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Thursday, March 13, 2008

AAA isn't AAA

74 of 80 AAA Bonds in ABX Index Fail Tests for Investment Grade.

Click on the link. Read it carefully.
This came out a couple of days ago and has been posted elsewhere... BUT because of the importance and significance of implications consequences, I had to post it.

U.S. Home Foreclosures Rise 60% in February as Mortgages Reset: "U.S. home foreclosure filings jumped 60 percent and bank repossessions more than doubled in February as rates on adjustable mortgages rose and property owners were unable to sell or refinance amid falling prices.

More than 223,000 properties were in some stage of default, or 1 in every 557 U.S. households, Irvine, California-based RealtyTrac Inc. said today in a statement. Nevada, California and Florida recorded the highest state foreclosure rates. "

Well, those numbers may help explain just how ridiculous these AAA ratings are.

"About $460 billion of adjustable-rate mortgages are scheduled to reset this year and another $420 billion will rise in 2011, according to New York-based analysts at Citigroup Inc. Homeowners faced higher payments as fourth-quarter home prices fell 8.9 percent, the biggest drop in 20 years as measured by the S&P/Case-Shiller home price index."

Honestly, there really is no stopping this... In two days the Fed has effectively offered $400 billion in temporary liquidity. All of which the market has now shrugged off. Back into the abyss we go.

You could go bottom fishing, like this guy.

Related Headlines:
Carlyle Capital Nears Collapse as Rescue Talks Fail (Update4)
Dollar Falls to 12-Year Low of 100 Yen on Carlyle Fund Failure

Related Blog Posts:
Ratings Fraud and Structured Credit?

Wednesday, March 12, 2008

The Big Test: Saved by the Fed

The big news yesterday was of course the new $200 billion lending facility announced by the Fed at 8:30.

Fed to Lend $200 Billion, Accept Mortgage Securities (Update10): “The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.

The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.

U.S. stocks rallied the most in five years on optimism the initiative will help avert a wider credit crunch. Treasuries fell and the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae retreated from close to a 22-year high. Fannie Mae and Freddie Mac, chartered by the government, are the largest sources of money for U.S. home loans.”

So let me get this straight. I could now walk up to the Fed with my crappy mortgage backed securities and trade them in for rock solid Treasuries? Sure, I’d have to take some kind of haricut, but I can turn something nobody else wants at any price and is therefore effectively worthless, into something liquid and valuable? I take something that is difficult, if not impossible to value and trade it in at what price? I take something with real credit risk and trade it in for something with no credit risk. Junk for gold. Awesome. Just awesome.

While this does add liquidity to the system, it doesn’t do much beyond that. The insolvency issue still remains unaddressed. If you couldn’t pay your mortgage before, you still can’t. Home prices will still continue to correct. The banks still won’t expand their lending and stimulate the economy. They know these measures are temporary and they know their collateral will continue to deteriorate. Every 28 days, they will have less collateral value to swap for Treasuries as their mortgage backed securities continue to shrivel up in value.

In the meantime, lets squeeze the shorts.

On March 5th, in my post The Big Test is Pending I argued that equity indices the world over will test their January lows and that failure there would be catastrophic. Yesterday would have been the day of reckoning. Without the Fed announcement, the markets would have slid into the abyss.

Since they all look the same, from the S&P 500 to the Shanghai Composite, I’ve only put up some of the indices in today’s post.

Money-Market Rate for Euros Rises After Fed's Action (Update1): “The cost of borrowing euros for three months rose for a seventh day, signaling central bank measures to combat the credit squeeze are having limited success.

The difference between the rate banks charge for three- month euro loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, showed a decrease in the availability of cash for borrowing, rising 2 basis points to 61 basis points. The spread was 42 basis points a week ago. It averaged 6 basis points in the first half of 2007.”

I’ve been mentioning LIBOR and EURIBOR for the last two weeks. These very sensitive measures of financial system stress have been quietly creeping higher. That they remain elevated after yesterday’s Fed announcement does not bode well for risky assets.

Stock Investors Grow More Pessimistic on U.S. Recession Concern: “Stock investors in the world's biggest markets are growing more convinced equities will fall in the next six months, a survey of Bloomberg users showed.”

How about equity investors are becoming more and more REALISTIC.

Related Headlines:
Fed Seeks to Limit Slump by Taking Mortgage Debt (Update1)
House's Frank Says Municipal-Bond Rating Scale `Ridiculous'
[EDIT: 03/11/08 - 9:20 AM]
Related Posts:

Tuesday, March 11, 2008

Parabolic Commodities: The End is in Sight

Risky assets will continue to lose value. Not necessarily because they all deserve to, but because they must. The entire financial system is de-leveraging. Yes, that means that even commodities will face the wrath of the margin clerks... Eventually. They’ve all gone parabolic. That NEVER ends well. EVER… and it ALWAYS signals the beginning of the end.

Equities in general (I'm using the S&P 500 here to represent) peak BEFORE commodities do. Commodities in general (I'm using the CRB Commodities Index to represent) then follow through to new highs before correcting just as aggressively.

I posted on the subject a while back.

This is all you need to know: PARABILIC = END IS NEAR.

First: When The Momos Go Parabolic…
Second: When The Momos Lead The Way Down
Thirdly: Life After Things Go Parabolic, This Bounce Too Will End.
Most importantly: All Bubbles Are The Same

Oil is at $109+ this morning… U.S. crude-oil inventories rose 1.75 million barrels last week, according to the median of responses in a Bloomberg News survey. Stockpiles increased in seven of the previous eight weeks, Energy Department figures showed.

