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Friday, April 18, 2008

Citirgroup Earnings, Downgrades and LIBOR

Citigroup (C) reported earnings this morning… or lack thereof. The market threw a little bit of a party. C and broader equity futures spiked up on the news.

Citigroup Reports Loss on $15 Billion of Credit Costs (Update1): “Citigroup Inc., the biggest U.S. bank by assets, posted its second straight quarterly loss on at least $15 billion of writedowns and increased loan losses as customers fell behind on home, car and credit-card payments.

The first-quarter net loss of $5.11 billion, or $1.02 a share, compared with earnings of $5.01 billion, or $1.01, a year earlier, New York-based Citigroup said in a statement. While the loss was worse than the $4.75 billion predicted by analysts in a Bloomberg survey, revenue exceeded their estimates. The shares climbed 6 percent to $25.46 in early New York trading.”

So C missed. But since it wasn’t an apocalyptic report, the broader markets are in rally mode. With revenue down 48% and $39 billion in write-downs booked, can it possibly get any worse?

“The bank cited increased delinquencies on mortgages, unsecured personal loans, credit cards and auto loans, amid “trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment.””

Actually it can. The losses on mortgages are far from over as housing prices are expected to continue to drop. The losses on unsecured personal loans, credit cards and auto loans are just now beginning to accelerate.

While the Bulltards are cheering, Moodys and Fitch have quickly and quietly snuck in some downgrades on C.

Fitch lowered C to AA- with a NEGATIVE outlook.
Fitch cut Senior Unsecured Debt to AA- from AA
Fitch cut Long Term IDR to AA- from AA

Fitch also believes that selling the frozen buyout loans that C has on its balance sheet won’t free up capital. Probably because C would have to finance the damn deals themselves and foot the first few losses to get a sale done.

Fitch downgraded Citigroup’s Individual Rating from A to A/B.
The ratings explained here:

“A denotes:
A very strong bank. Characteristics may include outstanding profitability and balance sheet integrity, franchise, management, operating environment or prospects.

B denotes:
A strong bank. There are no major concerns regarding the bank. Characteristics may include strong profitability and balance sheet integrity, franchise, management, operating environment or prospects.

C denotes:
An adequate bank, which, however, possesses one or more troublesome aspects. There may be some concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. D denotes:
A bank, which has weaknesses of internal and/or external origin. There are concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. Banks in emerging markets are necessarily faced with a greater number of potential deficiencies of external origin.

E denotes:
A bank with very serious problems, which either requires or is likely to require external support.

F denotes:
A bank that has either defaulted or, in Fitch’s opinion, would have defaulted if it had not received external support. Examples of such support include state or local government support, (deposit) insurance funds; acquisition by some other corporate entity or an injection of new funds from its shareholders or equivalent.

Gradations may be used among the five ratings: i.e. A/B, B/C, C/D, and D/E.”

Moody’s affirmed C’s ratings, but changed the outlook to NEGATIVE.

While equities are throwing a mini-party this morning, LIBOR is spiking hard again. The financial system is under HUGE stress.

The Eurodollar front month is getting absolutely smashed as LIBOR continues to spike. All technical levels have been destroyed. The front month is pricing in a 75 basis point hike now. Fun times.

I will repeat that. RATE HIKES. Not cuts.

Those of you thinking:
WTF is a Eurodollar?

Start reading. Start learning. This is about to become the next big thing…

Related Posts:
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Thursday, April 17, 2008

The South Sea Bubble and Todays Central Banks: FRB, BOE, ECB

The South Sea Bubble was one of history’s worst financial bubbles. There are also a very important lessons to be learned from the South Sea Bubble. Strangely, nobody seems to have learned them…

In 1711, the British government converted 10 million pounds of its war debt into the stock of the newly established South Sea Company, which had been granted exclusive trading rights in Spanish South America.

