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Friday, April 25, 2008

Bulltards Grow Complacent: VIX Drops

Yesterday’s New Home Sales data should have DESTROYED the argument that there won’t be a recession or that it will be short and shallow. I know, I know, equities didn’t seem to mind. Wait for it. Looks like the Bulltards really want to tag 1400 on the S&P 500. Volatility (VIX) has fallen to COMPLACENCY levels (in this credit crisis environment).

VIX and More:
Implied Volatility Suggests Risk in Financials at Six Month Low

The US dollar has perked up some on continued weak economic developments out of Europe. Consequently some of the fast money pulled out of commodities such as Gold and Oil.

The $120 area would appear to be 'arbitrary' resistance do to its status as a 'round number'. This makes for an interesting short opportunity around these levels.

Commodity price strength will ANNIHILATE the already MORTALLY wounded U.S. economy...

March New Homes sales show that things are getting worse FASTER. Sales volume has all but collapsed. Prices are starting to collapse. Combined this has resulted in a new record 11 months of sales inventory.

This means more foreclosures, more write downs and more big fat losses for both consumers and the entire financial complex.

New-Home Sales in the U.S. Plunge More Than Forecast (Update2): “Purchases of new homes in the U.S. plunged more than forecast in March to the lowest level in almost 17 years as stricter loan rules and falling prices caused buyers to hold off.

Sales dropped 8.5 percent to an annual pace of 526,000, the fewest since October 1991, from a 575,000 rate the prior month, the Commerce Department said today in Washington. The median sales price slumped 13.3 percent from the same time last year, the most in almost four decades.”

Calculated Risk:
More on March New Homes Sales
March New Homes Sales, Lowest Since 1991
Architecture Billings Index Falls to Record Low Level

Paper Economy:
New Homes Sales: March 2008

More cracks appearing…

Spanish Unemployment Rate Jumps the Most in 15 Years (Update2): “The unemployment rate in Spain, once an engine of European job creation, jumped the most in 15 years in the first quarter to a three-year high as the building market contracted.

The jobless rate rose to 9.6 percent from 8.6 percent in the fourth quarter, the Madrid-based National Statistics Office said on its Web site. The last time the rate increased that much was in the first quarter of 1993, when Spain most recently slipped into recession. The number of unemployed rose 13 percent, or 246,000, to 2.1 million people, the report said.

The global credit shortage is exacerbating the contraction in the Spanish real estate market following the construction boom that saw almost five million homes built in the past decade. Home sales fell by more than a quarter in the year to January as banks withheld credit from potential buyers.”

With a jobless rate of 9.6%, Spain won’t be able to maintain BUBBLE home prices. The crash in real estate prices that is still to follow will cripple the Spanish economy for many years. Those that don’t walk away from their mortgage debts will spend the rest of their lives paying down the debt. This will obviously adversely affect consumption spending. Those that do walk away will be free to start over, but the losses will then be immediately transferred to the banks. Crippled banks will then tighten credit conditions, squeezing the economy further still.

“Spain's economic growth will slow to 2.4 percent this year compared with 3.8 percent in 2007, the Bank of Spain said this month. The International Monetary Fund says the growth rate will be 1.8 percent, less than half of last year's pace.”

Already growth and growth estimates are dropping rapidly.

“Europe's fifth-biggest economy created more than half of all new jobs in the euro region in the five years through 2006 as record low interest rates and surging construction fueled a virtuous circle of consumption and hiring. Now that process has gone into reverse as banks shut off funding to homebuyers and a glut of properties is depressing home prices. Mortgage lending fell 28 percent in the year to January.”

Spain created more than half of all the jobs created in the Euro regions over the last five years. BUT, the vast majority of these jobs were in the real estate and construction industries. Poof! They will be gone just as quickly as they came. Instant recession.

“Around 800,000 homes built in the past four years remain unsold, according to Bloomberg calculations based on data from the Housing Ministry and Sociedad de Tasacion SA, a real estate valuation company. Cesar Oteiza, director of operations at property web site, says there may also be as many as 300,000 second-hand homes for sale.”

