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Friday, August 22, 2008

Female Ninjas

I was inspired by this thread over at Calculated Risk to make that poster.

Leveraged Ninja writes: They better not stop making ninja loans. Or else.
Leveraged Ninja 08.22.08 - 1:26 pm

Margin Call of Cthulhu writes: You're out of luck on that lyre loan. So is my buddy the ninja. He was really excited that they were marketing directly to him. It's really hard for ninjas to document income.
Margin Call of Cthulhu 08.22.08 - 1:26 pm

NINJA loans explained by Wiki:

"No Income No Job No Assets:

A ninja loan is a type of subprime loan issued to borrowers with No Income, No Job, (and) no Assets. The phrase was coined by HCL Finance as a name for one of their finance products. They were especially prominent during the United States housing bubble of the 2000s but have gained wider notoriety due to the subprime mortgage crisis in July/August 2007 as a prime example of poor lending practices[1]."

Trillion Dollar Mortgage Time Bomb, US May Lose AAA

Uh oh. The U.S. could lose it's AAA rating...

The trillion-dollar mortgage time bomb: “S&P added that saving Fannie (FNM) and Freddie (FRE, Fortune 500) might cost so much that the federal government's AAA credit rating, the top possible rating, might even be at risk. If that was lost, then all federal government borrowing would become more expensive.”

This next part is kind of funny…

“Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor's recently placed an estimated price tag on this worst case scenario -- $420 billion to $1.1 trillion of taxpayer's money.”

Few? I believe the market has made quite clear that more than a few are predicting an imminent need for a bailout.

No matter. This bubble was so big and handled so poorly thus far, that it is more likely that costs will hit the high end of the range.

So, US GDP for 2007 was about $13.79 trillion. $420 billion would be 3.0% of GDP. $1.1 trillion would be about 7.9% of GDP. Considering the giant budget deficit that is currently being projected, even the low end of the range would be difficult to digest.

“This dwarfs how much it cost to help banks during the savings and loan crisis of the late 1980's and early 1990's. That cost taxpayers about $250 billion in today's dollars.”

The Savings and Loans Crisis resulted in the failure of 747 banks and contributed significantly to the large budget deficits of the early 1990’s.

U.S. Budget Deficit Hit $102.77 Billion in July: “The U.S. government's budget deficit nearly tripled in July from a year earlier, pushed in part by aftershocks from failed financial institutions.

The Treasury Department on Tuesday said the government ran a monthly deficit of $102.77 billion in July, up 182% from $36.45 billion in July 2007.

Outlays were $263.26 billion last month, up 27% from July 2007's $206.89 billion. Spending rose on a $15 billion disbursement by the Federal Deposit Insurance Corp. to cover deposits at failed financial institutions. Calendar shifts also contributed to the figures, causing the July 2007 figure to be lower by $19 billion. The $263.26 billion spending number was a record for the month of July.

Government receipts were $160.49 billion, down 6% from the $170.44 billion recorded in the same month a year earlier.”

So, revenues down, expenses up. On a chart, that would mean the wrong lines are going the wrong way.

“Year to date, the deficit for fiscal 2008 totaled $371.44 billion, 136% higher than the $157.42 billion for the same 10-month period a year earlier. Year-to-date outlays were $2.47 trillion, up 8% over the same period, and revenues were $2.09 trillion, 1% lower.”

Think about it. That's right now. The economy isn't even in a recession YET...

Korea to Buy Lehman

No, not NORTH Korea.

U.S. Stock Futures Rise on Speculation Lehman May Be Purchased: “U.S. stock-index futures advanced, indicating the Standard & Poor's 500 Index may trim its weekly decline, on speculation Lehman Brothers Holdings Inc. may be acquired and as oil's decline buoyed the earnings outlook for airlines and automakers.

Lehman, the brokerage that's lost almost 80 percent of its value this year, surged 12 percent after Reuters reported Korea Development Bank said it may purchase the firm.”

Yup. That’s pretty much it. The big fat green candle you see in the S&P 500 futures contract (ES) early this morning is because Lehman may get bought…

Lehman (LEH) is up over 15% now.

