Custom Search

Friday, November 9, 2007

The Carry Unwind Accelerates

Yen Advances to 18-Month High Against Dollar as Stocks Decline: “The yen rose to the highest since May 2006 against the dollar as investors shunned riskier assets bought with loans in Japan. The U.S. currency erased its decline against the euro after dropping to a record low.

The yen climbed against all 16 most-traded currencies after stock indexes in Europe and Asia reversed gains and U.S. equity futures declined. Shares of Barclays Plc fell as much as 9.1 percent on concern Britain's third-biggest lender may announce a writedown of as much as 10 billion pounds ($21 billion). Wachovia Corp., the fourth-largest U.S. bank, said it may raise its allocation for loan losses.

“Risk aversion is coming back to the markets,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG. “The writedowns from financial companies tell you that subprime is a significant issue and dealing with its hangover is going to take some time. The yen will continue to benefit.””

Translation: It is slowly starting to sink in that borrowing massive amounts of money in a declining, low yield currency and investing the proceeds in risky assets in high yield currencies can become a really significant problem really quickly when those risky assets don’t perform as intended.

The Carry Trade unwind is accelerating… global de-leveraging is in full swing now. Expect continued weakness in equities.

When The Momos Lead The Way Down

On October 10th in the post When The Momos Go Parabolic I warned about the momentum names.

“I'm throwing up a few of the big momentum (momo) names that have been powering the market higher. Note the chart scale is no longer logarithmic. This helps illustrate just how fast these guys have done a moonshot. Note: the momo names go parabolic at the very end of the Bull market cycle. Unfortunately they can keep running for quite some time, so picking at top isn’t exactly easy… That being said, with all the indices at new record highs on anemic volume, a pullback is in order. The catalyst may very well be a disappointing earnings season. Alcoa started things off with a less than stellar report as did Chevron. Trade cautiously... book some of those profits.”

The damage is swift and savage. Intraday the Nasdaq 100 was down over 4% and all the big momo names were down close to or in excess of 10%. When the big momo names lead the way down the Bull is probably dead for good.

Thursday, November 8, 2007

Consumer Credit Dies A Little...

Consumer Credit: Consumer credit died last month… and it will only get worse going forward.

“Consumer credit increased at an annual rate of 5-1/4 percent in the third quarter of 2007. In September, consumer credit increased at an annual rate of 1-3/4 percent.”

Lets take a closer look:

The percentage annual rate of change of total consumer credit dropped from 7.5% in August to 1.8% in September. The rate of change in revolving credit, such as credit cards, dropped from 9.3% to 4.4%. Non-revolving credit, such as car loans, dropped from 6.4% to 0.3%.

Now that MEW is no longer a possibility, the recent spike in credit card usage was the next logical step in a desperate cycle. Yesterday’s data suggests that now credit card balances are slamming up against their limits and that consumers have maxed out their credit sources. They are starting to see ‘declined’.

It won’t be long before they start seeing ‘past due’ and ‘final notice’ on their statements.

Wednesday, November 7, 2007

Level 3 Rules

The deadline fast approaches…
November 15th is the day of reckoning.

Banks Face $100 Billion of Writedowns on Level 3 Rule, RBS Says: “U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.

The Financial Accounting Standards Board's rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, Royal Bank's Chief Credit Strategist Bob Janjuah in London wrote in a note today. The new rule is effective Nov. 15, he said.

“This credit crisis, when all is out, will see $250 billion to $500 billion of losses,” London-based Janjuah said. “The heat is on and it is inevitable that more players will have to revalue at least a decent portion” of assets they currently value using “mark-to-make believe.”

Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, according to Janjuah. Goldman Sachs Group Inc. has 185 percent, Lehman Brothers Holdings Inc. has 159 percent and Citigroup Inc. has 105 percent, Janjuah wrote.

Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and related securities, has Level 3 assets equal to 38 percent of its equity “and may well come out of all of this in the best health,” Janjuah said.

Under FASB terminology, Level 1 means mark-to-market, where an asset's worth is based on a real price. Level 2 is mark-to- model, an estimate based on observable inputs and used when there aren't any quoted prices available. Level 3 values are based on “unobservable” inputs reflecting companies' “own assumptions” about the way assets would be priced.

ABX indexes, which investors use to track the subprime-bond market, are showing “observable levels” that would eat up institutions' capital if the benchmark's prices were used to value their Level 3 assets, according to Janjuah.

The indexes have tumbled this year because investors expected rising numbers of borrowers to default on home loans, cutting the cash flowing to the bonds that package the mortgages.”

Want to Know More?
Summary of Statement 157
Summary of Statement 159

Mish shows Citigroup Fighting For Its Financial Life
“In a quarterly regulatory filing Monday Citigroup reports $134.8 billion in 'level 3' assets.

Level 3 assets are holdings that are so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management's best guess. The investment bank said its total liabilities related to level 3 assets at quarter-end were $40.36 billion, according to the Form 10-Q. Citigroup said it often hedges its level 3 positions.”

