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Friday, April 3, 2009

FASB Rules Won't Make Banks Money

FN: Yup. Reality vs Fantasy. Reality always wins… eventually.

Bank Stocks Won’t Get Lift From FASB, Goldman Says (Update1):The relaxation of fair-value accounting rules won’t prevent bank shares from falling because growth in bad loans is accelerating, according to Goldman Sachs Group Inc.

“Our core view is that banks will not bottom until underperforming asset growth decelerates,” Richard Ramsden, a New York-based analyst at Goldman Sachs, wrote in a report today. “Loans are going bad faster than banks earn money.”

Delinquent loans are increasing at a 3 percent annual rate industrywide, compared with a 2.5 percent rise in earnings before setting aside money for bad loans, Ramsden said.

U.S. regulators may force Bank of America, Citigroup and at least a dozen of the nation’s biggest financial institutions to write down as much as $1 trillion in loans, twice what they’ve already recorded, based on Federal Deposit Insurance Corp. auction data compiled by Bloomberg.

Banks failing Federal Reserve evaluations of loans this month may be ordered to make sales worth as little as 32 cents on the dollar, according to FDIC data. That would be less than half of the 84 cents on the dollar the Treasury Department suggested was a possible purchase price. Some of the bank- insurance agency’s auctions brought 0.02 cent on the dollar.

Lower valuations would lead to new writedowns and capital injections from the $134.5 billion remaining in the Troubled Asset Relief Program, Nobel Prize-winning economist Joseph Stiglitz said.”

Modified Mortgages Fail Faster

It would probably have been much easier to allow these mortgages to simply default the first time around and start from scratch… Modified mortgages fail faster... Nuff said.

Like I said, this is Most Definitely Not A Rescue.

Failure Rate Rises on Mortgages Revised in Late 2008, U.S. Says:Mortgages modified in the third quarter failed at a faster pace than those revised in the first, and the delinquency rate on the least risky loans doubled, signs of deteriorating credit quality, U.S. regulators said.

Loans modified in the first quarter to help borrowers keep their homes fell delinquent 41 percent of the time after eight months, and second-quarter loans had a 46 percent default rate, the Office of the Comptroller of the Currency and Office of Thrift Supervision said in a report today. Third-quarter trends “are worsening,” the agencies said.

“For the year and this quarter, we saw the same trend that we saw last time: quite high re-default rates, no matter how we measured them,” John Dugan, the U.S. Comptroller of the Currency, said in a conference call with reporters.

Lenders including Citigroup Inc. and loan-servicing companies are adjusting mortgages by lowering interest rates or crafting longer-term payment plans. The Obama administration is acting to help as many as 9 million struggling homeowners by using taxpayer funds to pay lenders such as bond investors, mortgage servicers for reworking the mortgages.

Dugan said higher re-default rates are likely related to stressful economic conditions and new loan plans are not producing significant reductions to make mortgages sustainable.

“Credit quality continues to decline and that’s true of all types of mortgages that we cover by risk category,” Dugan said.

Prime mortgages that were delinquent after 60 days more than doubled in the fourth quarter, to 2.4 percent from 1.1 percent in the first, and rose significantly from the third quarter to the fourth, the report showed. Prime mortgages, considered the least likely to fail, account for two-thirds of all mortgages.

Rising Failure Rates

Borrowers with mortgages that were modified in the first quarter re-defaulted after three months 22 percent of the time, while loans revised in the second quarter had a 27 percent failure rate and third-quarter loans that were 60-days overdue failed 31 percent of the time, the report showed.

Seriously delinquent mortgages, those 60 days or more overdue, increased in all loan categories in the fourth quarter, including subprime, Alt-A, and prime loans.

The percentage of borrowers skipping the first payment on a modified loan rose significantly in all categories, except prime loans, the agencies said. Fourth-quarter first-payment defaults on subprime mortgages rose to 4.4 percent from 3.8 percent in the first, and overall climbed to 1.4 percent from 1.2 percent in the first, the report showed.”

Financials Lagging

Gold: One More Push...

Gold (GLD) broke the rising trend after making a lower high even as Bernanke started monetizing debt. GLD is now sitting on support. One more push down, to about $890, should unleash serious selling...

Sensing a vulnerable market, the powers that be have already started moving to push Gold down. Rumors of significant IMF Gold sales have started hitting the wires.