Thursday, August 21, 2008

Total US Debt

Bulltards and serial bottom callers beware, just a little bit more debt needs to get annihilated here…

via Credit Writedowns: Total US Debt

Back in May, I showed you a chart of Total US Debt which demonstrated that the United States was an increasingly indebted country. This chart was for all domestic debt minus financials and it topped out at about 225% of GDP.

Below is the same chart for the U.S., except this time I have added domestic financial and foreign debt, so it represents all debt outstanding in the United States.

The US Debt to GDP ratio starts out just below 125% in 1952 and rises steadily to an enormous 333.8% by 2008. Needless to say, this is one major problem hampering the deleveraging we are now seeing in the financial sector.

By the way, if you are wondering what the debt total for Q1 2008 was in dollars, it was $47.4 trillion.

SourceFederal Reserve Flow of Funds

Fannie and Freddie: Poker, Bazookas and Paulson

“If you've got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won't have to take it out.” –Hank Paulson

Now let’s imagine trading as a giant poker game…

The Market: “Fannie Mae and Freddie Mac fell to new 52 week lows today.”
Translation: CALL.

Hank Paulson: “Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac. At the same time, recent developments convinced policymakers and the [firms] that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary.”
Translation: RAISE.

The Market: “Fannie Mae and Freddie Mac both succumbed to increased selling pressure yesterday, making new lows on increased volume. Both firms are struggling as losses mount.”
Translation: RE-RAISE.

Hank Paulson: “If you have a bazooka in your pocket and people know it, you probably won't have to take it out.”
Translation: ALL IN (Pushes a GIANT stack of chips into the middle. Each chip has a stamp on it saying: YOUR TAX DOLLARS.)

The Market: “Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.”
Translation: CALL (Pushes FNM and FRE to new lows at $3.93 and $2.88 pre-market. Down 20% and 15%.)

Now we wait for the RIVER CARD. The Market is definitely ahead. Heck, Hank is probably drawing dead.

This is one for the history books.

I’ve covered my Using Fannie and Freddie as Disaster Insurance (Update1) positions. Original post is here: Using Fannie Mae and Freddie Mac as Disaster Insurance.
I'm out. Close to zero is good enough for me. Who knows what the donkeys in Washington might try over the weekend...

Russia Smells Blood, Commodities Bounce, The 'Great Game' Heats Up

Overnight, the US dollar got hit pretty hard.

The US dollar is massively overbought and extremely stretched. A pull back to the 200 day EMA (green line) is probable. That would result in a bounce in commodities as well.

Everything is coming together nicely for a little bit of a commodity bounce and general equity weakness.

Oil Gains a Third Day on U.S.-Russia Tensions, Dollar Weakness: “Oil rose on speculation that Russian crude may be disrupted because of rising tensions with the U.S., and as the weaker dollar bolstered the hedging appeal of commodities.

U.S. plans for a missile shield in Poland will ``spur an arms race'' in Europe, Russia's Foreign Ministry said in a statement. About 1.1 million barrels of Caspian Sea crude remains shuttered following a pipeline fire in Turkey on Aug. 5. Russia's invasion of Georgia closed some export routes that could have been used to re-direct Caspian supplies to Europe.”

I wrote about that a week ago in The Russian Bear Awakens: Poland Threatened. Immediately after War: Russia and Georgia I picked the next target of Russian aggression in Quick Little Oil and Gas Bounce? Ukraine Next?.

Throughout history Poland has been repeatedly smacked around by it’s neighbors to the west (Germany, Austria), north (Sweden) east (Russia) and south (Hungary, Turkey). While the bad old days of 'hot' war and occupation are probably over, the new tools of war will be economic, political and covert. The prize remains the same. Power and control. The 'Great Game' was never really over.... it just cooled down a bit.

The U.S. is currently crippled in every major way.

Politically: A sitting president that is “full of sound and fury signifying nothing.” And an upcoming election too close to call has made any coherent foreign policy impossible.

Militarily: Tangled up in perpetual conflict in Afghanistan and Iraq while keeping a nervous eye on North Korea and Iran, the U.S. military is stretched to the breaking point, both in terms of manpower and logistics.

Economically: The U.S. is facing the very real consequences of the implosion of several very large bubbles and is already running some of the largest current account, trade and budget deficits ever. This means politicians will focus inwards and no further military adventures will be considered... giving free reign to the bold new Russia, looking for it's place in the sun.

