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Friday, September 14, 2007

Kill The Greenspan Put

North American indices have spent the early part of this week trickling higher in anticipation of Fed action early next week. I’m expecting a modestly negative bias today on profit taking and position squaring in advance of a busy week next week.

Commercial Paper Slump Eases; Asset-Backed Drop Slows (Update6): “The decline in the U.S. commercial paper market slowed last week, prompting speculation that the worst of the short-term credit rout may be over.

U.S. stocks rose and Treasuries fell after the Federal Reserve reported short-term debt dropped by $8.2 billion, compared with a decline of $54.1 billion a week earlier. That coincided with Countrywide Financial Corp. obtaining new financing and banks finding buyers for loans to fund Kohlberg Kravis Roberts & Co.'s buyout of Alliance Boots.”

In my opinion, it is premature to call a bottom here. Things are just starting to fall apart in other markets like the UK:

Northern Rock Gets Emergency Bank of England Funding (Update4): “Northern Rock Plc got emergency funding from the Bank of England, the biggest bailout of a British lender in 30 years, after a freeze in money markets left the mortgage provider unable to finance itself.

Northern Rock shares plunged as much as 26 percent to a six- year low after the company said today the central bank will provide an unspecified amount of credit. The Newcastle, England- based bank is the U.K.'s third-biggest lender by gross mortgages with loans worth 17.4 billion pounds ($35 billion) as of June 30.”

At the end of yesterday’s post, Bill Gross The Ninja, I discussed how the first cracks are now appearing in the UK real estate bubble.

“Northern Rock is the U.K.'s worst performing bank stock this year. Its shares fell 46 percent through yesterday, compared with the 12 percent drop of the nine-member FTSE All Share Banks Index. The stock fell 137 pence to 502 pence as of 10:45 a.m. in London, valuing the lender at 2.11 billion pounds.

“The outlook for Northern Rock as an independent entity does not look good,” said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has a “sell” rating on the stock.”

House Prices Plunge $20 000: “Calgary's resale housing market, which has set a scorching pace for the past two years, has dramatically cooled, with the average price for single-family homes plunging by about $20,000 in August, according to a local realtor.”

Calgary is at the heart of Canada’s commodity lead boom. Real estate prices in Calgary and surrounding areas like Fort McMurray have shot to ridiculous levels that rival and even exceed the excesses seen in the most speculative US markets. The first cracks are starting to appear DESPITE STUBBORNLY HIGH COMMODITY PRICES.

“The average sale price dropped primarily because of a decline in the sales of luxury homes, those over a million dollars.”

A closer look at the data reveals that most of the drop was caused by a drop in luxury home sales, therefore disproportionately pulling down the mean price. HOWEVER, when an 850 square foot condo costs $362 000 and commands a $300 condo fee, even those with salaries of $70 000 are living beyond their means.

Fidelity's Shah Expects Sharper Swings in Markets (Update1): “Fidelity International Ltd.'s Sanjeev Shah, who's taking over the 3.1 billion-pound ($6.3 billion) U.K. Special Situations Fund from Anthony Bolton, said the current turmoil in markets will get worse.

“The environment has changed and it will get more volatile,” Shah said in an interview. “There is more uncertainty in the market in terms of economic outlook.””

I post what some of the big players are thinking because it is important. These thoughts are self-fulfilling prophesies first and then contrarian indicators second. As the hedgies, traders and other managers start to get concerned they will act accordingly and asset prices will behave accordingly. In this case EVERYBODY is reducing their risk exposure. That means rallies are being sold and valuations are contracting. Expect lower highs and lower lows until everybody is fully de-levered and re-trenched.

TraderFeed has great posts on market and trader psychology with the recent post Using Emotion to Change Emotion being particularly relevant during these times of market uncertainty and heightened volatility.
AfraidToTrade has great posts about managing emotions and building sound trading strategies that overcome your trading fears. The Psychology section of the blog is a great resource.

