declines to 10-Month Low (Update3): “German business confidence fell to a 10-month low in August after an increase in the cost of credit clouded the outlook for economic growth.”

Well, considering two good sized German banks just got bailed out courtesy of the state, is it really that surprising to see confidence drop?

When the state bails out those that should have failed you get the worst possible economic system “Capitalism without financial failure is just socialism for the rich.” James Grant wrote a very worthwhile read in NYT: The Fed’s Subprime Solution. Barry Rictholtz of The Big Picture also has a good post about this story.

Yen Gains on Speculation Credit Losses Will Deter Carry Trades: “The yen strengthened for a second day against the dollar on speculation banks will report more credit- market losses, prompting traders to pare higher-yielding investments funded by loans in Japan.”

Let the carry unwind continue. Also of significance are the BOJ minutes for july.

BOJ to Raise Interest Rates Gradually, Minutes Show (Update2): “The Bank of Japan will raise interest rates gradually based on developments in the economy and prices, July meeting minutes released today show.”

The BOJ really doesn’t like the Carry Trade, especially now that it is becoming more and more obvious that cheap liquidity can cause serious misallocations of capital and under appreciation of risk.

“Governor Toshihiko Fukui told reporters after last week's decision that keeping borrowing costs too low may spur risky investments, suggesting the bank still plans to raise rates.”

Put on your helmets… time to plunge.

Monday, August 27, 2007

No Rate Cut In September

I believe that this week traders will realize that Bernanke will not cut in September and start pricing accordingly. It is going to take traders a while to realize that Bernanke is NOT Greenspan.

As Bernanke Retreats to Wyoming, Critics Ask Is He Prime Time: “Ben S. Bernanke's critics from Washington to Wall Street are starting to ask whether the Federal Reserve chairman is ready for a prime-time crisis.”

Traders really do not understand Bernanke and know it. This makes them a very nervous bunch.

Home Depot Cuts Supply Unit Price to $8.5 Billion (Update1): “Home Depot Inc., the world's biggest home-improvement retailer, agreed to sell its construction- supply unit for $8.5 billion, cutting the price by 18 percent as the U.S. credit squeeze curbed demand for leveraged-buyout debt, three people familiar with the agreement said.”

While this deal did go through, an 18 percent price cut is a wake up call. It is only a matter of time before traders and bankers start to questions the valuations of some of the massive still pending LBOs.

LBBW to Buy SachsenLB to Help Rescue State-Owned Bank (Update2): “Landesbank Baden-Wuerttemberg, the largest German state-owned bank, agreed to buy Landesbank Sachsen Girozentrale following a 17.3 billion-euro ($23.7 billion) credit bailout because of investments in U.S. subprime debt.

LBBW will pay at least 300 million euros for the bank and immediately provide 250 million euros in cash for SachsenLB, whose finance affiliates have struggled to sell commercial paper amid a global credit crunch. A final purchase price will be set by the end of the year, LBBW said yesterday in Stuttgart.”

A $23.7 billion bailout is not insignificant. The new combined bank will be busy, maybe for years, fixing this mess. As financial institutions around the globe tighten up and look inwards there will be very real consequences to the global economy.

The McClellan Oscillator (Ratio/Adjusted) for both the NYSE and NASDAQ has shot from deeply depressed oversold levels straight to overbought. This is yet another argument for a short term top in the very near future. Existing home sales today might be the catalyst to turn the market down.

I use a 50 and 200 day EMA of the McClellan Oscillator to 'smooth' the data. Both averages fell below the zero line in mid May signalling the deterioration of market internals even as prices continued to march higher.