Gold Drops Most in a Week as Equity Rally Dulls Haven Demand:Gold fell the most in more than a week on speculation that the world economy will improve, eroding the appeal of the precious metal as a haven. Silver gained.

Global equity indexes rallied as Group of 20 leaders met to discuss economic stimulus plans amid mounting evidence the worst of the recession may be over. Manufacturing in China increased last month and home prices in the U.K. rose. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, has been unchanged since March 27.

“The fear is coming down, and so is gold,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “If gold is an indicator of fear and trepidation, as fear diminishes, people will sell gold.”

Gold futures for June delivery fell $18.80, or 2 percent, to $908.90 an ounce on the Comex division of the New York Mercantile Exchange, the biggest drop for a most-active contract since March 24.

The Standard & Poor’s 500 Index of equities jumped as much as 4.3 percent and the MSCI World Index climbed for a third straight day.

National leaders at the G-20 meeting agreed to a regulatory crackdown to rein in excesses and pledged more than $1 trillion in emergency aid to help ease the global recession. The summit produced a call for stricter rules governing hedge funds, executive pay, credit ratings and risks taken by banks.

IMF Gold Sale

Gold’s losses accelerated after a U.K. official said the International Monetary Fund should consider selling its gold reserves to raise cash. International Development Secretary Douglas Alexander said there has been discussion with South Africa about the market effects of a “phased and appropriate sale” of some IMF bullion reserves.

In April 2008, the Washington-based lender’s executive board approved a plan to sell 403.3 metric tons of bullion to help close an annual budget deficit. President Barack Obama’s administration soon will push Congress for legislation that allows the IMF to “mobilize” its stockpile of gold to boost its funds, Treasury Secretary Timothy Geithner said on March 11.

A move to sell gold must be supported by 85 percent of the lender’s executive board, and will require legislative action in most member countries, the IMF said in April 2008. The board representative from the U.S. needs congressional approval to vote in favor of any sales, the IMF said.

The mere mention of the possibility of IMF gold sales making the rounds at the G-20 today is pressuring gold prices,” said Ralph Preston, a commodity analyst at Heritage West Futures Inc. in San Diego. A drop below $890 may trigger more selling, he said.

Thursday, April 2, 2009

Reality vs Fantasy

FN: The broader markets are stretched to the upside of their ranges. A move above 830 on the S&P 500 could flip the trend from DOWN to UP.

The current battle is a big one. The market threw a bit of a party in anticipation of the FASB mark-to-market vote. The vote came in this morning. As expected the rules will be 'relaxed' and 'significant judgment' will be allowed in the valuation of assets 'held to maturity'. (I'm not sure if the asshats holding these assets have any judgment...)

It is important to understand that the FASB decision does not change what really matters: CASHFLOW.

A bank holding toxic assets does not like what they would fetch on the open market. The market price is (mostly) the present value of EXPECTED future cashflows. For example, the market price of a particular mortgage reflects that fact that while it is CURRENTLY paying, it will stop in three months. The way the banks are now going to value that same mortgage is quite a bit different. They will categorize that mortgage as a 'hold to maturity' and since the mortgage is still throwing off cash as intended it will be valued at par (or something ridiculously close to par) INSPITE of the fact that everybody knows that it is very probable that the mortgage will cease payments sometime in the near future.

The effects of this decision will be fleeting. They have to be because it does not change what really matters.

FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Update1): “The Financial Accounting Standards Board, pressured by U.S. lawmakers and financial companies, voted to relax fair-value rules that Citigroup Inc. and Wells Fargo & Co. say don’t work when markets are inactive.

The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more. FASB approved the changes during a meeting in Norwalk, Connecticut.”

FN: Meanwhile in the real world job losses continue to mount. The unemployed will continue to default on their mortgages, car payments and credit cards. It will not matter what kind of ‘significant judgment’ is applied to their debts. In the end, when all is said and done, the market will mark them to reality.

While battles between Reality and Fantasy are almost always epic, Reality always triumphs.

U.S. Initial Jobless Claims Rose by 12,000 to 669,000 (Update1):The number of Americans filing unemployment claims unexpectedly rose last week to the highest level since 1982 and those staying on benefit rolls jumped to a record as companies kept cutting jobs to trim costs.