China Raises Rates for Fifth Time to Cool Economy (Update2): “China raised interest rates for the fifth time since March to curb the fastest inflation since 1996 and damp speculation in stocks and real estate.

The benchmark one-year lending rate will increase to a nine- year high of 7.29 percent from 7.02 percent, starting tomorrow, the central bank said today on its Web site. The one-year deposit rate will rise to 3.87 percent from 3.6 percent.”

Stomping on the brakes again… eventually they’ll get this thing to slow down… or skid out because this wild behemoth really isn’t easy to control at all.

Ease Money-Market Crisis by Letting Banks Go Bust: Mark Gilbert: “It's far from certain that lower central-bank rates would unfreeze the money markets. Moreover, central bankers are probably willing to sacrifice smaller lenders so the pain is enough to make financiers more cautious about future investments, provided there's no threat to general stability.”

The Banke of England however, has a different opinion and as I’ve argued in We Need Another Volcker, I believe it is the correct approach.

“The Bank of England, by contrast, has been adamant that it won't rescue the money markets by accepting low-grade collateral, or by offering three-month cash. Indeed, the Fed and the ECB were rebuked yesterday, albeit obliquely, by U.K. central bank Governor Mervyn King for bailing out commercial banks.

King sounds determined to take advantage of the current contagion to try to extinguish the notion of a “Greenspan put” or “Bernanke put,” the idea that central banks will always ride to the rescue.

The U.K. central-bank chief said helping commercial banks salvage their “risky or reckless lending” is especially dangerous because it “encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their liquidity problems will be insured ex post by the central bank.””

The death of the “Central bank put” would beneficial to all in the long run as market participants are firmly reminded that the risks they take are ACTUALLY their own. The current system of privatizing profits and socializing the losses is disgusting and perversion of capitalism.

“The correct number of banks to fail when a credit bubble bursts is not zero. If the best way to avoid the mispricing of risk in future is to sacrifice some of the less-prudent lenders on the altar of liquidity, then let the culling commence. That is especially the case if it erases the perception that central banks will always act as lenders of last resort, even to institutions that don't deserve to survive.” [Emphasis mine]

Think about it. The Fed injects liquidity and cuts rates. What kind of lesson will that send to the irresponsible lenders and consumers of credit? What will that do to their FUTURE behavior towards risk? How big will the NEXT bubble therefore be?

Thursday, September 13, 2007

Bill Gross The Ninja

I don’t expect much action now as the over hyped Fed meeting on September 18th draws ever nearer. I must say PIMCO’s Bill Gross is quite the financial ninja:

Pimco's Gross Exited Commercial Paper in August, Holdings Show: “Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., sold the fund's remaining holdings of commercial paper last month as demand for short-term corporate debt dried up.

The $104.4 billion Pimco Total Return Fund had none of its assets in debt carrying the ratings given to issuers of commercial paper at the end of August, according to data published on the Newport Beach, California-based firm's Web site. As recently as April the fund had 20 percent of its assets in debt carrying the highest commercial paper ratings.”

That is one hell of a large position to move in such a timely manner. I’m impressed.
Gross last month said the asset-backed commercial paper market “is basically history.” For a while at least…

Bank of England Relaxes Deposit Restrictions to Spur Lending: “The Bank of England relaxed restrictions on the amount of money financial institutions need to hold with the central bank, encouraging them to lend more to each other as it tries to reduce overnight borrowing costs.

Commercial banks, which agree to hold a specific amount of money at the Bank of England at the end of each month-long maintenance period, can now undershoot that target by 37.5 percent and still earn interest at the benchmark interest rate, the central bank said today. That compares with a previous restriction of 1 percent.”

Still struggling with the moral hazard dilemma, the BOE is digging deep into its bag of tricks in an attempt to bring down the overnight lending rates between banks.

“The U.K. central bank's actions contrast with the more activist stance of the European Central Bank and the U.S. Federal Reserve.”