At the time, there were a few brave souls out there that dared argue that this was NOT a good idea. After all, the government really shouldn’t be making risky, speculative bets with your hard earned money. We all know what happened. It is called the South Sea Bubble after all.

Fast forward to today…

The Bank of England is about to start to accept MBS as collateral in exchange for Government Bonds. Read the full article here.

“It is understood that the Treasury about to finalize a scheme under which the Bank would allow lenders to swap their mortgage-backed assets for government bonds rather than cash. Lenders would be able to use the gilts as collateral for loans from other banks. It is hoped that the move will ease the seizure in the credit markets and lead to a drop in mortgage rates for homeowners.”

Once again, only a small minority has dared question these actions. Once again, this isn’t likely to end well for the same poor bastards: You, the taxpayer.

As I said in a recent post: Dammit, why won’t you learn?

If I thought it would make a difference, I would buy the damn pamphlets and send the originals to ‘Swervin’ Mervin King of the BOE and ‘Helicopter’ Ben Bernanke of the FRB. Then I’d make ‘The Maestro’ Alan Greenspan eat them in public for being the first real serial bubble blower.

Ye Olde Credit Crisis: 18th-Century Warning for Sale (Update1): “The Bank of England should take care when it invests public funds in risky or money-losing ventures, according to documents being sold by Christie's International.

The warning is no reference to the U.K. central bank's role in the rescue of Northern Rock Plc. The London-based auction house said it refers to what might be called “ye olde credit crunch” of 300 years ago.

The 1715 pamphlets “The Ruine of the Bank of England, and All Publick-Credit Inevitable” and “The Directors of the Bank of England, Enemies of the Great Interest of the Kingdom” may fetch as much as 20,000 pounds ($40,000) in a London sale on April 30.

The forecasts of doom were written by John Holland, co- founder of the Bank of Scotland, who criticized the British government for converting the national debt into the stock of the ill-fated South Sea Company.”

Of all the central banks, who is the BADDEST?

Fed Accepts Dodgy Collateral in Race to Bottom: Caroline Baum: “The Fed isn't alone in broadening the range of collateral it is willing to accept in response to the credit crisis. In December, the Bank of England added asset-backed securities to its eligibility list. The European Central Bank, which has extended the term of its loans in recent months, has always accepted a range of marketable and non-marketable assets as collateral.

The European press is abuzz with stories about Spanish banks tendering boatloads of asset-backed securities as collateral for ECB loans.

So the Fed is in good company in the race to the bottom on collateral quality.”

Well, the race to the bottom is just getting started. However, Bernanke is definitely leading with the Bank of England not far behind. The more cautious Jean-Claude Trichet over at the ECB is making up the rear.

Related Posts:
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Wednesday, April 16, 2008

Something To Think About: Goldman Sachs, Level 3

No time.
Short post.

Just something to think about…

“Consequently, in their view, there is no true market; consequently the assets are Level 3. It is notable for example that Goldman Sachs' Level 3 assets increased in the last quarter to $82.3 billion from $54.7 billion. Since it seems most unlikely that Goldman, a smart operator if ever there was one, has been deliberately loading up on $26.6 billion worth of illiquid rubbish, the change must result largely from strategic reclassification from Level 2 to Level 3. Indeed, Goldman's Level 3 asset-backed securities doubled during the quarter to $25 billion, presumably for precisely the reason that Goldman found unattractive the market prices prevailing for those securities. At $82.3 billion, Goldman Sachs Level 3 assets are more than twice its capital. This is not therefore a peripheral problem, which can be allowed to remain hidden within the arcana of accounting conferences. The reality is that, as was demonstrated in the true recessions of 1973-74 and 1980-82 but not in the mere dips of 1990-92 and 2001-02, the value of highly illiquid Level 3 assets taken on at the peak of a bull market is pretty well a big fat zero.”

Read the full article here.

Tuesday, April 15, 2008

Just More of the Same

Just more of the same…

Dollar Overnight Libor Rate Jumps the Most in April, BBA Says: “The cost of borrowing in dollars overnight climbed the most in two weeks, according to the British Bankers' Association.

