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Friday, August 15, 2008

The Russian Bear Awakens: Poland Threatened

Too much easy commodity bling has got the Big Bad Russian Bear strutting around, balls out.

I shit you not, when this story from the Jerusalem Post started making the rounds on the trading floors, traders starting pounding equities down and lifting fixed income. I’m not kidding. The squawk boxes were blaring and traders just ran with it.

Shoot first, and don’t ask any questions… not even later.

'Russian general threatens Poland with attack over US deal': “A top Russian general said Friday that Poland's agreement to accept a US missile defense battery exposes the country to attack, pointing out that Russian military doctrine permits the use of nuclear weapons in such a situation, the Interfax news agency reported.

The statement by Gen. Anatoly Nogovitsyn is the strongest threat that Russia has issued against the plans to put missile defense elements in former Soviet satellite nations.

Poland and the United States on Thursday signed a deal for Poland to accept a missile defense battery as part of a system the United States says is aimed at blocking attacks by rogue nations but that Moscow claims is aimed at weakening Russia.

"Poland, by deploying [the system] is exposing itself to a strike - 100 percent," Nogovitsyn, the deputy chief of staff, was quoted as saying.

Interfax said he added, in clear reference to the agreement, that Russia's military doctrine sanctions the use of nuclear weapons "against the allies of countries having nuclear weapons if they in some way help them." Nogovitsyn said that would include elements of strategic deterrence systems, according to Interfax.

At a news conference earlier Friday, Nogovitsyn had reiterated Russia's frequently stated warning that placing missile-defense elements in Poland and the Czech Republic would bring an unspecified military response. But his subsequent reported statement substantially stepped up a war of words.

Tensions between Russia and the West have soared over the brutal fighting that erupted last week between Russian and Georgian forces over the separatist Georgian region of South Ossetia.

Russian forces went deep into Georgia in the fighting, raising wide concerns that Russia could be seeking to occupy parts of its small, pro-US neighbor, which has vigorously lobbied to join NATO, or even to force its government to collapse.

Under the agreement that Warsaw and Washington reached Thursday, Poland will accept an American missile interceptor base.

"We have crossed the Rubicon," Polish Prime Minister Donald Tusk said, referring to US consent to Poland's demands after more than 18 months of negotiations.

Washington says the planned system, which is not yet operational, is needed to protect the US and Europe from possible attacks by missile-armed "rogue states" like Iran. The Kremlin, however, feels it is aimed at Russia's missile force and warns it will worsen tensions.

In an interview on Poland's news channel TVN24, Tusk said the United States agreed to help augment Poland's defenses with Patriot missiles in exchange for placing 10 missile defense interceptors in the Eastern European country.

He said the deal also includes a "mutual commitment" between the two nations to come to each other's assistance "in case of trouble."

That clause appeared to be a direct reference to Russia.

Poland has all along been guided by fears of a newly resurgent Russia, an anxiety that has intensified with Russia's offensive in Georgia. In past days, Polish leaders said that fighting justified Poland's demands that it get additional security guarantees from Washington in exchange for allowing the anti-missile base on its soil.”

"Pop!" said the Commodity Bubble

US dollar strength is smashing up all commodities, from oil and gold down to palm oil and rubber.

Gold, Silver Slump, Leading Commodities Drop on Dollar, Growth: “Gold plunged below $800 an ounce, silver dropped as much as 12 percent and oil, corn and copper slumped as the dollar's rebound reduced the appeal of commodities after a six-year boom.

Palm oil tumbled as much as 9 percent, and rubber and wheat fell as the dollar headed for its longest winning streak in more than two years and on concern a spreading global economic slowdown will reduce demand for raw materials.

Commodities, measured by the Standard & Poor's GSCI index, have tumbled 21 percent from their record July 3, descending into a bear market. Oil traded near its lowest for more than three months, gold for eight months and silver for almost a year. Copper and corn reached six-month lows this week.”

“Pop!” said the bubble (just like all the other bubbles before it).

Thursday, August 14, 2008

Really Scary Fed Charts: JULY, More of the Same

Last month: Really Scary Fed Charts: JUNE, ‘Just’ 1% of GDP Now
This month: Things got a little worse….

The really big question is: Just how long can the Fed keep doing this?
Take a close look at the Federal Reserve Balance sheet here.

Maiden Lane LLC is the product of the Bear Stearn’s bailout and is worth $29 billion. A good chunk of that will be lost. No doubt about that.