Initial jobless claims swelled by 12,000 to 669,000 in the week ended March 28, topping 600,000 for a ninth straight time, after a revised 657,000 the prior week, the Labor Department said today in Washington. The number of people staying on benefit rolls soared in the prior week to 5.73 million.

Another Labor Department report tomorrow may show the jobless rate in March rose to the highest in more than 25 years, reinforcing concerns that the economy will continue to bleed jobs as companies reduce output. Less employment and slowing incomes may thwart a rebound in consumer spending, setting back prospects for an economic turnaround in the second half of 2009.”

Wednesday, April 1, 2009

S&P 500: The Trend is DOWN

FN: The S&P 500 (SPX) failed to close that gap yesterday and was violently rejected into the close. Resistance around 810 held and the probable bankruptcy of GM and Chrysler brought out the sellers. Prices are now below the rising 200 period (15 minute chart) EMA (green line) and the slope hast flattened. Prices are also below the 50 period (red line) and 20 period EMA (blue line). It will be difficult to overcome the 742 000 ADP job losses reported today and create some upward momentum… especially with Non-Farm Payrolls now looming ominously on Friday.

We are at the top of the range and overbought on the daily chart. There is nothing but air all the way back down to 666. All support on the way is pretty weak…

The trend is your friend… and it is still down.

ADP Job Losses Awful, Doesn't Yet Include the Failure of GM, Chrysler

“The weakness in the labor market is deep and broad and means the recession really could last through the end of this year.” -Steve Cochrane

ADP Says U.S. Companies Reduced Payrolls by 742,000 in March:Companies in the U.S. cut an estimated 742,000 workers in March, pointing to no relief in sight for the labor market amid the longest recession in seven decades, a private report based on payroll data showed today.

The drop in the ADP Employer Services gauge was larger than economists forecast and followed a revised cut of 706,000 for the prior month.

Companies are slashing staff as tight credit conditions and shrinking household wealth cause sales to shrink. The Labor Department may report in two days that employers cut payrolls in March for a 15th consecutive month, putting jobs losses in the current downturn at more than 5 million, according to a Bloomberg survey.

FN: This is bad. But it will only get worse. These numbers don’t yet include the implosion of both GM and Chrysler and the knock on effects of that on down the supply chain. Job losses will continue to come in at horrific levels for months to come.

Obama Said to Find Bankruptcy Likely for GM, Chrysler (Update2): “President Barack Obama believes a quick, negotiated bankruptcy is the most likely way for General Motors Corp. to restructure and become a competitive automaker, people familiar with the matter said.

Obama also is prepared to let Chrysler LLC go bankrupt and be sold off piecemeal if the third-largest U.S. automaker can’t form an alliance with Fiat SpA, said members of Congress who were briefed on the GM and Chrysler situation before the president said two days ago that the automakers’ viability plans were insufficient.

The president gave GM 60 days to come up with deeper cost and debt reductions than the biggest U.S. automaker proposed in its plan submitted last month. The “quick and surgical” bankruptcy his administration said was also an option appears to be inevitable, said the members of Congress and two other people familiar with the matter. Obama personally signed off on asking GM Chief Executive Officer Rick Wagoner to step down, which he did on March 29, they said.”

FN: I recently wrote that the bankruptcy of GM is Actually Bottom Making Material. This is one of the required purging catalysts. A large number of 'game changing' events like this must occur before the global economy and global financial markets can recover.

You will know them when you see them (because they will change your world and your life).

Tuesday, March 31, 2009

Most Definitely Not A Rescue

This is most definitely not a rescue.

Words that describe this…


Financial Rescue Nears GDP as Pledges Top $12.8 Trillion (Update1): “The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks. The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

Goldman Sachs: Short Again

Goldman looks like a good short again. I grabbed some on the first signs of weakness off the 200 day EMA (green line). I'm looking to add on strength with stops above $115.00.

Because I don't trust this pig, I use options and various short option strategies. I trade the stock intraday, but never hold it overnight.

Oil: Rising Bear Wedge, Break Down

I love the Bear Wedges.
Oil breaking down like this will suck down the big energy names in the broader indices. The monster short squeeze in financials is now running out of steam. The Geithner toxic asset purchase plan has been revealed in all its glory and failed to inspire much confidence. Combine these two major developments and you have a recipe for a retest of the S&P 500 lows of 666.