The London interbank offered rate, or Libor, for dollars climbed 27 basis points, to 2.67 percent today, the BBA said. The three-month rate rose less than a basis point, to 2.72 percent.

The three-month pound rate was little changed at 5.93 percent. The comparable euro rate gained less than 1 basis point to 4.76 percent.”

U.S. Foreclosures Jump 57% as Homeowners Walk Away (Update2): “U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.

More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.

About $460 billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are “simply walking away and deeding their properties back to the foreclosing lender” rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.

About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report. U.S. home price declines will probably double to a national average of 20 percent by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.

Borrowers who owe more on their mortgages than their homes are worth may be buffeted by increasing job losses in a “very substantial recession,” Rosen said. About 8.8 million borrowers had home mortgages that exceeded the value of their property, Moody's said last week.

Bank seizures climbed 129 percent from a year earlier, according to RealtyTrac, which has a database of more than 1 million properties and monitors foreclosure filings including defaults notices, auction sale notices and bank repossessions. March was the 27th consecutive month of year-on-year monthly foreclosure increases. In February, foreclosure filings rose 60 percent.”

“We're not near the bottom of this at all. The foreclosure process will accelerate throughout the year.” -Kenneth Rosen, chairman of Rosen Real Estate Securities LLC

“At least 2 million jobs will be lost because of this recession, so we'll get a cumulative negative spiral. A normal recession is 10 months. We think this one may be twice as long.” -Kenneth Rosen, chairman of Rosen Real Estate Securities LLC

U.S. Producer Prices Climbed Almost Twice as Much as Forecast: “Prices paid to U.S. producers rose almost twice as much as forecast in March, reflecting higher fuel and food costs that threaten a pickup in inflation.

The 1.1 percent gain followed a 0.3 percent increase in the prior month, the Labor Department said today in Washington. So- called core producer prices that exclude fuel and food increased 0.2 percent, as forecast.

Rising raw-material costs are hurting profits as slowing demand makes it difficult for companies to pass increases on to consumers. The need to avert a deeper economic slump will prompt Federal Reserve policy makers to lower the benchmark interest rate again this month even as inflation accelerates.”

“Cost pressures are building and will continue to build for a few quarters before they recede. That means margins will get crimped and profits will shrink. The Fed will cut rates again.” -Michael Gregory, a senior economist at BMO Capital Markets in Toronto

Being a financial ninja and all, I just have to drop kick Michael Gregory; senior economic or not. So let me get this straight, higher inflation which is reflected in rapidly rising input costs will lay the smack-down on profits. So far so good. THEREFORE, the Fed will have to cut again? WTF? More cuts will result in further declines in the dollar, which will therefore result in higher or stable commodity prices. This in turn means inflation pressures WON’T recede.

10%! Hahaha.. That isn’t supposed to happen in first world economies. Then again, maybe first world status is about to be a thing of the past…

“So far this year, wholesale costs are up 10.2 percent at an annual pace compared with 8.4 percent at the same time last year. The core rate has increased at a 5 percent annual pace compared with 2 percent in the first three months of 2007.”

The US dollar (USD Index) has begun to consolidate after significant declines. Expect the USD to digest these recent declines before attempting another larger move. A break about the $73.00 area would change the picture significantly. A break below the $71.00 area would result in more of the same, namely: Resumption of the commodity rally.

New records in crude… $113… like it was nothing. Uh oh. Something snapped somewhere. No es bueno.

Crude is blowing through new highs pre-market even as the dollar rallies... (Spread traders that are short oil and long gold are getting squeezed out. So says the word on the street.)

Prices pulled back and tested the $100 mark twice before busting up and through the $110 area. Prices could easily gravitate towards 'nice round numbers' like $115 and $120 because there really is no other reference point in this kind of speculative blow out. There are a few Fibonnacci projections around $114.82 and $117.86.