Russia, after being humiliated in the early nineties is now experiencing a booming economy, both as a consequence of embracing capitalism and booming commodity prices. Brimming with new confidence and chafing under old insults from the west, Russia can smell blood. Seeing an insecure, indecisive and divided west, Russia will take this opportunity to expand it’s power and influence.

China and India will not be far behind. Expect them to use this opportunity as well to make their moves in their respective regions.

Ten years from now, the balance of global power is going to be significantly different. The 'Great Game' is about to heat up again with some new major players set to enter the field.

Wednesday, August 20, 2008

America Headed for a Depression

I say, “What he said! Amen!” (Points to Karl Denninger at the Market Ticker)

Why America is Headed for a Depression:

“We simply must recognize that:

We cannot spend more than we make.

We cannot send trillions of dollars overseas to buy cheap imported goods while denying our citizens good jobs at the same time, then expect to have a high standard of living. If we do that our standard of living goes down and theirs (China's) goes up. The poor farmer going from living in a stick hut to a bunkhouse in a factory gets quite a (relative) boost in his standard of living. How far down does your standard of living have to go to meet parity with him?

We cannot demand that the government provide things, whether that be retirement, medical care, or anything else, that cannot be fully funded from today's tax revenues. This, unfortunately, means that in their present form Social Security and Medicare cannot be allowed to continue to exist. This is a fact whether you wish to admit it or not. Playing partisan politics and calling names will not fix this. The original design of these programs was defective - intentionally so. Use your heads and face the math.

We cannot own a house if we are unable to put 20% down, finance it for 30 years on a fixed mortgage, and pay no more than 36% of our pretax income for all debt, including our mortgage payment. This is a mathematical fact; those who are levered beyond this are at high risk of default and should default so prices can correct to sustainable levels. Do you want to be able to afford a home, or claim to own one that you'll never actually have clear title to? We must stop lying to both ourselves and our neighbors.

A home is a place to live. The laws of common business balance prohibit it from rising in value faster than prevailing wages over extended periods of time. Unfortunately, prices in the general economy tend to rise at the same rate as wages, and houses come with costs (maintenance, property taxes and utilities) which means that on average, they make poor investments - but are great places to live. If you want to invest in housing and not go broke, you must buy it when cheap and sell it when expensive, just like a stock - whether you like living in the place or not.

We cannot buy a car if we do not have a 20% down payment or need to finance it for more than the duration of the warranty if new, two years if used. If that makes the car too expensive, we need to buy a cheaper (or used) one.

We cannot use credit on an ever-expanding basis, nor can we tap phantom equity to pay it off. Revolving credit used for true emergency purposes is reasonable. Carrying ever-expanding balances and then taking out a HELOC to pay it off is not. Down this road you will lose your house - eventually. Just ask those people who have or are. And oh by the way, its not credit - its DEBT. Don't forget that.

$30,000 a year to attend a university is unconscionable. A person graduating with a Bachelors carrying $100,000 or more in debt is outrageous and that we allow the university system to exploit our children like this is even more so. Never mind the debt merchants at the student registration table handing out credit card applications to young people with no income, no job, and no assets! Bankrupting our children starting at 18 must end now, and it will only happen when we as adults say no f*ing way is my kid going to spend that kind of money he or she doesn't have to go to your school. Cut that crap out or go out of business. Why are you permitting your children to be violated by these clowns?

Our retirement security is our problem. It is not our children's bill nor is the government's issue to solve. If you are not saving and investing 10% of your gross income you are going to be in trouble when you retire. As an example, if you make $100,000 and save 10% of it in a retirement account that earns 9% in yield (entirely possible using a simple timing signal I have discussed in The Ticker before), start at 21 and retire at 65, in a 401k with a predicted inflation rate of 4% you will have $88,000 annually to live on. The bad news is that if you wait until you're 30 to start you'll only have $53,000 a year (!), and if inflation is 6% instead of 4% as well you will have just $30,000 in today's purchasing power. That's a hell of a haircut from your $100,000 salary! Still think you can get by saving less? If you don't act prudently now, you'll be working well into your 70s, and it won't be by choice. So much for those MaiTais on the cruise ship.