Overnight Euro Libor Drops as ECB Vows to Help Market (Update1): “The overnight rate banks charge each other for euros dropped after European Central Bank executive board member Gertrude Tumpel-Gugerell said the bank will continue to support ailing money markets.

The ECB yesterday injected an extra 75 billion euros ($104 billion) for three months to ease a credit drought. Global borrowing costs have surged because lenders are wary of providing cash to institutions that may have undisclosed losses from U.S. subprime mortgages. The squeeze has all but closed the market for commercial paper, forcing banks and institutions to raise ever more money in the interbank markets.”

I’m really starting to get suspicious here that something unpleasant is lurking in the shadows. The ECB has been injecting monster amounts of liquidity while the other central banks have injected far less and far less frequently.

Bernanke Spurns Greenspan Quick Fix, Seeking Data, Deliberation: “Alan Greenspan trusted his instincts. Ben Bernanke trusts the MAQS.

For the past several days, the MAQS -- a group of analysts in the Federal Reserve's Macroeconomic and Quantitative Studies unit -- have run a series of what-if scenarios on the U.S. economy that will play a critical role in next week's interest- rate decision.”

For the future of US and global economic stability, I can only hope that Bernanke will act more like the BOE’s King and less like Greenspan. News like this, suggesting calm deliberation and long run planning, coming out of the Fed is encouraging. The Fed under Bernanke appears more disciplined…

KKR May Delay First Data Loan Sale on Terms Dispute (Update1): “Kohlberg Kravis Roberts & Co. may delay the sale of loans to finance the $26 billion takeover of First Data Corp. until next week after failing to agree on terms with bankers, people close to the negotiations said.

The First Data sale is the biggest to be attempted since rising U.S. mortgage defaults led to the highest borrowing costs for LBOs in four years. The planned sale is being watched by bankers and buyout firms as a gauge for how $320 billion in debt committed for pending buyouts may fare. Banks would have to hold the loans and bonds if they can't be sold to investors.”

Failure of this transaction, or some of the other large ones, WILL knock quite a few points off equity indices as valuations are re-adjusted downwards. Conversely, IF First Data gets done, it will show a significant vote of confidence.

“Demand for LBO debt has evaporated, with more than 50 bonds or loans abandoned or reworked since June. Investors are balking at debt without covenants, or restrictions, that give them greater power over a company's finances.”

Goldman Global Alpha Fund Fell 22 Percent in August (Update1): “Goldman Sachs Group Inc.'s Global Alpha hedge fund fell 22.5 percent in August, its biggest monthly decline, on losses from currency and stock trades, according to an update sent to investors.

The fund, managed by Mark Carhart and Raymond Iwanowski, has dropped by a third in 2007 and 44 percent from its peak in March 2006. Investors notified New York-based Goldman last month that they plan to withdraw $1.6 billion from the fund, or almost a fifth of the assets as of July 31.”

That is some serious pain both in terms of returns and redemptions. Another month of redemptions and the fund will further have to adjust positions in what could still be a less than ideal market.

“Goldman Alpha's biggest loss in the month stemmed from the managers' decision to sell Japanese yen and buy Australian dollars. The so-called carry trade unraveled when the Australian dollar fell 6 percent against the yen in August. The managers' investment in equities, including stocks in the U.S., Norway and Finland, declined 4.7 percent.”

THAT was a CROWDED TRADE. Everybody and his mamma were in that exact same position. I’m surprised that the super hedgies at Goldman didn’t see this one coming. They are supposed to be the best ever at this game…

U.K. House Prices Decline for First Time Since 2005 (Update1): “U.K. house prices fell for the first time since 2005 in August after five interest-rate increases in the past year discouraged buyers, the Royal Institution of Chartered Surveyors said.”

Just as things look like they can’t get any worse in the US, the UK is showing the first signs of its own real estate bubble topping out.

“Higher borrowing costs are nevertheless increasing the burden on consumers already shouldering a record 1.3 trillion pounds ($2.6 trillion) in debt. A gauge of interest from new buyers dropped the most since August 2004, RICS said.