Commodity price strength will ANNIHILATE the already MORTALLY wounded U.S. economy... Strangely, equities seem to be fine with that...

Monday, April 14, 2008

The TED Spread, LIBOR and EURIBOR = Scary Bad

That stubborn financial system stress isn’t going away…

Euro Money-Market Rate Remains at Highest This Year, EBF Says: “The cost of borrowing in euros for three months stayed at the highest this year, according to the European Banking Federation.

The euro interbank offered rate, or Euribor, rose about half a basis point to 4.75 percent, the highest level since Dec. 27, the EBF said today. The one-week rate was little changed at 4.23 percent.”

This means risky assets, such as equities, are going to enjoy a rough ride in the near future.

Nothing Special With Treasuries as Fed Has Mortgages (Update5): “The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September.

As recently as March 21, Treasuries were in such demand that traders were willing to lend cash at rates 2 percentage points less than the Fed's target for overnight loans if they could obtain the securities as collateral. Now, the gap is back in line with the 0.06 percentage point average in the 10 years prior to August, when subprime mortgage losses spread.

The $6.3 trillion-a-day repurchase agreement, or repo, market is a barometer of sentiment because it's where firms finance trades. A narrowing of the spread between the so-called general-collateral and federal-funds rates may suggest declining demand for U.S. government debt. Treasuries have lost 0.8 percent on average since March 20, when the central bank expanded the type of debt it would take in return for the securities to include mortgage and commercial real estate bonds.”

Sounds good no? Wait for it…

“Since dealers typically use repurchase agreements to finance their holdings, movements in the rates affect the cost of holding the securities in inventory. Dealers last month increasingly let trades involving Treasuries go uncompleted because the cost to obtain the securities became too expensive.

Failures to deliver or receive Treasuries, known as fails, totaled $2.3 trillion in the week ended April 2, the highest since May 2004. Fails averaged $173.6 billion a week since July 1990, data on the New York Fed's Web site show.

The general collateral rate increased to 2.25 percent on April 9, from 0.9 percent on March 20, according to data from Jersey City, New Jersey-based GovPX Inc., a unit of ICAP Plc, the world's largest inter-dealer broker. The Fed's target rate held constant at 2.25 percent during that period.”

FAILURE TO DELIVER… or FAILS have been quietly sneaking higher. The AVERAGE value of Fails is about $173 billion a week. Last week the value of Fails was $2.3 trillion.

Aberration? Nah. Not bloody likely. This is probably foreshadowing the great fun Bears are likely to have in the very near future at the expense of the Bulls…

“The spread between the rate banks charge for three-month loans denominated in dollars and the overnight index swap rate, a measure of banks' willingness to lend, widened to 81 basis points today, or 0.81 percentage point, from 57 basis points on March 18. The low this year was 24 basis points on Jan. 24.”

The spread between the rates banks charge and three-month loans in dollars continues to bounce around at extremely stressed levels. NOTHING the Fed or any other central bank has done has been able to coerce this spread back down. That is NOT good.

“Fed and Treasury officials are considering ways to replenish the central bank's supply of U.S. bonds if needed to ensure the Fed can keep lending to Wall Street dealers. The Fed is selling some of its Treasuries to finance its lending programs.

Treasury bill, note and bond holdings at the Fed fell 21 percent to $560 billion on April 9 from $713 billion on March 5, said George Goncalves, chief Treasury and agency debt strategist at Morgan Stanley in New York. The firm is a primary dealer.

One option would be for the government to sell more debt and deposit the proceeds with the Fed, according to a Treasury official and two people at the central bank familiar with the proposal. The Fed would then use the cash to purchase Treasury notes, which it could lend to dealers.”

The BEST idea the Powers That Be are shopping around is another great debt circle jerk. They’re seriously considering having the US Treasury, which is already running a massive deficit that requires in excess of $2 billion dollars from abroad daily to finance government expenditures, sell MORE debt. The brilliant plan is then to park that debt with the Fed, so the Fed can swap it out for GARBAGE. Brilliant. Wicked brilliant.