Outstanding debt on the Term Auction Facility (TAF) is now $150 billion and climbing.

Related Posts:
TAF, TSLF, PDCF Explained.
Fact Sheet: Bush Stimulus Package

Quick Little Oil and Gas Bounce? Ukraine Next?

Another short post.

A quick little bounce in Oil and Gas could be brewing...

From a technical perspective, both are massively oversold, and the Bulls haven't given up on the 'energy is going to infinity because we've reached Peak Oil and the Chinese are gonna buy up everything in the whole wide world' trade yet.

Geopolitical developments are starting to raise some eyebrows. The Russians aren't too keen on keeping the ceasefire in Georgia...

The real big prize is the Ukraine. With 11 million ethnic Russians living in the east, Russia is just 'itching to cause some serious shit' before December when NATO reviews Ukraine's membership application...

“Under the radar, in early December, tests came back from three undisclosed labs in Belgium, Britain and Germany, confirming what many scientists already suspected: In September, 2004, Ukrainian President Viktor Yushchenko had been poisoned. His blood samples did indeed contain an abnormally high level of dioxin, 1,000 times the accepted level. One year later, Yushchenko's face—with its strong jaw and movie-star features, perfect politician material—remains badly pockmarked.

Dioxins are normal byproducts of industry and waste incineration. Most people have been exposed to them in small doses. For example, anyone who eats animal fat has a little dioxin in their bodies. But, in higher quantities, the chemicals can cause cancer, organ disease, miscarriages, menstrual ailments, low birth weight, abnormal hair growth or a severe form of acne called chloracne. This same skin condition plagued the locals exposed to a chemical spill in Seveso, Italy, in 1976 and now Yushchenko suffers the same fate.

Most experts believe Yushchenko ingested the dioxin on the night of September 5, 2004, in the midst of a neck-and-neck presidential race, after dining with General Igor Smeshko, the former head of Ukrainian intelligence. Shortly after dinner, Yushchenko complained of sickness and vomited. Bad sushi, the state-run media claimed at the time.

No one has been charged with the president's poisoning and, like most criminal cases in the former Soviet Union, it is unlikely to be solved. But that has not stopped scientists in the Ukraine from assembling their own version of events.

In the days following the dinner, Yushchenko fell gravely ill. He underwent three weeks of detoxification treatment while being sequestered at an Austrian clinic. Doctors diagnosed him with acute pancreatitis and symptoms of edema. But, two weeks later, his face developed pockmarks.

"We knew right away he was poisoned because his skin symptom was very symptomatic of this kind of dioxin," said Mykola Prodanchuk, one of Ukraine's top toxicologists and the director of the Kiev-based Institute of Eco-Hygiene and Toxicology.

Tasteless but highly toxic, the dioxin Yushchenko ingested was administered in a dose probably less than 1 mg. A drop in a bowl of soup would have gone undetected, said Prodanchuk. Yushchenko was served a rather large dose, roughly a quarter of the lethal quantity for rhesus monkeys. Once ingested, the dioxin—a fat-soluble chemical—moves from the blood to fatty tissues. The body then tries to eliminate the dioxin through its sebaceous glands, which are what causes skin to grow oily or pimply. Half a dose of dioxin gets eliminated every few years but never completely rids itself, Prodanchuk said.

The dioxin found in Yushchenko's blood—pure 2,3,7,8-TCDD—is "the most potent of all the dioxins," said Daniel Hryhorczuk, professor of environmental and occupational health sciences at the University of Illinois. "I doubt someone could have been sophisticated enough to give a dose in the range where you'd be guaranteed to maim and not kill," added Hryhorczuk, implying that the intent was most likely Yushchenko's death, not disfigurement. Hryhorczuk said the dioxin was probably not a homegrown concoction made in Ukraine, but rather, the work of a foreign laboratory. "To make a compound this pure requires a lot of sophistication."

The early suspect: Russian intelligence. After all, it is no secret that Yushchenko, a pro-Western reformer, was not the Kremlin's preferred candidate in 2004. Moreover, Russia's KGB has a long history of failed assassination attempts of political figures, stretching as far back as the time of Rasputin, Tsarina Alexsandra's mystic who was nearly poisoned in 1916 by pastries laced with cyanide.”

Wednesday, August 13, 2008

The 'Recast' Bomb

Could you survive a 20% increase in your mortgage payments? How about 40%? 60%? 80%?!