5th Hindenburg Omen in this Cluster

Uh Oh...

Yesterday the broader markets rallied. The Financial Index (XLF) rallied. But Citigroup hit new lows… Uh oh.

Citigroup Credit Swaps Near Highest in Five Years (Update2): “Credit-default swaps on bonds of Citigroup Inc., Wachovia Corp. and Morgan Stanley are trading at the highest in at least five years on speculation the biggest U.S. banks may be forced to write down more subprime assets.

Contracts tied to Citigroup's debt have climbed 17 basis points to 70 basis points since Oct. 31, according to broker Phoenix Partners Group in New York. The swaps are trading at the widest levels since at least September 2002, Credit Suisse Group data show. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Credit-default swaps tied to New York-based Citigroup more than tripled in the past three weeks, indicating the risk of default is rising. Citigroup this week said losses from the assets may rise to $11 billion, and analysts said the writedowns may increase. Contracts on Morgan Stanley and Wachovia Corp. and Merrill Lynch & Co. are at or near six-year highs on concerns that their losses will grow.”

Tickers: C

Citigroup Writedowns May Be as Much as $13.7 Billion (Update6): “Citigroup Inc., the world's biggest bank, may have losses from asset-backed bonds of as much as $13.7 billion, roughly equal to the company's profit so far this year. The shares fell for a sixth straight day.”

Toss in some emergency SIV financing…

“Citigroup reported $5 billion in net income in the first quarter, $6.2 billion in the second quarter and $2.4 billion in the third quarter, for a total of $13.6 billion. Writedowns of $21.1 billion would be equal to about 17 percent of the bank's reported shareholders' equity of $120 billion in 2006.

Citigroup Inc. said yesterday that it provided $7.6 billion of emergency financing to the seven structured investment vehicles it runs after they were unable to repay maturing debt. The SIVs drew on the $10 billion of so-called committed liquidity provided by Citigroup, according to a Securities and Exchange Commission filing.”

MBIA, Ambac Losses Will Be `Massive,' Egan Jones Says (Update1): “Bond insurers including MBIA Inc., Ambac Financial Group Inc. and ACA Capital Holdings Inc. face “massive losses” over the next few quarters that could test their ability to raise new capital, Egan-Jones Ratings Co. said.

MBIA may lose $20.2 billion on guarantees and securities holdings, Sean Egan, managing director of Egan-Jones, said on a conference call today. ACA Capital may take losses of at least $10 billion; New York-based Ambac may reach $4.3 billion; mortgage insurers MGIC Investment Corp. and Radian Group Inc. may see losses of $7.25 billion and $7.2 billion, respectively, Egan said.

“There is little doubt that the credit and bond insurers face massive losses over the next few quarters and many will be capital challenged,” Egan said.”

Tickers: ABK, MBA, RDN

Dollar Slumps to Record on China's Plans to Diversify Reserves: “The dollar fell the most since September against the currencies of its six biggest trading partners after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.

The dollar fell against all 16 of the most-active currencies, declining to the weakest versus the Canadian dollar since the end of a fixed exchange rate in 1950, a 26-year low against the pound and a 23-year low versus the Australian dollar. The New York Board of Trade's dollar index dropped to 75.21 today, the lowest since the gauge started in March 1973.”

The pressure on the dollar increased substantially early this morning on news out of China. Crude oil and gold reacted by melting up…. and equity futures reacted by erasing all of yesterdays gains in the pre-market.

GM Reports $39 Billion Loss on Deferred Tax Charge (Update2): “General Motors Corp., the world's largest automaker, reported a record $39 billion quarterly loss after three money-losing years forced the company to write down the value of future tax benefits.

GM fell as much as 8.8 percent in early trading after the size of the loss surprised analysts. Excluding the tax writedown, the deficit was $2.80 a share, more than 10 times the 22 cents estimated by 15 analysts surveyed by Bloomberg.”

GM was struggling during the best of times. Now that credit is tightening and US consumers are struggling to make their mortgage payments, new car sales in the US are likely to be ‘soft’ going forward. Not and ideal time to restructure the company.

GM pulled down the DOW futures pre-market. Out one point the futures were down 187…

Tickers: GM, F

Tuesday, November 6, 2007

Today We Try To Bounce

Fitch May Downgrade Bond Insurers After New Test (Update2): “Fitch Ratings may lower the AAA credit ratings on one or more bond insurers after a new review of the companies' capital takes into account downgrades of collateralized debt obligations that they guarantee.

Fitch said it will spend the next six weeks reviewing the capital of insurers including MBIA Inc., Ambac Financial Group Inc., CIFG Guaranty and Financial Guaranty Insurance Co. to ensure they have enough capital to warrant an AAA rating. Any guarantor that fails the new test may be downgraded within a month unless the company is able to raise more capital, New York- based Fitch said today in a statement.

CIFG and FGIC, the bond insurer whose owners include Blackstone Group LP, have the highest probability of suffering erosion in the capital because of the falling value of CDOs, Fitch said. Ambac has a “moderate probability” and MBIA is at “low” risk, Fitch said.”