The number of unsold homes, relative to the population of Spain, is at astronomical levels. There now really are ghost towns in Spain…

“This is brutal. That this can happen while the economy is still growing around 2.5 percent is really worrying.” -Jose Luis Martinez, a strategist at Citigroup Inc. in Madrid.

“Spain's getting hit from all sides. This is still the early stages, and unemployment is picking up pretty quickly already.” -Dominic Bryant, an economist at BNP Paribas SA in London

Related Posts:
Slow Motion Housing Crash: UK, Spain
More Ghost Towns
Ghost Towns? In Spain?
UK: Definitely The Next Important Victim

Thursday, April 24, 2008

RISE Dark Lord Libor! RISE!

RISE Dark Lord Libor! RISE!

Libor to Rise as Banks Stay Wary, Derivatives Signal (Update1): “Interest-rate derivatives are signaling that the rate banks charge for loans in dollars in London may rise further as financial institutions remain reluctant to lend.

The difference between the rate of three-month loans in London relative to the overnight index swap rate, known as the Libor-OIS spread, is 89 basis points, just below the year high of 90 basis points reached on April 21.

The London interbank offered rate, or Libor, for dollars climbed to a seven-week high amid speculation the global credit crunch prompted lenders to manipulate the rate to prevent their borrowing costs from escalating. The British Bankers' Association said last week it will speed up a review of the process by which money-market rates are set daily and ban any member providing misleading quotes.”

Despite every attempt to bring Libor down, the banks continue to both hoard and need cash. The Fed, in all its brilliance, is offering to do more of the same.

“The persistence of banks' need for cash and increase in Libor rates has triggered speculation that the Federal Reserve will increase, for the third time, the amount it loans through its Term Auction Facility, which is known as TAF. The Fed has auctioned a total of $360 billion in temporary funds through TAF since its debut in December. This month, both TAF auctions were for $50 billion each in 28-day loans.

The rate at this week's TAF was 2.87 percent, or 82 basis points above the minimum bid set by the Fed, the highest spread to date. An increase in the spread signals a rise in demand for funds in the banking system.

The TAF auction rate was 3 basis points below one-month Libor for dollars at 2.90 percent, after the prior auction's rate was 10 basis points above one-month Libor, sparking heightened attention on Libor. The rates for a collateralized loan, as are TAF funds, are typically lower than those that are offered without it, as with Libor, given the maturity is the same.”

What the Fed should be doing is emphasizing and enforcing TRANSPARENCY. This it is not. It is because the banks don’t trust each other, and rightly so, that they are feverishly hoarding and refuse to lend to one another. You see, each bank knows its own books and knows the accounting tricks its using, such as tossing bad positions into the Level 3 asset bucket. Knowing just how precariously everything is balanced in house and just how fake all numbers for public consumption are, the banks rightly assume their peers are just as messed up. What you have is a Mexican stand off. Nobody moves. Until the banks can figure out who among them is actually legitimately solvent, Libor will stay elevated.

This also has knock on effects…

“Use of Eurodollar futures, which are based on predictions for Libor rates, as a bet on expected changes in Fed interest- rate policy has waned amid the questions regarding Libor rates, according to Credit Suisse Securities USA LLC, one of the 20 primary dealers that trade directly with the Fed.

Eurodollar futures open interest, or the total number of futures contracts that have not been closed, liquidated, or delivered, declined by 21 percent since the end of January, according to CME Group data. It fell 4.7 percent for the week ended April 18, after the BBA announced it was monitoring banks involved in the Libor process, from the end of the prior week.

Eurodollar futures, which trade in price terms, settle to three-month dollar Libor at expiration. The settlement price is derived by subtracting the Libor rates from 100.”