Starting in 2009 option ARMs start to 'recast' in ever increasing quantities, from less than $10 billion a quarter to $20 and then $30 billion. The bulk of these recasts will occur between 2010 and 2012.

Bank Debt Risk Rises as Writedowns, Losses Exceed $500 Billion: “The cost of protecting bank bonds from default rose after UBS AG and JPMorgan Chase & Co. pushed writedowns and losses from the worldwide credit crisis to more than $500 billion.”

These write downs don’t yet include any real Alt-A (option ARM) losses. Estimates for total losses to the financial system now exceed $1 TRILLION. The highest estimates are for losses of $1.6 TRILLION.

Good thing the Bulltards on CNBC are calling a bottom in equities eh? The fastest way to blow your account is to listen to Jim Cramer foam at the mouth and bounce around in front of the camera like a retarded ninja on speed.

“Buy! Buy! Buy!”

Another Bear Wedge, Financials Overbought

No time for a detailed post.
Heads up: Rumors abound. Apparently Russian tanks are heading for Tiblisi (Georgia's capital) this morning despite the ceasefire. Both Russia and Georgia have denied these rumors... only to have the resurface repeatedly since early this morning... The rumor was just picked up and repeated by CNN.

Tuesday, August 12, 2008

Credit Crunch, Bank Failures, Moral Hazard and Adverse Selection

The selective enforcement of ‘no naked shorts’ shorts rule on 19 financial stocks expires today…

FDIC Fund Strained by Bank Failures May Lift Premiums (Update2): “The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the Federal Deposit Insurance Corp.'s fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for insuring deposits will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision is due by the fourth quarter.”


“Premiums for deposits will likely rise.” I understand that. Imploding banks are costing so much money so quickly that the FDIC Fund is being depleted and needs to be replenished. Sheila Bair, lacking all kinds of understanding and creativity, will simply raise premiums to increase revenues. Great. Just great. Dead banks won’t be able to pay any of the premiums. Weak banks really don’t need the extra costs right now. That leaves the more prudent, conservative banks that did not go ‘balls out’ in this credit bubble to bear the full burden. So as irresponsible financial institutions fail, a shrinking circle of responsible financial institutions get to pay an ever increasing amount.

Can you say Moral Hazard: “The prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. Moral hazard arises because an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to bear some responsibility for the consequences of those actions. For example, an individual with insurance against automobile theft may be less vigilant about locking his car, because the negative consequences of automobile theft are (partially) borne by the insurance company.”

Can you say Adverse Selection: “Anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. On the most abstract level, it refers to a market process in which "bad" results occur due to information asymmetries between buyers and sellers: the "bad" products or customers are more likely to be selected. A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its high-balance, low-activity (and hence most profitable) customers.”

Fed Says Banks Toughen Lending Standards Amid Slump (Update3): “The Federal Reserve said more banks made it harder to borrow money as defaults and delinquencies on home loans soared and the economy faltered.

Most “domestic institutions reported having tightened their lending standards and terms on all major loan categories over the previous three months,” the Fed said today in its quarterly Senior Loan Officer Survey.

Funds were scarcer for homebuyers and small businesses, credit card loans became tougher to get, and even banks' best customers were subject to greater scrutiny. Tighter credit may delay any recovery in economic growth, which economists forecast will slow well into next year.”

Credit continues to tighten. SIGNIFICANTLY.

“The survey, conducted last month, covers 52 domestic banks with combined assets of $6.1 trillion, along with 21 foreign institutions. About 75 percent of U.S. banks indicated they tightened standards on prime mortgage loans, up from 60 percent in the previous survey, the central bank said.”

The only possible outcome is a MASSIVE, PROLONGED RECESSION. (Hehe, and to think, the Bulltards are buying equities in general and financials in particular as oil comes off with the naïve belief that some decrease in oil will more than offset a GLOBAL CREDIT CONTRACTION.)

“The economy is also faltering. The unemployment rate has moved up 1 percentage point during the past 12 months to 5.7 percent, while delinquencies on home loans to borrowers with weak or limited credit histories rose to 18.8 percent in the first quarter from 13.8 percent a year earlier.”

“The credit crunch is intensifying. It reinforces the view that the economy will be weak in the next several months and there will be renewed pressure on the Fed to start easing again.” -James O'Sullivan, UBS

Morgan Stanley Rating Cut by Moody's on Risk Controls (Update2): “Morgan Stanley had its long-term credit rating lowered by Moody's Investors Service, which cited the second-biggest U.S. securities firm's failed risk-management practices.

