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Wednesday, July 30, 2008

Links: This is What I Read

Of the posts I read this morning, as part of my morning routine, these were the most interesting or useful (to me):

MacroMan explains how the massive "equity market crack" (long energy and short financials) trade was responsible for the big move in equities yesterday in Just Say No.

Market Ticker demonstrates that politicians and Wall Street are doing everything in their power to make sure housing remains unaffordable in Pimco’s McCully and Sustainable Home Ownership.

In New York Governor Warns of Crisis, Mish makes clear that economic fundamentals are deteriorating rapidly. “In June 2007 the 16 banks that pay the most on their business profits remitted $173 million to the state treasury. This June, just a month ago, they sent remitted $5 million — a 97 percent decrease.”

Over at Naked Capitalism, they argue We Need a Recession (Well at Least a Slowdown). I’m a little harsher. Only a serious, deep and protracted recession will truly flush the excesses from the financial system and allow for some really good reform.

Paper Economy: S&P/Case-Shiller: May 2008, nothing but continued weakness in real estate prices.

Toro’s Running of the Bulls puts up a simple chart that makes it very clear: Housing Still Too Expensive.

Tuesday, July 29, 2008

Merrill: How Many Times Can You Lie?

During a conference call on July 17, Thain said: "Right now we believe that we are in a very comfortable spot in terms of our capital."

Hahahaha. Reuters has a good article on it here.

How many times can you lie to your shareholders before they take you out behind the woodshed in a sudden fit of pure rage?

(Merrill Picture from MacroMan)

Merrill: Finally Marks to Market, Raises Capital

Dilution. Massive dilution.

Merrill to Sell $8.5 Billion of Stock, Unload CDOs (Update3): “Merrill Lynch & Co., the third- biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Temasek Holdings Pte., the Singapore-owned fund that became Merrill's biggest investor by acquiring shares in December, will buy $3.4 billion of the new stock, Merrill said yesterday in a statement. The New York-based company is paying Temasek $2.5 billion to offset losses on its earlier investment. Merrill will also book $5.7 billion of writedowns in the third quarter.

Almost $19 billion of net losses in the past year forced Chief Executive Officer John Thain to backtrack from assurances that the firm had enough capital to weather the credit crisis. Since taking the post in December, Thain has raised $30 billion in an effort to keep pace with mounting charges on mortgage bonds amassed by his predecessor, Stan O'Neal. Standard & Poor's cut the firm's debt rating last month and signaled that more downgrades were possible.”

Thain swore up and down that Merril didn’t have to raise anymore capital…

Expect massive share offerings from all major banks and brokerages. Expect massive dilution. Expect more forced balance sheet de-leveraging. $30.6 billion is no small amount… and finding a bid for all that selling isn’t going to be easy. Therefore Merril is dumping them at one fifth of face value. That’s $6.12 billion. More specifically, rumors are that it was 22 cents on the dollar.

But far more interesting is this little gold nugget:

“Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.”

So in order to get ANYBODY to buy this $30.6 billion pile of crappy bonds, Merrill had to provide the financing and promise to eat any losses greater than $1.68 billion. So because of a neat accounting trick, $30.6 billion is removed from the balance sheet, making it look leaner and cleaner. Really, the ultimate risk is still with Merrill. So, the question then is: Did Merrill really SELL the bonds? Or just shuffle everything around a bit?

Other food for thought:

“Why these assets are written down when you're selling them and weren't written down in your earnings is a question. This kind of announcement is surprising and a little disheartening.” -Ralph Cole, Ferguson Wellman Capital Management Inc.

This also creates another bigger headache. The sale sets a precedent. Now there is a ‘mark’ for these bonds and other institutions now have to move them out from their level 3 asset bucket (where they are being valued at some fantasy level) and back into the ‘mark to market’ asset bucket at about 22 cents on the dollar.

Merril (MER) is the 20th largest weighting in the DOW Jones Financial Index at just over 1%. SKF, the Proshares Ultra Short Financials is x2 the inverse of that index.

Monday, July 28, 2008

The Final Bubble: Commodities

Crude Oil Rises After Nigerian Militants Claim Pipeline Attacks: “Crude oil rose, rebounding from a seven-week low in New York, after a Royal Dutch Shell Plc pipeline in Nigeria was attacked by militants.

The incident occurred on the Nembe Creek trunk line in Rivers State, Shell spokeswoman Caroline Wittgen said. The rebel group, the Movement for the Emancipation of the Niger Delta, or MEND, claimed responsibility for damaging two pipelines in an e- mailed statement.”

Some old story. Oil drops quickly and significantly and almost immediately somebody somewhere gets on the phone and ‘motivates’ some group of militants to start making some noise… Those oil trading warlords sure have a good thing going eh?

A technical bounce in oil is overdue. Failure to move higher this week would be an incredible sign of weakness. Oil, now deeply oversold, could bounce to the 50 day EMA (red) around $131. Additional resistance is around $135.

Never forget that demand destruction for oil is now accelerating. Demand destruction in first world countries while significant will be exceeded by far more complete demand destruction in emerging economies.

Funds for Highways Plummet As Drivers Cut Gasoline Use: “A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.”

It really is Time to be Short Commodities. Expect bounces. Some of which will be quite large. Wait for them to lose their momentum before going short.

Commodities Seeing Demand Destruction, Canada Rolls Over. When commodity producing economies start to wobble, the top is almost certainly in.

The commodity heavy Canadian market put in what appears to be a significant top. The MACD rolled over long before prices did. A brief bounce failed at the 200 day EMA (green). The rapidly falling 50 day EMA (blue) is rushing in to pair up with the 200 day EMA to increase resistance around the $83.00 area. Failure to hold the $79.00 area would result in a quick, brutal wave of selling into support around $75.00.

Remember, Oil Drops on Subsidy Cuts in China, India, Malaysia and Taiwan. That is when and where the real demand destruction will take place.

Sunday, July 27, 2008

Benjamin Graham: Fuck the Financials!

Although the great value investor died in 1976, according to his many writings and his 'deep value' approach if he were alive today I'd bet a lot of money on him saying, "Fuck the financials!" today. Confused? Click here. (Seriously, you should click and follow the link. You're intrigued by the mere mention of Benjamin Grahaman and his uber greatness. He was practically a money making machine. In comparison you completely suck at life. I'm not even kidding. You should really click or forever hold your piece...)