Crude Oil Rises Above $108 to Record as Returns Outpace Stocks:

“The grab for hard assets is on due to the lack of confidence in the rest of the markets at the moment.” –John Kilduff

“The perception in the financial community is that the oil market is the one safe harbor. The speculation that's moving oil higher will eventually undercut some of the safety they seek. As prices rise, the economy will weaken and eventually hit demand.” –Rick Mueller

“We're witnessing an ongoing flow of fund buying, which isn't particularly motivated by the particulars of the petroleum market. Prices have rallied to such an extent where sellers have backed off. Any time prices go lower the buyers come right back into the market.” –Tim Evans

“Clearly the fundamentals don't matter at this point. We've seen bubbles in other markets over the years and eventually they end. It's impossible to see when that will be the case here.” –Chip Hodge

“The golden days of oil moving between $15 and $25 a barrel are clearly in the past, but it's hard to justify oil over $100, given the fundamentals. There are longer-term concerns about supply, which would justify a price in the $70s.” –Rick Mueller

Persian Gulf Oil-Tanker Rates May End Declines on Cargo Backlog: “The cost of shipping Middle East crude to Asia may be steady, after falling the most in three months yesterday, because a backlog of cargoes is building up.”

Unrelated, but just as important:

BOE Offers Further Three-Month Loans to Ease Tension (Update1): “The Bank of England said it will hold two more auctions of emergency funds, joining the Federal Reserve in stepping up efforts to ease renewed tensions in money markets.

The U.K. central bank will offer 10 billion pounds ($20 billion) of three-month loans on March 18 and will hold a further auction on April 15, according to a statement. The size of the second auction will depend on the outcome for the first.

The Bank of England and other central banks are struggling to restrain an increase in money market interest rates after about $190 billion of losses from the U.S. subprime mortgage slump made financial institutions reluctant to lend to each other.

While central banks damped market rates in December when they announced joint measures to counter the credit shortage, conditions have tightened since then. The cost of borrowing pounds and euros for three months rose to a two-month high today.”

I’ve been mentioning the spikes in LIBOR and EURIBOR since last week. This does not bode well for risky assets.

Bear Stearns Shares Fall on Liquidity Speculation (Update6): “Bear Stearns Cos. denied that the firm lacked sufficient access to capital, after speculation about a liquidity crisis pushed the stock down 11 percent in New York trading, the most since the 1987 stock market crash.”

Of course Bear Stearns says it ain’t so… but if it is, look out below.

Monday, March 10, 2008

Negative Yields, Emergency Rate Cuts

Several good blogs picked this up earlier last week… and now Bloomberg has picked up the story.

TIPS' Yields Show Fed Has Lost Control of Inflation (Update1): “Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They're so convinced that they're giving up yields just to buy debt securities that protect against rising consumer prices.

The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, ending last week at minus 0.16 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second-biggest U.S. mutual fund company, say TIPS are a bargain.

For the first time in a generation, money managers must come to grips with a central bank that's more intent on spurring the economy than restraining price increases. With oil above $100 a barrel, gold approaching $1,000 an ounce and the dollar at a record low against the euro, TIPS show investors aren't convinced Fed Chairman Ben S. Bernanke will be able to tame inflation once policy makers stop cutting interest rates.”

This is definitely not good.

“The last time investors were so worried about faster inflation amid slowing growth, Paul A. Volcker presided over a Fed that would raise rates as high as 20 percent to end the stagflation crisis of the 1970s, according to Seth Plunkett, a bond fund manager at American Century Investment Management in Mountain View, California. The firm manages $20 billion.”

In my post We Need Another Volcker on September 12, 2007 is wrote:

“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.”

Too late for that now.

The de-leveraging continues. That means more pain for risky assets, such as equities, is pending.

Hedge Funds Reel From Margin Calls Even on Treasuries (Update1): “The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States.

Since Feb. 15, at least six hedge funds, totaling more than $5.4 billion, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.

While lenders are most unsettled by credit consisting of real estate and consumer debt, bankers are now attempting to raise the rates they charge on Treasuries, considered the world's safest securities, because of the price fluctuations in the bond market.”

Carlyle is one of the more prominent casualties…

Carlyle Capital Says Lenders May Force Further Sales (Update3): “Carlyle Group's mortgage-bond fund said creditors may liquidate as much as $16 billion of securities unless the two sides reach agreement on debt repayments.

The fund has asked lenders to refrain from further sales after they liquidated collateral securing $5 billion of debt, Carlyle Capital Corp. said in a statement today. It is meeting lenders to discuss more than $400 million of margin calls and is “evaluating all options,” the Guernsey, U.K.-based fund said.”


This morning we’ve got the usual rumours: “The Fed will do an emergency cut this morning.”

S&P went bid of course as the source of the rumour was identified as Goldman Sachs.

For those among you that have been conditioned to believe that rates DOWN = equities UP... check it out:

Equities fall FIRST, and then rates fall SECOND. Rates and equities are POSITIVELY CORRELATED... with equities LEADING in BOTH directions. When the FED STOPS cutting rates, THAT is the signal to go LONG. Not before.

I’ve put up a nice little chart illustrating the relationship between short term rates and equities.

Furthermore, how can you get EXCITED about emergency rate cuts when real yields are negative? I mean, seriously.

Related Blog Posts:
Real Interest Rates Are Now Negative
The Death of Real Yields Continues

Related Headlines:
Auction-Rate Collapse Spurs Bond Sale ‘Tidal Wave’, Hearings in Congress
Money Markets May Force BOE to Revive Auctions, Barclays Says