Related Posts:

Financials: Weak Into the Close, Expect More Selling

Yesterday the broader markets all bounced off their lows into the close. However, financials did not. There was no rally... there was no short covering squeeze into the close. This is a sign of weakness and follow thru selling is likely.

Monday, March 30, 2009

Gold and Silver: If Not Up, Then Down

Gold (GLD) and Silver (SLV) could not go up even as Ben "Helicopter" Bernanke finally lived up to his name. Gold put in a major intraday reversal the day the Bernanke announced $300 billion in debt monetization... and then quickly faded. GLD has now broken a rising trendline.
If not up, then done.

The fact that Bernanke actually decided to monetize debt should be interpreted as a sign of fear and extreme economic weakness. Clearly the Fed knows something. They've stared into the eyes of the Deflation Monster and blinked. If there was even the slightest possibility of inflation the Fed would NEVER dare monetize any debt. The fact that they are probably means that the global economy and the global financial system have actually deteriorated further. The prolonged deflation threat is now very very serious.

It may be time to ADD to the short Gold and Silver exposure.

Commercial Real Estate: Didn't Rally With Rest of Market

Even as the broader equity markets rallied, commercial real estate did not. The Real Estate iShares (IYR) underperformed significantly. It has now begun to apparent that the next shoe to drop will be commercial real estate and that it will a large shoe. IYR was unable to get past the gap $28.00 and failed to get past both the declining 20 day EMA (blue line) and the 50 day EMA (red line).

The Commercial Real Estate Outlook 2009 [ HT Moose ] report from Deutsche Bank is truly chilling.

GM: This is Actually Bottom Making Material

The broader markets rallied hard all month. The mouth breathing pump monkeys on CNBC even started postulating, between giggles and squeals of retarded delight, that this Bear Market rally was actually a new Bull Market rally.

Over the weekend Rick Wagoner, CEO of the colossal failure that is General Motors (GM) was ousted by President Barak Obama. The President’s car task force has finally concluded that turnaround plans of GM and Chrysler could not work and that they therefore would not be getting anymore bailout money without further deeper cuts. The futures did an instant face plant in overnight electronic trading.

However, this is one of the first steps in the right direction. This is actually bottom making material.

For the broader markets to bottom and for the economy to bottom, certain cataclysmic events must occur. While the timing or form of these cathartic events are difficult to predict, you WILL know them when they occur. If GM and Chrysler are forced into bankruptcy, that will be the one of the bottom forming events.

Many more, such as the final nationalization of Citigroup (C) and Bank of America (BAC) and the complete unwinding of AIG are still required. Losses must be taken by all stakeholders, not just tax payers. Balance sheets must be purged and legacy liabilities written off. These companies need to be recapitalized and relaunched with pristine balance sheets. Only then can they contribute constructively to the economy and help engineer an economic revival.

GM’s Wagoner Steps Aside After Failing Obama Scrutiny (Update3): “General Motors Corp. Chief Executive Officer Rick Wagoner was forced out after President Barack Obama’s task force decided he was unable to craft a plan to save the automaker he ran for more than eight years.

Wagoner, 56, said he agreed to an administration request to leave. Chief Operating Officer Fritz Henderson will become CEO and director Kent Kresa will succeed Wagoner as chairman. GM had been seeking as much as $16.6 billion in new U.S. loans after an initial installment of $13.4 billion.

“It’s very hard for the government to write a big check without giving some evidence of change,” said John Casesa, managing partner at New York-based consulting firm Casesa Shapiro Group. “This will also give the government moral authority with the other stakeholders to make them sacrifice.”

Wagoner became a symbol of the failing U.S. auto industry in recent months after flying to Washington via corporate jet to ask for aid. Since taking over in 2000, he presided over $82 billion in losses during the past four years and yielded GM’s title as the world’s top-selling carmaker to Toyota Motor Corp.

His exit caps an unsuccessful five-month push to win U.S. aid without losing his job. Forced to work for $1 a year and cede most of his corporate perks, he had said he wouldn’t resign unless compelled. On March 27, 129 days after Congress’s first hearing on the future of GM, he got that call.

“On Friday I was in Washington for a meeting with administration officials,” Wagoner said today in a statement. “In the course of that meeting, they requested that I ‘step aside’ as CEO of GM, and so I have.”