“Affordability is at its most stretched in over a decade, said RICS's Perry. “Many will worry that rising mortgage repayments will prove a step to far.””

Housing prices have more than tripled in less than ten years. Some of the blame can be attributed to a shortage of housing. However, shortage or not AFFORDABILITY is a must.

Wednesday, September 12, 2007

We Need Another Volcker

Equity indices drifted up yesterday on extremely low volume. To have expected anything else is to misunderstand the psychology of September 11th. Prices can drift a bit further before most indices enter the danger zone once again for the Bears. I’m looking to add to my shorts around these levels.

Three-Month Pound Libor Holds at 9-Year High; King Shuns Market: “The three-month rate banks charge each other for pounds held at its highest in nine years after Bank of England Governor Mervyn King said policy makers are unwilling to supply extra cash to money markets.”

The Bank of England, thus far is the only central bank to BOTH fully grasp the future implications of moral hazard AND act accordingly.

“The central bank won't amend its system for financing commercial banks by changing collateral rules or making longer- dated loans for fear of encouraging risky behavior in future, King said today in written testimony to the U.K. Treasury Committee.

“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior,” he said. “That encourages excessive risk- taking, and sows the seeds of a future financial crisis.””

What the world needs is another Paul Volcker to really purge the system and set things up for real, robust growth. ASSET PRICE inflation (yeah that would include your ridiculously priced home) is just INFLATION by another name.

“The overnight rate for euros dropped 2 basis points to 4.15 percent, after climbing 40 basis points yesterday as the ECB drained a record 60 billion euros ($83 billion) from the money market. The three-month rate declined 1 basis point to 4.74 percent, near an eight-year high, the BBA said.

The European Central Bank, the Fed and other central banks have loaned banks $400 billion over the past month to help lower lending rates. The Fed on Aug. 17 cut the rate at which it loans money directly to banks and dropped its bias toward fighting inflation.”

The other central banks just don’t get it. IF the central banks manage to navigate through this current mess, the disrespect of risk in the financial community will rise to knew levels.

Dollar Falls to Record Low Against Euro on Rate Differential: “The dollar fell to a record low against the euro as investors bet the Federal Reserve will reduce its target interest rate, narrowing the gap between the U.S. and Europe.

The currency declined for a sixth day, the longest losing streak since April, after the National Association of Realtors yesterday cut its home sales forecast, stoking concern the housing slump is spreading. Investors meanwhile added to wagers the European Central Bank will raise borrowing costs by year-end.”

Such a weak currency makes it very hard for Bernanke to cut rates. The bottom could really fall out then… Gold is already on the move and oil is misbehaving…

Saudi Arabia Wins OPEC Increase, Defying Iran, Libya (Update2): “Saudi Arabia persuaded OPEC members to increase production for the first time in a year, seeking to reduce the record price of oil, over the objections of Iran, Qatar, Venezuela, Libya and Algeria.

The 500,000 barrel- a-day increase will be on top of actual production, according to Kuwait's acting oil minister, Mohammed Abdullah al-Aleem.”

However, crude closed at a new cash high. Clearly a depreciating dollar is affecting crude prices even as economic forecasts the world over continue to be revised downwards.

GMAC Bonds Rally on Citigroup's $21 Billion Financing (Update4): “Bonds of GMAC LLC rallied after Citigroup Inc. offered $21 billion of financing for the automobile and home lender.”

Looks like some people are starting to find liquidity again…

Citigroup's Old Lane Hedge-Fund Unit Declined 5.9% in August: “Old Lane LP, the hedge-fund firm acquired this year by Citigroup Inc., fell 5.9 percent in August, hurt by losses on debt and emerging-market securities.”

Pirate Capital Bars Withdrawals From Two Activist Hedge Funds: “Pirate Capital LLC, the hedge-fund manager run by Thomas Hudson, barred withdrawals from its two Jolly Roger Activist funds after the firm's assets declined by almost 80 percent in the past year.”