We MUST frame the political debate in this nation around these principles. We MUST teach these facts to our children. We MUST stop demanding that the government give us that which as a nation we cannot afford, and WE MUST shout down those in the public space who continue to insist on unsupportable, unsustainable spending both by individuals and by the government.”

Equities: Bear Wedge, First Cracks

A quick update to: Equities: Bear Wedge, Overbought, Looking Weak

Compare the charts from that post to this post. The first cracks in this rally have appeared. While it’s still too early to claim victory, Bulltards should definitely have that wild eyed look of fear and impending doom right about now…

Tuesday, August 19, 2008

Sallie Mae: Suspicious Put Open Interest

Damn! How do they KNOW?

These traders are either real financial ninjas (not probable) or they have access to dirty, secret insider info (most probable)...

From Bloomberg on August 13th: U.S. Options Index Climbs as Bank and Brokerage Shares Tumble:

"The most-active options on Sallie Mae were those giving the right to sell the stock at less than half the current price.

Sallie Mae put trading rose to almost quadruple the 20-day average as the largest U.S. educational lender lost 3.3 percent to $15.69. The most-active contracts, which give the right to sell the shares at $7.50 by January 2010, added 3 percent to $1.70."

From Bloomberg on August 19th: US Equity Movers:

"SLM Corp. (SLM US), the student lender known as Sallie Mae, tumbled 14 percent to $13.32."

That's it. No other explanation. Just that SLM got pwned.

Lets take a closer look at option activity. Well, what a surprise? Sallie Mae Put Open Interest looks just like that of Lehman... which looks just like that of Bear Stearns.

Open Interest in the Jan 09 10 Puts is 79 461 contracts. That is massive.

We do know Fannie Mae and Freddie Mac are screwed. We know they recklessly piled on the risk and we know they can't survive on their own. We know a bailout is imminent.

Maybe we haven't been paying enough attention to Sallie Mae. It would appear that ALL GSE's engorged themselves with bad credit.

Hey Sallie Mae! How you doing?

"Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE). The company began privatizing its operations in 1997, a process it completed at the end of 2004 when the company terminated its ties to the federal government." (SallieMae)

Related Post:
Lehman Put Open Interest: Just Like Bear Stearns

Swap Spreads, Bank Failures: Worst is Yet to Come

So despite the largest and most aggressive rate cutting campaign in history and despite a full alphabet soup of new, fancy liquidity measures, swap spreads continue to rise…

Can you say, “Uh oh! Something somewhere is about to go KABOOM?!”

Oh, and Libor traded at 2.81 percent today and that approaches the widest levels attained last August when the wheels came off Bear Stearns…

The difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the Libor-OIS spread widened to 78 basis points. That’s a lot and the worst level since May 2nd.

Five-Year Swap Spread Tops 100 on Risk Aversion: Chart of Day: “Interest-rate derivatives are showing that investors are preparing for another round of turmoil in credit markets amid renewed concern that the U.S. will have to bail out Fannie Mae and Freddie Mac.

``Risk aversion is continuing in the market,'' said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., a unit of France's largest bank. ``These firms really may very well be closer to insolvency than we thought.''

The CHART OF THE DAY shows the five-year interest rate swap spread rising above 100 basis points in the past year ahead of the unwinding of structured investment vehicles, the collapse of Bear Stearns Cos., the seizure of IndyMac Bancorp Inc. and now mounting concern that the two-largest U.S. mortgage finance companies may need to be propped up by the federal government. The spread is the premium charged over Treasury yields to exchange floating for fixed-rate payments.

The U.S. plans to recapitalize Fannie and Freddie with taxpayer money if they fail to raise enough equity from private investors, Barron's said on Aug. 16, citing a person in the Bush administration it didn't identify. Treasury Secretary Henry Paulson, who on July 31 received authority from Congress to help the companies if needed, has said a bailout won't be necessary.

The five-year swap spread traded at more than 104 basis points late yesterday. The spread moved above 100 on July 17 for the first time since March, then retreated later in the month. The spread peaked at 116 basis points on March 6, the most since at least 1988, when Bloomberg began compiling data.

Swap spread movements usually reflect changing perceptions of credit risk and expectations of Libor. Swap rates are higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as the London Interbank Offered Rate, or Libor.”