I’ve put up charts of some of these guys in the past. Tickers: ABK, MBI.
Keep an eye on these guys. Should there even be a rumor that they can’t make good on the insurance they’ve written…

IndyMac Reports $202.7 Million Loss as Mortgages Sag (Update1): “IndyMac Bancorp Inc., the second- largest independent U.S. mortgage lender, reported its first loss in more than eight years in the third quarter as the company made fewer loans.

The company lost $202.7 million, or $2.77 a share, compared with a gain of $86.2 million, or $1.19, a year earlier, Pasadena, California-based IndyMac said today in a statement. The average estimate of seven analysts surveyed by Bloomberg was a 46-cent loss, and IndyMac had forecast as much as 50 cents.

IndyMac today cut its dividend in half and said it eliminated more than 1,500 jobs to help weather the worst housing slump in 16 years. The company told investors last March they were confusing its business with purveyors of low-quality mortgages that had the highest default rates.”

While this may be the first loss in eight years, expect many more.

Citigroup's Stuckey to Run Subprime Unit After Losses (Update3): “Citigroup Inc. named Richard Stuckey to manage most of its $43 billion of subprime mortgage assets, choosing the same executive who helped unwind Long-Term Capital Management LP's bad bets nine years ago.

Stuckey, 51, will run the Sub-Prime Portfolio Group, created after the largest U.S. bank by assets said Nov. 4 that it will write down as much as $11 billion of subprime debt and Chief Executive Officer Charles O. ``Chuck'' Prince III resigned. Stuckey will oversee most of the bank's securities linked to homeowners with poor credit, according to a memo sent to employees and confirmed by Citigroup spokesman Dan Noonan.”

Shittybank is scrambling to fix things. An oversold bounce may be in order at these levels… even if its just the shorts locking in some gains.

Dollar Falls to Record Low Against Euro; Fed May Lower Rates: “The dollar fell to a record low against the euro on speculation financial-company losses from subprime-mortgage defaults will grow, prompting the Federal Reserve to cut interest rates a third time this year.

The U.S. currency declined versus all 16 of the most- actively traded currencies except the yen after Fed Governor Randall Kroszner said conditions for subprime-mortgage borrowers may worsen. It dropped the most against the South African rand, falling 1.2 percent.”

This morning the dollar was pushing lows pretty aggressively… even setting off a few stops. The dollar is now at levels that should start to really be a concern for equities.

Oil Rises to Record on Forecast U.S. Supplies Fell, North Sea: “Crude oil rose on speculation that U.S. inventories declined for a third week and as a storm closed production in the North Sea.

An Energy Department report tomorrow will probably show crude inventories fell 1.7 million barrels last week, according to an analyst survey. Oil reached a record $96.24 a barrel on Nov. 1 after supplies unexpectedly dropped. ConocoPhillips and BP Plc said they will start evacuating workers from some North Sea platforms before a storm forecast for later this week.”

Oil is getting into the ‘oh shit’ range. At these prices any move in the crack spread to more normal levels will provide the knockout blow to the reeling US consumer. Another bad inventory number tomorrow and we get that much closer to $100...

Monday, November 5, 2007

I've Escaped My Cubicle...

I have escaped my cubicle.

Over the weekend I moved almost 500 kilometers from Toronto to Montreal and swapped my cubicle for the trading floor.

I have successfully completed a 10 month consulting gig. I am now staring at the half dozen monitors at my station on the trading floor of proprietary derivatives trading shop CFT Financials.

Now that I am back in the thick of things surrounded by some of the best prop traders I’ve ever came across, expect serious improvements to the blog.

I used to trade with the guys here at CFT Financials years ago at Refco. (Yeah, I was there when Refco imploded.) These guys are some of the best in the business…

“One prolific success story to emerge from the Mac Futures incubator is British trader Andy Priston. Priston was in his early twenties when he became the first trader to complete the Mac Futures prop training program.

Nicknamed “Braveheart” for his bold trading style, he is now considered one of the most successful futures traders in the business. Priston’s trading is said to account for as much as eight percent of monthly trading activity in the Eurodollar futures contract on the Chicago mercantile Exchange. The 28-year-old reportedly earns as much as $15 million per year and recently appeared in the annual Sunday Times list of richest Brits. He was helping Refco Trading services set up a new shop in Montreal, Canada when Refco went bust following a financial scandal involving its CEO (see related story in this issue). Man Financial bought the company and offered Priston a job, but the trader turned it down in favour of starting a new prop trading office in Montreal with some former Refco employees.

The story of this unique trader has inspired countless others to try and duplicate Priston’s success by entering the training program of their local prop shop and gaining the chance to prove themselves on the front line of a proprietary trading department. Greaves says opportunities for young people interested in getting started in trading have never been better, thanks to the prop shop model.” -Brokers On The Run

Shameless plug: CFT Financials is always looking for trading talent. (Offices: London, UK, Montreal QUE and Toronto ONT)

Things are getting sloppy today. Take that Bulltards! (I just couldn’t resist.)