Custom Search

Friday, February 15, 2008

Jim Cramer Sucks At Life

Jim Cramer sucks at life.
The best way to make 'mad money' is to stop watching Mad Money.

Don Harold DESTROYS Jim Cramer in this video. Watch it.

Other Stupid Jim Cramer Vidoes:
Cramer Off His Meds, Calls For Housing Shortage
Cramer: "We Have Armageddon!"
Cramer With Amensia
Cramer Making Fun of Bears

The Monolines: Such A Slow Death

Yesterday was indeed the turning point. FGIC, the fourth-largest bond insurer, was downgraded six levels late yesterday in an already weak market.

FGIC Loses Aaa Insurance Credit Ratings at Moody's (Update2): “FGIC Corp. lost its Aaa bond insurance rating at Moody's Investors Service, which said the company is in worse financial shape than larger competitors MBIA Inc. and Ambac Financial Group Inc.

The insurance units of New York-based FGIC were cut six levels to A3 and may be reduced again, Moody's said today in a statement. MBIA and Ambac shares rose after Moody's said they “are better positioned from a capitalization and business franchise perspective” than FGIC.

FGIC, the fourth-largest bond insurer, is about $4 billion short of the amount of capital needed to justify a Aaa ranking, Moody's estimates. FGIC had been top-rated since at least 1991 until it was downgraded by Fitch Ratings last month after failing to raise enough capital to compensate for losses on subprime mortgage guarantees. Moody's said its assessments of Armonk, New York-based MBIA and Ambac of New York will probably be complete in the next few weeks.”

FGIC, MBIA and Ambac are reeling from their expansion beyond guaranteeing municipal debt to collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummets, ratings companies are pressing insurers to add more capital.

MBIA and Ambac tumbled more than 80 percent in the past year as they posted record losses of more than $5 billion and concern grew the companies may not get enough capital.”

In case you’re thinking… “It can’t be THAT bad. Why does all this even matter? Why is the market throwing such a temper tantrum over this?”

“A downgrade of the top rated bond insurers would strip $2.4 trillion of municipal and mortgage-backed debt of their AAA guarantee, throwing doubt on the rankings of thousands of schools, hospitals and local governments around the country.”

That’s why… and we all know how the ‘muni’ market is doing…

UBS Won't Support Failing Auction-Rate Securities (Update3): “UBS AG won't buy auction-rate securities that fail to attract enough bidders, joining a growing number of dealers stepping back from the $300 billion market, said a person with direct knowledge of the situation.

The second-biggest underwriter of the securities, whose rates are reset periodically at auctions, notified its 8,200 U.S. brokers of the decision yesterday, said the person, who declined to be identified because the announcement wasn't publicly disclosed. Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Citigroup Inc. allowed auctions to fail as mounting losses from the collapse of subprime mortgages causes capital markets to seize up.

Bank of America Corp. estimated in a report that 80 percent of all auctions of bonds sold by cities, hospitals and student loan agencies were unsuccessful yesterday. That may mean as much as $20 billion of bonds failed to find buyers, based on the $15 billion to $25 billion of auction-rate bonds scheduled for bidding daily, according to Alex Roever, a JPMorgan Chase & Co. fixed income analyst.”

Uh oh. This is what happens when balance sheets are MAXED out. In situations like this rate cuts WON'T help. The mythical Fed is powerless. The banks simply don’t have the available capital. End of story.

“Auctions are failing as confidence in the creditworthiness of insurers backing the securities wanes, and as loss-plagued banks seek to avoid tying up their capital. More than 129 auctions failed yesterday, Kritzmire said.”

If the banks bid in these auctions and nobody else does, then they are forced to take the paper on themselves. Since they can’t afford to take the paper onto their strained balance sheets, they don’t bid… and the ‘muni’ market implodes.

““If you talk to the dealers, their balance sheets are getting flooded with these auction-rate certificates right now,” said Doug Dachille, who oversees $7 billion in fixed- income securities as chief executive officer of First Principles Capital Management LLC in New York. “Right now, the way they're dealing with the issue is they won't bid. That's why we're seeing failed auctions.””

The only real solution is for the banks to go get re-capitalized. However, the trick is to get new capital faster than the old is being destroyed. The capital injections so far, such as Citigroup, have been done to replace capital that was written off. This means that the burden on balance sheets isn’t being reduced.

UBS Falls to Four-Year Low After Posting Record Loss (Update2): “UBS AG fell to a four-year low in Swiss trading after the U.S. subprime mortgage crash led to a record loss and Chief Executive Officer Marcel Rohner declined to predict whether the bank will return to profit this quarter.

Europe's largest bank by assets fell as much as 8.4 percent after reporting a fourth-quarter loss of 12.5 billion Swiss francs ($11.3 billion). Zurich-based UBS took $13.7 billion in writedowns on securities infected by subprime mortgages.”

The $13.7 billion write down is MASSIVE for UBS. That means that UBS now has a balance sheet $13.7 billion smaller. Raising $13.7 billion would not be an easy feat… and it would only bring UBS back to square one. You see now how these ‘muni’ auctions aren’t finding a bid?