“Libor uncertainty has led to a large-scale deleveraging in the Eurodollar complex. Over the past week, the decline in open interest has been dramatic as the problems with Libor have become more publicized.” -Dominic Konstam, head of interest-rate strategy at Credit Suisse

We trade Eurodollar (ED) futures here at CFT Financials in a big way. All day, everyday. Some of our traders are complaining loudly. “Where did all the size go?”
Others are loving it. Less competition you see. There are more opportunities as certain moves are now more pronounced because there is nobody there to take the other side. We’ve also noticed a conspicuous reduction in the “Quants”. Maybe blindly running the computers in this credit crunch resulted in some outsized losses. Or maybe there isn’t enough liquidity for these programs now. Either way, quite a few computers aren’t trading anymore.

More importantly, things have gotten WORSE, not better. So this is far from over.

The Eurodollar (XED, candles) contract prices off of Libor (LIBOR, green). We know Libor is elevated and rising (that would be falling on this chart). The market is taking back Bernanke's rate cuts. Since this is happening in the short end of the curve, you won't yet have noticed the effects on the 'real economy'. Wait until mortgage, car loan and credit card rates all start to rise as well...

Since LIBOR is THE determining factor in most floating rate, variable rate, option ARM and any other crazy credit product out there, you know now that rates and rate resets are going to be suddenly and unexpectedly higher in the very near future.

The S&P 500 (SPX, candle) is back at the 'break point' of 1400. The declining 200 day EMA has almost caught up as well. This 1400 area will act as formidable resistance. With the residential real estate market continuing to deflate and with the commercial real estate market yet to deflate... with the consumer completely crippled... with job losses set to accelerate... and with the entire financial system mortally wounded...

ANY pop above 1400 would have to be temporary...

Now for some comic relief:

Ambac May Raise More Capital After Reporting Loss (Update1): “Ambac Financial Group Inc., the bond insurer that raised $1.5 billion last month, may be forced to seek more capital after it lost money for the third straight quarter.”


Monoline Related Posts:
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Ambac Gets Crushed, Another Bank Wobbles
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Wednesday, April 23, 2008

Ambac Gets Crushed, Another Bank Wobbles

Remember those monoline insurers that used to move the market by a couple hundred points in either direction? The ones that everybody seems to have forgotten about? Well, Ambac (ABK) just reported earnings. HINT: Pre-market, ABK is -20%...

Ambac Posts Loss on CDO Writedowns, New Business Drop (Update2): “Ambac Financial Group Inc., having staved off a credit-rating downgrade, posted a wider loss than analysts estimated after taking $3.1 billion in charges for subprime-mortgage securities.

The first-quarter net loss was $1.66 billion, or $11.69 a share, compared with net income of $213.3 million, or $2.04, a year earlier, New York-based Ambac said today in a statement. The company's operating loss of $6.93 a share was larger than the $1.82 estimated by six analysts surveyed by Bloomberg.”

The operating loss of $6.93 a share was larger than the $1.82 estimated by six analysts? Hahaha… Analysts are generally about as useful as a third nipple. (READ: What's Analyst Worth? Not a Penny as Estimates Miss (Update2))

“New business slumped 87 percent as states and municipalities shunned its insurance and the market for mortgage securities dried up. Ambac ratcheted up estimates for claims it will need to pay on home-loan debt by $2 billion.”

ABK is dead. Done. Kaputt. There is NO new business, therefore there is no new cash flow to pay for pending losses. Nuff said.

“Ambac raised $1.5 billion in March after credit rating companies threatened to strip the bond insurer of its top rating following record losses on subprime-mortgage securities. The additional capital staved off downgrades by Moody's Investors Service and Standard & Poor's. Fitch Ratings cut Ambac Assurance Corp. to AA in January. All three companies have negative outlooks on the ratings.”

This first quarter loss of $1.66 billion completely wipes out the $1.5 billion that ABK could BARELY scrape together. ABK had to TRIPLE the number of outstanding common shares to 285 million to raise that money.

“The company this week said it's seeking shareholder approval to increase authorized shares to 650 million from 350 million.”

Lacking both imagination and any real chance in hell, ABK is going for more of the same. Can you say MASSIVE dilution? ABK is worth absolutely nothing. Why anybody would hold a long position in their common is beyond me. A complete and full bailout would probably still push common to ZERO. Especially a government bailout.