Although the hedgies are still suffering, some are more than others. These clowns are in the same boat: Y2K Finance Hedge Fund Halts Redemptions and Sales (Update4)

Countrywide Shares Fall on Report Lender Needs Cash (Update4): “Countrywide Financial Corp., the biggest U.S. mortgage lender, fell almost 2 percent on the New York Stock Exchange after the New York Post said the company is negotiating a second multibillion-dollar bailout.

Blowing through the first $2 billion in about a month does NOT inspire confidence at all. Bank of America is going to be PISSED if the next bailout has similar or better terms because they took the risk of stepping up first.

U.S. MBA's Mortgage Applications Index Increased 5.5% (Update1): “Mortgage applications in the U.S. rose 5.5 percent last week, reflecting gains in both purchases and refinancing.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan rose to 657.4 from 622.9 the prior week. The group's purchase index rose 5.2 percent and its refinancing gauge rose 6 percent.”

I’ve discussed the MBA index in my post Bear Raid. Once again and to simplify, in this environment when this index goes up it is a BAD sign. As jammed up homeowners scramble to refinance and are REJECTED they have to apply MULTIPLE times to multiple lenders… hence RISING applications. The Bulltards will spin this as a ‘housing stabilization’ story.

Tuesday, September 11, 2007

So Many Debates

Futures are pushing higher this morning on what is expected to be a slow news day. The focus will be on Bernanke’s 11:00 AM speech in Berlin. This is a prepared speech on global issues but traders will be ‘interpreting’ his every word to try to assess his immediate intentions on monetary policy.

EU Cuts Growth Outlook, Says Turmoil Has Raised Risks (Update2): “The European Commission cut its growth estimate for the euro-area economy after the collapse of the U.S. subprime market raised borrowing costs worldwide.

The economy of the 13 nations that use the euro will probably expand 2.5 percent this year, down from a May forecast of 2.6 percent, the commission, the European Union's executive agency in Brussels, said in a report today.”

While the reduction in growth isn’t large, the European Commission isn’t the first to cut its estimates. Last week the European Central bank cut its forecast for euro-area growth.

“The overnight money-market deposit rate rose to a six-year high of 4.65 percent last week as the crisis in the U.S. mortgage market made banks reluctant to lend, leading to cash shortages.”

The U.S. subprime induced credit contraction is starting to bite into the ‘real’ economy. The IMF has also jumped onto the estimate reduction bandwagon:

“IMF European Director Michael Deppler said yesterday that the turbulence in financial markets will slow European economic growth more than previously expected. The Washington-based fund, which had predicted growth of 2.6 percent this year and 2.5 percent for 2008, is “in the process of revising the numbers down,” he said.”

I mentioned yesterday in The Final Blow that stubbornly high commodity prices might be the catalyst to tip a wounded global economy into the red. Factor in the possibility of serious U.S. dollar weakness and the Euro area could rapidly experience some serious problems.

“The credit-market issues may compound pressures already confronting manufacturers. Oil prices have risen 27 percent this year, while the euro is up 8.6 percent against the dollar in the last 12 months, making European exports less competitive. European manufacturing grew at the slowest rate in almost two years in August and business and consumer confidence dropped to a six-month low.”

Fed Policy Makers Signal Division on Risks, Size of Rate Cut: “Federal Reserve Governor Frederic Mishkin joined San Francisco Fed President Janet Yellen in flagging an increasing threat to consumer spending, differing with officials who still see signs of economic strength.”

Fed watchers are interpreting this as a debate between the 25 basis point cut camp and the 50 basis point cut camp.

“Rupkey said there's no ambiguity in the Treasury market, with the two-year note yield at 3.84 percent, indicating traders anticipate a series of rate cuts. The yield is more than 1.25 percentage points below the Fed's 5.25 percent target rate for overnight loans between banks.”

However, the futures market has a terrible record of predict Fed action. Bespoke Investment Group posted a great post, Fed Fund Futures VS Reality, on just that issue.