Crippled balance sheets can only result in a sharp economic contraction

Banks at Risk From $203 Billion Writedowns, Says UBS (Update1): “The world's banks “remain at risk” of up to $203 billion in additional writedowns, largely because the bond insurance crisis could worsen, UBS AG said.

Writedowns for collateralized debt obligations and subprime related losses already total $150 billion, Finch estimated. That could rise by a further $120 billion for CDOs, $50 billion for structured investment vehicles, $18 billion for commercial mortgage-backed securities and $15 billion for leveraged buyouts, UBS said. “Risks are rising and spreading and liquidity conditions are still far from normal,” the note said.

U.S. monoline insurers MBIA Inc. and Ambac Financial Group Inc. are struggling to maintain the AAA ratings on their insurance units because of losses on residential mortgages, exposing banks to possible writedowns on CDOs guaranteed by the insurers. Monoline insurers guarantee the repayment of bond principal and interest in the event of defaults.

Ambac was the first monoline insurer to ever be downgraded when Fitch Ratings cut it to AA from AAA in January, citing “significant uncertainty” over the insurer's business model.”

That does NOT help with the crippled balance sheet problem. Not at all.

Bank Risk Soars on Concern Bond Insurer Breakup May Fuel Losses: “The cost of protecting banks from default soared on concern a proposal to break up bond insurers MBIA Inc. and Ambac Financial Group Inc. may trigger further credit market losses.

Credit-default swaps on the Markit iTraxx Financial index of 125 banks and financial institutions jumped 6 basis points to 100 at 11:45 a.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Japan index rose 4 basis points to 86, Morgan Stanley prices show.

New York Insurance Department Superintendent Eric Dinallo said regulators are trying to help the two biggest bond insurers raise $15 billion to avert rating downgrades that may endanger the $1.2 trillion of debt they guarantee worldwide. One option is to split the insurers' municipal bond business from their money-losing subprime-mortgage units, Dinallo said in a Bloomberg Television interview yesterday.”

Know this: The US economy is in a recession... and will stay there for quite some time.

Thursday, February 14, 2008

Markets Rallies Without The Financials...

Yesterday equities rallied significantly. The S&P and the Nasdaq both lead the charge. A closer looks reveals some disturbing warning signs. Equities rallied on weak volume the financials (XLF) and materials (XLB) did not participate. This rally is probably over soon.

Related Posts:
Bank Troubles, This Bounce Looks Exhausted

Wednesday, February 13, 2008

Fed Cuts Rates, Market Raises Rates

Municipal Market Is Beset By Wave of Auction-Bond Failures: “Banks including Goldman Sachs Group Inc., Wall Street's most profitable securities firm, and Citigroup Inc. failed to support auctions of debt sold by U.S. municipal borrowers, causing interest rates on the securities to surge as high as 20 percent.

Rates on $100 million of bonds sold by the Port Authority of New York and New Jersey with yields determined through periodic auctions soared to 20 percent today from 4.3 percent a week ago, after the debt failed to attract enough bidders, according to data compiled by Bloomberg. Presbyterian Healthcare in Albuquerque, operator of seven hospitals throughout New Mexico, had rates on $38.7 million of debt reset at 12 percent.”

You don’t want to hear about failures in the $360 billion auction-rate securities market. That is not good… not good at all.

“Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, as has occurred in recent months, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in the terms of the debt.

In the case of the Port Authority, owner of the World Trade Center site in lower Manhattan and operator of the New York area's three major airports, bond documents show that a failed auction would result in rates of 20 percent.”

Listen now and listen carefully: The Fed does NOT set rates. It never has and never will. It simply cannot. The Fed can barely and with great difficulty set and maintain the Fed funds target rate. That’s pretty much it. The market ultimately ends up setting all other rates. Understand that and understand it well, because that is how capitalism works.

Rates are set by the voluntary and mutually beneficial interaction of both borrowers and lenders. They settle on a market clearing rate such that both parties benefit… and the Fed be damned. Today, right now, lenders are maxed out and they have no appetite for more debt. That means they can charge a much higher rate for their money and will to discourage borrowing.

I first mentioned rising rates in my January 31st post, Fed Cuts and Rates Rise: Bond Vigilantes. Mish brought this up even earlier in his post: Mortgage Rates And The Red Queen Race

““We have seen widening spreads, reduced demand for certain auction rate securities and failed auctions, including some auctions in which Citi acted as broker dealer,” Danielle Romero-Apsilos, a spokeswoman at New York-based Citigroup Inc., said in a statement.

The turmoil in the auction-rate market is the latest fallout in a credit squeeze that began with the subprime mortgage market collapse last year and led to at least $133 billion in credit losses and asset writedowns. For borrowers, the failures mean higher borrowing costs just as the economy is slowing, threatening revenue.”

Surprised that the great mythical Fed can’t control rates? Don’t believe me? Pay attention:

Bernanke Stymied as Rate Cuts Fail to Lower Borrowing Costs: “The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.