Morgan Stanley's debt was downgraded one level to A1 from Aa3, Moody's said in a statement today. Both firms are based in New York. A1 is the fifth-highest investment-grade rating.”

The long run consequences are serious. Morgan Stanley (MS) and the rest of Wall Street needs to go on another massive capital raising binge and lower credit ratings will translate into a higher cost of capital.

The short covering bounce in financials should be just about over. It’s Time To Go Ultrashort, Again.

Wachovia's Second-Quarter Loss Widens on Legal Costs (Update2): “Wachovia Corp., the fourth-largest U.S. bank, said its second-quarter loss was bigger than reported in July because of costs to settle a probe of auction-rate securities sales. It also increased planned job cuts.

The bank revised the loss to $9.11 billion, or $4.31 a share, from $8.86 billion, or $4.20 a share, according to a regulatory filing today. The Charlotte, North Carolina-based bank now plans to dismiss 6,950 employees later this year, 600 more than previously disclosed. The new job cuts will come from Wachovia's mortgage operations, spokeswoman Christy Phillips Brown said.”

Expect more of this as the legal “bubble” is just getting started…

Argentina's Debt Rating Cut to B by Standard & Poor's (Update2): “Argentina's foreign debt rating was cut by Standard & Poor's on concern slowing economic growth will crimp tax revenue while mounting investor mistrust in inflation data erodes confidence in the government.

S&P lowered Argentina's rating to B, five levels below investment grade and in line with countries including Jamaica and Paraguay, from B+.”

Argentina has been faking it’s inflation statistics like you wouldn’t believe. The world ignored this when credit was cheap and plentiful, buying into the emerging market miracle story. Now that credit is neither cheap nor plentiful, the market has taken notice. Argentina will find it very very difficult to raise funds from abroad going forward.

I bring this up because the U.S. too has been faking it’s inflation statistics. Nobody is fooled by ‘core’ and ‘headline’ CPI numbers that bear no relation to reality. Should the budget deficits get large enough, and I believe they will, then the world’s Bond Vigilantes will wake up and lay down the law.

Monday, August 11, 2008

Bond Vigilantes, US Treasuries, US Dollar, Oil

Talk about being ahead of the curve…
I last brought this up in US Treasuries, US Dollars, Commodities.

Bond Vigilantes Who Gave Bush a Pass May Ambush Obama or McCain: “The bond vigilantes who've been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.

Investors and former policy makers predict that the same market forces that torpedoed President Bill Clinton's “putting people first” spending initiatives at the start of his presidency are gathering again at the prospect of McCain's tax cuts and Obama's health-care and education programs.

“Though times are different and a lot of the government spending is necessary, we're going to see rates rise in a saw- tooth pattern over the next few years,” says E. Craig Coats Jr., the head of Salomon Brothers' government securities desk when it was the world's biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.

That course-reversal prompted Clinton political adviser James Carville to observe at the time: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Economists and traders say the prospects for increased government borrowing needed for either McCain or Obama to enact their proposals will again lead investors to shun Treasuries and push up interest rates. Ten-year yields are forecast to reach 4.63 percent by the end of 2009, according to a Bloomberg survey of 68 economists.”

I’ve warned of the Bond Vigilantes in the past…

Inflation, Rates and a Fed Out of Ammo
Fed Cuts Rates, Market Raises Rates
Fed Cuts and Rates Rise: Bond Vigilantes
The Bond Vigilantes are Back

Dollar Gain Signals Pain as Rally Prompts Exit From Bull Trade: “Just because the dollar posted its biggest gain against the Euro in almost eight years doesn't mean the U.S. currency won't continue to be plagued by the nation's slowing economy, widening budget and trade deficits and negative inflation-adjusted interest rates.

The 4 percent surge against the single European currency this month was enough to prompt Bank of America Corp. to tell its customers to exit trades betting on more gains. Morgan Stanley still forecasts the greenback will approach a record low by October as the U.S. housing slump and credit-market losses keep the Federal Reserve from raising interest rates this year.”

The guys are Morgan Stanley miss the point (or are talking their book). The Euro is overvalued and will collapse as the Euroland economy dives into a recession. The ECB is definitely done raising and will most probably end up cutting.

Like I keep saying, the Global Decoupling Theory is Garbage. With real estate prices collapsing in Ireland, Spain, Greece, and now Italy NO other outcome is possible.