(Courtesy of: Bespoke Investment Group)

OPEC Plan by Saudis to Boost Output Opposed by Algeria, Libya: “A Saudi Arabian-backed proposal to temper high oil prices by raising oil production at today's OPEC meeting in Vienna is meeting resistance from Venezuela, Algeria and Libya.”

The Saudis are thinking about the long run. Venezuela, Algeria and Libya, blinded by greed, are thinking for the short run. The global economy is weakening as the global credit bubble deflates. Lower commodity prices, especially oil, would give the Fed significantly more room to maneuver A series of rate cuts now would tank the U.S. dollar and therefore send dollar denominated commodities sky high. The result would be instant, massive inflation AND higher commodity prices would suck the remaining oxygen out of a weakened economy.

“Oil prices above $77 a barrel are a burden to consuming nations, prompting some Persian Gulf producers to discuss a proposal to raise OPEC quotas by 500,000 barrels a day at the meeting at OPEC's Vienna headquarters. The group's biggest producer, Saudi Arabia, proposed an increase, Iraq's oil minister said before the meeting started.”

Should this proposal succeed, expect a violent and broad based short covering rally in equities. Keep your stops tight. With an American election looming, the Saudis are going to get their balls squeezed hard on this.

““There's going to be a lot of pressure, particularly on Saudi from the Americans to do something, and I think the Saudis will listen,” John Hall, the director of U.K.-based energy consultants John Hall Associates, said in an interview in Vienna today. “They recognize that there is an impact on world economic growth if the price is allowed to stay at these very high levels.”

China's Inflation Surges to 6.5%; Trade Gap Widens (Update6): “China's inflation rate accelerated to a 10-year high and the trade surplus widened, adding pressure on the central bank to raise borrowing costs for the fifth time this year.

Consumer prices rose 6.5 percent in August from a year earlier after gaining 5.6 percent in July, the statistics bureau said today. The trade gap widened 33 percent to $24.97 billion, the second-highest monthly total.

Stocks fell the most in more than two months on concern the government will raise rates, curb bank lending and sell more bonds to cool the world's fastest-growing major economy. Premier Wen Jiabao is trying to stop money from record exports stoking consumer-price gains and asset bubbles.”

The numbers from China are starting to get pretty scary. This runaway beast will be hard to tame, if not impossible. Something’s got to give at some point soon. A contracting U.S. economy, especially one led by Democrats, could result in a serious political clash between these two giants with real economic consequences. 2008 will be an interesting year.

Japan Machine Orders Surge Three Times Forecast Pace (Update5): “Japan's machinery orders surged in July at three times the pace forecast by economists, easing concern the economy will contract for a second quarter.

Orders climbed a seasonally adjusted 17 percent to 1.12 trillion yen ($9.9 billion) from June, the Cabinet Office said in Tokyo today. The gain was led by demand for electronic machinery.”

Huh? Yesterday GDP numbers showed an equally surprising 1.2% decline in GDP.

“Corporate spending fell by the most in more than two years in the second quarter. Japan's economy shrank at a 1.2 percent annual rate in the quarter, the largest contraction since 2003, the government said yesterday.”

That is some seriously contradictory data.

Monday, September 10, 2007

The Final Blow?

This week should be interesting. The deterioration of key economic indicators around the world is starting to become obvious. I built my short positions early last week when the S&P500 was in the 1480 – 1490 are. My volatility adjusted stops give me both the necessary room and protection. I am onside and have the ability to hold out for my preferred scenario: A retest of the lows.

Global Growth Threatened as U.S. Contagion Spreads (Update1): “This time, when the U.S. sneezes, the rest of the world may well catch a cold.

Global economic growth looks likely to slow markedly in the months ahead as further weakness in the U.S. infects Asia and Europe. That would represent a shift from the last 18 months, when the world economy proved immune to a U.S. slowdown and grew at an annual clip of more than 5 percent.”