HVB Chief Sees `Significant' First-Quarter Writedowns (Update2): “HVB Group, UniCredit SpA's German banking unit, said it expects “significant” writedowns related to the credit crisis in the first quarter.”

Another German banks warns. HVB Group is the second largest private-sector bank in Germany and with Bank Austria Creditanstalt, the undisputed market leader in Austria. With over 61,700 employees, 2,000 branch offices and more than 8.8 million customers HVB is not the kind of bank you want to see get in trouble.

HVB doesn’t report until May 8th. To pre-announce like this definitely means that the writedowns will be massive.

Bondholders Lucky to Get 10 Cents on Dollar in Looming Defaults: “The looming wave of bankruptcies is unlikely to be kind to bondholders. And they have only themselves to blame.

Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents.”

While painful for the suckers holding this junk debt, consider the world of pain this will cause the uber nerds that fancied themselves financial engineering Gods and wrote heaps upon heaps of completely under priced CDSs (Credit Default Swaps)? Whole teams of math ninjas at the banks and hedge funds wrote records amounts of CDSs off their ridiculously complex and perpetually optimistic models. This was of course done at a time when corporate defaults had been at record lows for the most consecutive years in the history of man.

“Chapter 11 business bankruptcies rose 16 percent in the first quarter.”

It would seem that nobody sat these suckers down and explained to them the meaning of the word CYCLE and how to combine it with the words BUSINESS and ECONOMIC.

1. any complete round or series of occurrences that repeats or is repeated.
2. a round of years or a recurring period of time, esp. one in which certain events or phenomena repeat themselves in the same order and at the same intervals.

Maybe they all listened to Larry Kudlow and his “Goldilocks economy” FOREVER crap.

The TED Spread has moved up again. Three month LIBOR remains at 2.92 today.

Monoline Related Posts:
Quiet, Sneaky Little Downgrades: CFC, MBI
Ambac ‘Bailout’: Why Bother?
Ambac Bailout: The Wheels Come Off
Monoline Bailouts: The Great Circle Jerk

Related Posts:
Fragile Banks: More Bailouts, More Capital
The Race To The Bottom Accelerates
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

Tuesday, April 22, 2008

Fragile Banks: More Bailouts, More Capital

This is the SECOND German bank to run into trouble this month:

Duesseldorfer Hypo Rescued by Bank Group After Crisis (Update2): “Duesseldorfer Hypothekenbank AG, the closely held German public-sector lender, was bailed out by a group of banks, at least the fifth lender in the country to get emergency aid since the collapse of the U.S. subprime market.”

I must emphasis the fact that it is the FIFTH bank in Germany to get emergency aid.

“The BdB banking association bought Duesseldorfer Hypo from the Schuppli family and aims to sell it to a new owner, it said in an e-mailed statement late yesterday. The bank, which has a balance sheet of 26.7 billion euros ($42.4 billion), has booked 8.5 million euros in writedowns on asset-backed securities since last year. It doesn't own subprime loans, it said.”

So, despite NOT directly owning any subprime loans, this bank quickly and quietly imploded.

“Writedowns and lower demand for public-sector financing almost erased profit at Duesseldorfer Hypo last year, after earnings of 22 million euros in 2006.”

With worse still to come as consumer credit and commercial real estate are all expected to start to suffer now, that was enough to kill this bank.

RBS to Sell $24 Billion in Shares After Markdowns (Update4): “Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors in Europe's largest rights offer to boost capital depleted by writedowns.

RBS fell as much as 5.7 percent in London trading after saying it marked down assets by 5.9 billion pounds and will cut the 2008 dividend.”

RBS got a little greedy and stretched itself a little too thin just a couple of months ago with the acquisition of ABN Amro Holding NV.

“RBS's capital cushion shrank after credit markdowns and its part in last year's 72 billion-euro ($114 billion) purchase, mostly in cash, of ABN Amro Holding NV with partners Banco Santander SA and Fortis.”