What? Why? How could this be?

Large U.S. Banks May Fail Amid Recession, Rogoff Says (Update2): “Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.

``The worst is yet to come in the U.S.,'' Rogoff said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''

Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''

Oh. Gotcha. The worst is yet to come…

Come on... did you REALLY think the greatest credit bubble EVER would end with JUST a 20% decline in real estate and stock prices?

Related Posts:
Credit Crunch, Bank Failures, Moral Hazard and Adverse Selection
Regional Banks: Dead Men Walking

More Evidence of Pending Deflation

Regular readers of this blog already know I’m firmly in the Deflation camp.
Via Naked Capitalism and the Telegraph, the evidence for a sudden, deflationary sucking sound continues to mount:

More Evidence of Sharp Contraction in Money Supply (Not for the Fainthearted):

“We had written in mid July that money supply in the US, as measured by M1 and M2, had been contracting for several months. Eurozone M1 growth had also fallen to near zero growth levels, and M4, the broadest measure of money in the UK, had actually dipped into negative growth territory.”

The Telegraph story that highlighted this development provided additional detail:

"Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc...Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. "Credit liquidation has begun," he said."

I recommend reading the entire post.

Monday, August 18, 2008

Equities: Bear Wedge, Overbought, Looking Weak

Oil peaked at $147 (grey, area) and equities (SPX, candle) hit bottom. It is clear, that the fuel for this rally in equities is the decline of oil prices specifically and commodities prices more generally. Unfortunately, the Bulltards have misunderstood (again). A declining commodity complex is not 'good for the consumer' (although that is true in the longer term). In this case, right now, commodity prices are signaling a serious and sudden halt in GLOBAL ECONOMIC GROWTH. Ultimately this is BEARISH for those very same equities currently rallying...

The last TWO up days have been unable to recover the value lost over last TWO down days. In an 'uptrend' up days typically more than recover the value lost over the previous down days.

Sure, it IS August, but volume on this rally is as pathetic as on the last one. We all know how that ended. With equities now overbought (Slo STO), a rotation DOWN in prices is pending.

The S&P 500 is forming the same rising Bear Wedge... only this time there isn't nearly as much enthusiasm. With the Fed donecutting and bailouts pending, there really isn't much left to pump up the debt fueled behemoth of a U.S. economy.

The NYSE McClellan Oscillator (NYMO, line) is currently massively overbought. However, prices haven’t kept pace. The NYSE Composite Index (NYA, grey area) has barely 'bounced'. This is one hell of a divergence. On the last rally, both moved UP in tandem. Not so this time. This is foreshadowing significant future (soon) equity weakness...

The NYSE Composite (NYA, candle) has not bounced this time around as much as the S&P500 (SPX, grey area). Last time around, both moved up in lock step. The NASDAQ Composite (not shown) has rallied even harder. Without participation by the NYSE, there is no confirmation. The hedgies are just shuffling money around... from one sector to another without committing NEW money. Therefore, rallies are not sustainable. Sell STRENGTH.

Bernanke Opened Pandora's Box

Looks like Bernanke opened Pandora’s Box

Bernanke Tries to Define What Institutions Fed Could Let Fail: “Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes.

In the year since credit markets seized up, the 54-year- old Federal Reserve chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac.

The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 billion portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes.”

Bernanke crossed a line that even serial bubble blowing Greenspan refused to cross.

“Under Bernanke's predecessor Alan Greenspan, the Fed drew a clear line against using its portfolio to influence specific markets. An internal study published in 2002 warned that “the favoring of specific entities” might “invite pressure from special-interest groups.””

So what happened IMMEDIATELY after Bernanke crossed that line?

“Just three days after the Fed approved a loan against Bear Stearns securities, Pennsylvania Democratic Representative Paul Kanjorski and 31 other lawmakers sent Bernanke a letter asking him to open the discount window to nonbank education-loan companies. Bernanke refused.

The 2002 study said such pressures “could pull the Fed into fiscal debates” and “compromise its objectives” for monetary policy: keeping employment high and inflation low.””

There you have it. Down the slippery slope we go… it won't be long now before irresponsible politicians will be happily commiting the Fed's $900 billion balance sheet to prop up their faviourite failed pet projects.