With a declining currency, who in their right mind, from abroad, would gobble up more US government debt at these yields? Wouldn’t you first force the yield UP, to compensate for the declining currency and the ever increasing risk that the world may be reaching a saturation point with regards to appetite for US debt?

In the end, the bagholders will of course be the average taxpayer.

Watch the TED spread here.
What is the TED spread?
Understanding the TED spread.

As you can see, the spread is ramping up for another go at the old highs… Only this time the Central Banks of the world have far less tricks and ammo available to reject the advance.

To simplify: A BIG TED spread is scary bad for risky assets. Nuff said.

Earnings Are Going To Be Awful

Intraday, on the 15 minute chart you can clearly see when the short squeeze started on April 1st as the new quarter kicked off. Prices peaked on April 8th just short of major resistance around 1390. Prices have retraced the entire move and are now languishing around 1325 as we enter earnings season.

Earnings are going to be awful. Worse than the market expects... at least that would be my bet.

Goldman Strategist Says U.S. Earnings Are `Awful' (Update2): “The U.S. corporate earnings season got off to an “awful” start and stocks will continue to fall, according to Goldman Sachs Group Inc.

“Early signs are awful,” a team led by New York-based David Kostin, Goldman's U.S. investment strategist, wrote in a note today. “We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower in coming weeks.”

Of course earnings are going to be awful. This is the worst financial crisis since the 1930’s. Funny thing is, analysts have just finally started cutting their estimates…

“Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an estimate for an increase of 4.7 percent at the start of 2008.”

What do you think that does to the ‘equities are super cheap based on their PE ratio’ argument? A LOW PE doesn’t always signal a bargain; in fact it frequently foreshadows a sudden and significant decline in the E part of the equation. As a general rule, P drops before E as those more informed and the more sophisticated money bails out long in advance...

For example:

Wachovia Posts Loss, Plans $7 Billion Capital Raising (Update4): “Wachovia Corp., the fourth-largest U.S. bank, reported an unexpected loss because of subprime- infected mortgage holdings, cut its dividend and said it will raise about $7 billion in a share sale to replenish capital.”

Wachovia posted an UNEXPECTED loss. Haha… Gimme a break. If you couldn’t see that one coming you shouldn’t be trading or investing. It would be far easier and quicker for you to stand at the end of your driveway (for additional comic relief, somewhere near the foreclosure sale sign) and directly hand out your hard earned money to random strangers as they walk or drive by.

Notice the sudden cut in the dividend and the mad scramble to raise an additional $7 billion? That means the big boys are scared shitless about the next quarter… and the quarter after that… otherwise they would just ‘weather the storm’.

This isn’t going to be a ‘V’ shaped or even a ‘W” shaped recession. This is going to be a nasty long ‘L’ shaped or ‘\’ (perpetual slide) shaped recession that will last years.

Related Posts:
GE Disappoints, Citing Finance: Bottom? What Bottom?
Credit Losses and the Shape of the Recession

Sunday, April 13, 2008

Dammit, Why Won't You Learn?

"The year 1929 reached almost the end... under the promise and appearance of increasing prosperity, particularly in the United States. But in October a sudden and violent tempest swept over Wall Street......... The whole wealth so swiftly gathered in the paper values of previous years vanished. The prosperity of millions of American homes had grown up a gigantic structure of inflated credit, now suddenly proved phantom. Apart from the nation-wide speculation in shares which even the most famous banks had encouraged by easy loans, a vast system of purchase by instalment of houses, furniture, cars and numberless kinds of household conveniences and indulgences had grown up. All now fell together." -Winston Churchill

Housing bubbles...
Debt bubbles...
Speculative investment bubbles...

Repeat after me: All bubbles are the same. Always and forever.

Dammit, why won't you learn?