The acquisition battle was a long one with many different players furiously outbidding and out maneuvering each other for the privilege of being the GREATEST FOOL.

I shit you not, but now the SAME dumbass analysts that called for more and more acquisitions are calling for divestitures. Hilarious.

“They have overpaid for acquisitions and have had a weak capital base, but there's nothing in this statement which confesses that they have made significant mistakes over recent years. We would like to see disposals from the global banking and markets portfolio which got them into trouble.” -Simon Maughan, Analyst at MF Global Securities Ltd. in London

“The bank plans to issue 11 new shares for every 18 existing shares at 200 pence each, or 46 percent below yesterday's close.”

That is expensive. Existing shareholders just got seriously diluted… and still it may not be enough:

“Moody's Investors Service said today that it may downgrade the B+ financial strength rating and the Aaa senior debt and deposit ratings of Royal Bank of Scotland Plc and the Aa1 senior debt rating of the group.”

National City Follows Wachovia, WaMu in Rush for Cash (Update1): “National City Corp. joined Wachovia Corp. and Washington Mutual Inc. to tap what KBW Inc. calls “an abundance” of capital, after losses tied to the slumping housing market made U.S. financial companies a bargain for investors.

National City, Ohio's biggest bank and subprime lender, agreed to sell a $7 billion stake to a group led by Corsair Capital LLC yesterday, at a discount to market price. The move, which would dilute existing shareholder value, sent the stock plummeting almost 28 percent.”

The discount was 40% to the previous close. That would certainly warrant at least a 28% drop.

Bottom pickers in financials are going to get whacked. Wait for all the capital raising to have been concluded. You won’t miss out. Prices will languish for years as the banks work through their balance sheets and retrench.

Prices are at resistance just below the psychologically important 1400 level on the S&P 500 (SPX). Resistance ranges from about 1390 to 1396 and appears to be pretty solid. The low volume rally that got prices this far should run out of steam here. The bounce from 1257 has been impressive. Oversold conditions have been alleviated. Complacency has set in (VIX, grey). It is time for the next leg down. The financials started declining yesterday, even as the broader markets held their ground.

The Mortgage Finance Index (MFX) couldn't even make it past the recent swing high of 52.73 on this bounce. More importantly, notice how MFX turned south first, while the S&P 500 (SPX, grey) continued to squeeze higher to about 1390. The broader markets CANNOT sustain a rally of any kind as long as the financial complex continues to a source of weakness. The REAL bottom will be confirmed when the broader financial complex LEADS the rally out the hole. I don't expect the lows around $40 to hold...

As the banks desperately go raising capital, the dilution effects alone will result in declining equity prices. Expect a test of the lows around the $75.00 area on the Bank Index (BKX) in the very near future. Failure of these lows is probable.

Related Posts:
Credit Losses and the Shape of the Recession
Watch the East Buy the West for Cents on the Dollar
Sarcastic Rant on Fannie and Freddie

Monday, April 21, 2008

The Race to the Bottom Accelerates

There may have been some confusion over these charts in my last post Citigroup Earnings, Downgrades and LIBOR. Up is down and down is up. The chart is RISING from the bottom left to the top right as rates FALL. To calculate the yield that the front month Eurodollar (XED) contract is implying, you take 100 minus the price. For example, 100 minus Friday's close of 97.09 results in a yield of 2.91%. At the beginning of April, yields were about 2.25%. As you can see the moves late last week have raised yields significantly....

Also notice how the Eurdollar (XED) and LIBOR (LIBOR) track closely. LIBOR is the most important shortest term interest rate and therefore Eurodollar prices heavily off of LIBOR.

Nobody actually expects the Fed to hike rates anytime soon. The fact that short rates have risen quite sharply despite the best efforts of the world's Central Banks is evidence that they have or are losing control...

Depending on where you start, you could argue rates rose by as much as 1% since March. The most important rates in finance use LIBOR as a benchmark, floating and fixed rate mortgages and swaps to name a few.