Companies are paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further price declines.”

First, market participants are re-pricing risk. That is to say, pricing in more and that means higher rates. Second, they’re maxed out. Their balance sheets are bloated. They don’t want to take on new loans… so they increase the cost of money to discourage further lending. The Fed? Well, bluntly put: Almost irrelevant.

“Banks and investors are demanding greater compensation for offering credit as losses mount on subprime-mortgage securities and concerns grow that ratings of bond insurers will be cut. Elevated borrowing costs mean Fed Chairman Ben S. Bernanke will have to reduce rates further to revive the economy, Fed watchers said.”

... and so cut he will. Furiously.

“Those cuts were the fastest since the federal funds rate became the principal policy tool around 1990. The Fed lowered the rate by 75 basis points on Jan. 22 in an emergency move, then by an additional 50 basis points at the regular meeting on Jan. 30.”

Related Posts:
Really Scary Fed Charts, Why Bernanke Will Furiously Cut
Fed CHANGES Really Scary Fed Charts

Related Headlines:
Auction-Bond Failures Roil Muni Market, Pushing Rates to 20%
Auction-Bond Failures Spread to Student Loan Debt (Update2)
Bond Insurance Turns Toxic for Munis as Rates Soar (Update1)

Tuesday, February 12, 2008

All Bubbles Are The Same

Surely you can guess whats next then eh?
All Bubbles are the same. Always. Forever.

Mr. Danger, Chavez and Buffett

“If you freeze us, if you really manage to freeze us, if you damage us, then we will hurt you. Do you know how? We are not going to send oil to the United States, Mr. Bush, Mr. Danger… Venezeula will join in your economic war and other countries will be with us in the economic war… Never again will they rob us – the Exxon Mobil bandits. They are imperial American bandits, white collar thieves.” –Hugo Chavez

Venezuelan President Hugo Chavez is famed for his incendiary oratory and low IQ. But in his recent threats to cut off oil shipments to the U.S., a move he says could propel world prices to $200 a barrel, he's blowing smoke, not fire.

The U.S is the single largest destination for Venezuela's oil exports. More importantly, the U.S. is home to refineries specially equipped to handle Venezuela's brand of heavy, high-sulfur crude. Finding other customers for the country's oil in a hurry simply isn’t possible.

Any embargo would hurt Venezuela far more than the U.S. Venezuela supplies about 11% of U.S. oil, but the U.S. accounts for the bulk of Venezuelan oil exports.

I’m scaling into a short here. One unit short on the spike, with two more planned around $95 and $97. Should prices fail to reach these targets, short two units on a break below $92. Stop around $101 with profit targets around $85, $82 and $78.

Buffet has offered to re-insure municple bonds held by MBIA, Ambac and FGIC. Futures love it this morning. This news is just in the nick of time and will allow equities to follow through on their bounce.

Monday, February 11, 2008

Global Decoupling Theory, Correlation Contagion

Slowly but surely people are coming to the conclusion that the global ‘Decoupling Theory’ isn’t holding up. (Duh)

Europe's Economy May Stay Sick Longer After Catching U.S. Cold: “Europe's economy has caught the U.S.'s cold, and may be sick longer.

Persistent inflation and budget deficits may prevent policy makers in the 15 nations that share the euro from moving as aggressively as their U.S. counterparts to cut interest rates and taxes. Meanwhile, Europe's labor laws will make it harder for companies to speed a recovery in profits by reducing payrolls.

“A European downturn will take noticeably longer to run its course than the U.S. one,” Nobel laureate Edmund Phelps, an economics professor at Columbia University in New York, said in an interview.”

Better late than never.

“Next year “might be a period of `reverse decoupling,' with the U.S. economy enjoying a sharp recovery and the euro-area economy stagnating,” says Dario Perkins, senior European economist for ABN Amro Holding NV in London. “A relatively inflexible economy and `sticky' inflation” will hold Europe back, he says.”

Understand this: The last few years have been nothing but a liquidity (read DEBT) driven party. Financial innovation, such as mass securitizations and the mass embrace of derivatives resulted in the development of what is now termed ‘the shadow banking system’. This resulted in flood of liquidity, which is characterized by easy access to cheap debt. This pushed up ALL risky assets over the ENTIRE globe. Now with liquidity circling the drain as financial institutions try desperately to digest their suddenly swollen and impaired balance sheets, the correlations of ALL risky assets are approaching ONE.

There is now no such thing as diversification within the risky asset class.

Correlation, Contagion, and Asian Evidence:
“Empirical evidence shows that contagion affects both developed and emerging markets and does not seem to vary with the relative fundamental economic health or trade and financial linkages of the Asian economies. Contagion occurs across both asset types and geographical borders and tends to have larger effects in equity markets than in currency and bond markets. There is evidence to support the hypothesis that contagion is regional and transmitted through developed markets.”

Related Posts:
The Global ‘Decoupling Theory’ is Garbage
Asia Tanks
The Dollar Smile Theory