Economists have been arguing that the health of the economies of the world were no longer as correlated as they once were. They misunderstand the impact and consequences of globalization of both economies and financial markets. Should the US consumer falter, the consequences will ripple through the global supply chain. For example, the manufacturers of Widgets in Vietnam will have to idle their factories because the orders from McBoxStores have slowed. For example, although German banks were forbidden by law from giving out stupid high LTV mortgage loans at home, they could buy them in huge quantities and with huge leverage from abroad with the click of a mouse. We are all connected now…

Japan's Economy Contracts a More-Than-Expected 1.2% (Update6): “Japan’s economy contracted at almost twice the pace forecast by analysts in the second quarter, reinforcing speculation the central bank will leave interest rates unchanged this year.

The economy shrank at a 1.2 percent annual rate in the three months ended June 30 as business spending slumped, the Cabinet Office said in Tokyo today. The government initially forecast a 0.5 percent expansion.”

This makes a rate hike in Japan an impossibility and illustrates just how quickly things can deteriorate.

Wall Street Credit Costs Soar on Spread to U.S. Rates (Update1): “Wall Street is getting no benefit from the biggest bond market rally in five years.

Sales of U.S. asset-backed securities, such as bonds that repackage subprime loans or credit card receivables as well as collateralized debt obligations, fell 73 percent from a year earlier to $30 billion last month, according to Deutsche Bank AG, Germany's biggest bank.”

On top of that, all the main players on Wall Street are stretched thin by massive prior commitments that don’t look so lucrative anymore…

“The five largest U.S. securities firms -- Goldman, Morgan Stanley, Merrill Lynch & Co., Lehman and Bear Stearns -- will have to fund $75 billion of loan commitments to LBOs at a loss because most investors have stopped buying that kind of debt, Citigroup Inc. analyst Prashant Bhatia estimated last month.”

But then again, none of this should really be much of surprise.

“The securities industry has relied increasingly on borrowed money to boost profits and returns for investors. In the first quarter, Goldman had 24.7 times more in assets than it had in shareholders' equity, and the firm's return on the tangible portion of that capital was 44.7 percent. Five years earlier, in the first quarter of 2002, the leverage ratio was 16.8 and return on equity was 15.4 percent.”

First, returns of 44.7% are not sustainable. EVER.
Second, returns like that are NECESSARILY a product of greater risk. Understand that.
Third, mean reversion CANNOT be prevented. Only slowed or postponed.

Debt Market in `Pivotal' Test as $140 Billion Matures (Update2): “Banks and companies need to refinance almost $140 billion of commercial paper in Europe by the end of next week and may push up yield premiums on corporate bonds, according to Deutsche Bank AG, Germany's biggest bank.

“This could be a pivotal seven to 10 days,” Jim Reid, a credit strategist at Deutsche Bank in London, wrote in a note to investors today. “This will inevitably lead to wider corporate spreads, especially in high yield.”

Borrowers are paying the highest costs in six years for commercial paper, IOUs maturing in 270 days or less, because of losses from assets related to subprime mortgages. The yield in the U.S. has soared to 6.33 percent for 30-day debt from 5.48 percent on Aug. 9.

Almost $60 billion of the commercial paper due this week and next is owed by conduits, firms set up by banks and companies to invest in longer-term assets, according to Reid. The debt is backed by bonds including asset-backed securities, as well as car loans, mortgages and trade receivables. The remaining $80 billion of commercial paper is unsecured.”

Despite serious efforts by all the major central banks, the debt markets are currently seized up. How and when this is resolved will determine the extent of the carnage.

OPEC Will Probably Maintain Output Limit, Members Say (Update3): “OPEC will probably maintain its oil production targets, resisting calls for more supply because of concerns demand may falter as U.S. economic growth slows, said officials from six member-nations.”

OPEC can’t resist. Greed triumphs again. An increase in production would lower prices immediately and these would certainly go a long way to help alleviate the pending global slowdown. Could it be that high energy and commodity prices will strike the final blow and drag down a global economy already wounded by the bursting of a global credit bubble?