While still range bound, yields along the entire curve have moved up significantly. The further out on the curve, the more significant the move higher. This is most definitely NOT what Bernanke had in mind when he started cutting. The market is not supposed to take away his rate cuts...

However, in reality it isn't the Fed that sets rates at all but the market. Banks have been unable or unwilling or both to cut their rates on everything from mortgages to car loans and credit cards. Eventually too, traders and investors will demand a higher yield from US Treasuries to compensate for inflation and a declining currency...

So, in yet another desperate attempt to bring LIBOR and all associated short rates back down into their desired ranges:

Bank of England Swaps Bonds to Revive Bank Lending (Update7): “The Bank of England offered to swap government bonds for mortgage securities to kick-start bank lending, with Governor Mervyn King pledging to meet demand even if it exceeds an estimate of 50 billion pounds ($100 billion.)

The measures, backed by Prime Minister Gordon Brown's government, mimic a swap of $200 billion of securities by the U.S. Federal Reserve last month as central banks around the world struggle to prop up financial markets. A surge in borrowing costs prompted U.K. banks to withdraw their best mortgage offers, threatening to exacerbate the worst housing downturn since 1992.”

Well, the TSLF didn’t work. But that obviously isn’t preventing the BOE from employing the same trick. Those of you who watched equities rally over the last week and started toying with the idea that the worst was over, better think again. Would this really be necessary NOW, if the worst was over? Perhaps things have deteriorated further… to the point where the BOE has finally decided to try something, anything else.

The race to the bottom continues…

Stocks `Fire Sale' Burns Investors as Debt Costs Rise (Update1): “A stock market fire sale at the cheapest prices in 13 years is burning investors as companies turn away from the highest credit costs in more than a decade.

Corporations in the U.S. and Europe must repay $1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc. show. As the cost of borrowing for investment-grade companies climbed to 2.35 percentage points above government debt in the past year, firms such as Wachovia Corp., Wesfarmers Ltd. and Imperial Energy Plc are selling shares for an average 14.7 times profit, Bloomberg data show. That's the lowest since at least 1995.”

I don’t need to tell you that this CAN’T end well under the current conditions…
So how will the companies of the world deal with these problems? Well, simply put, they will issue shares like you won’t believe…

“Businesses have sacrificed shareholders as the cost of paying dividends decreased to a six-year low versus interest on bonds. The difference between the extra yield investors demand to buy investment-grade bonds from companies tracked by New York-based Merrill and the dividend yield of stocks in the MSCI World Index narrowed to 0.4 percentage point this month, from 1.42 points a year ago.

The last time paying dividends cost the same as bond interest was in December 2000, preceding an increase in new shares issued in the following 12 months, data compiled by Bloomberg show. The same increase now would put almost $800 billion of new equity in global markets in the next 12 months as cash-strapped companies tap investors to repay debt and fund operations.”

Just what struggling longs need eh? Can you say MASSIVE dilution? … and it isn’t gonna be cheap!

“After the worst quarterly decline in the MSCI World Index since 2002, investors are less willing to risk money on corporate earnings than at any time since at least 1995, measured by the gauge's price-earnings ratio. Investors paid an average of $14.71 for every dollar of earnings generated by the 1,940 companies included in the stock benchmark last month. A year earlier, investors paid $17.09 per dollar of profit.

That may force companies to sell larger stakes to make up for financing shortfalls. Banks and brokerages, whose balance sheets have been the hardest hit by credit market losses, have raised or announced plans to seek at least $163 billion in capital since July.”

The equity discount is going to hurt existing shareholders. Major long term shareholders know if their core holdings are likely to have to raise additional capital in the near future. It would therefore make sense for them to reduce their positions now and then just participate in any offering, which would be at below market prices, to quickly and cheaply rebuild their original long positions.

Therefore, expect quite the tsunami of supply as long term equity holders attempt to exit before the companies can attempt to raise additional equity. This does not bode well for equity prices.

Related Posts:
The South Sea Bubble and Today’s Central Banks: FRB, BOE, ECB
Dammit, Why Won’t You Learn?
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble