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Friday, November 6, 2009

Warren Pollock: Zombie Banks, The Game Has Changed

FN: Sounds like Japan v2.0 to me...

The recent change in U.S. and U.K. monetary policy is very similar now to what the Japanese tried, where Quantitative Easing (QE) was forced onto a captive debt market. The full consequences of which will only know become obvious: De-facto sovereign default.

It is Japan we should be worrying about, not America: "Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return."

Some angry ninja quotes from about the same time last year:

I Give You The Stupidity Trap... Errr... Liquidity Trap (11/10/08):
"Awesome. Just awesome. What could possibly go wrong in a zero rate world? Oh wait, all those under funded pension plans can’t earn the yields they need to fund the outrageous promises that were made to indignant, arrogant Baby Boomers during this Age of Entitlement."

Japan v2.0: GLOBAL Liquidity Trap (09/18/08):
"We are heading for a Liquidity Trap. Believe it. I see Japan v2.0… on a GLOBAL scale."

Japan v2.0 (09/18/09):
"Think ZERO percent interest rates and think DEFLATION. Think LOST DECADE. Think DEPRESSION. Now make all that GLOBAL.

That is what we have to look forward to."

This Weeks Rally: Not So Impressive

FN: Upon closer inspection, yesterday's rally was not nearly as impressive as it first seemed. Four up days in a row could not re-capture one down day. Volume on the way up has continued to decrease. Breadth was not strong either. There was no Major Accumulation day. The two Major Distribution Days still stand.

Tuesday, November 3, 2009

Bailing Out Failed Bailouts

Yesterday I wrote that we were Passing Thru the Eye of the Storm.

Evidence that the sky is darkening once again with financial storm clouds is the sudden increase in bailouts. While a bailout is in itself disheartening and just the absolute wrong policy choice in general, what really hurts is that they are done so poorly. Failed bailed out companies are coming back for second and third rounds and the government is throwing additional good money after bad.

GMAC May Receive Third Government Bailout in November (Update3): "GMAC Inc., the lender that received two government bailouts totaling $13.5 billion, is negotiating with the Treasury Department for a possible third lifeline next month, people familiar with the matter said."

RBS, Lloyds Get $51 Billion in Second Bank Bailout (Update3): "Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc will receive 31.3 billion pounds ($51 billion) in a second bailout from the U.K. taxpayer as the two banks agreed to cap bonuses.

The Treasury will inject 25.5 billion pounds of capital into RBS, for a total of 45.5 billion pounds, making it the costliest bailout of any bank worldwide. The government will fund about a quarter of Lloyds’s 21 billion-pound fundraising. Both banks said they won’t pay cash bonuses to workers earning more than 39,000 pounds this year."

Eventually somebody will say something... somebody will do something and stop this madness... right?!

This can't go on. Right? How is all this supposed to work out later? This is some terrible math isn't it?

Regional Banks Break Down

Wilbur Ross Sees ‘Huge’ Commercial Real Estate Crash (Update3): "Billionaire investor Wilbur L. Ross Jr,, said today that U.S. is in the beginning of a "huge crash in commercial real estate."

On Friday 9 banks failed and were seized by the FDIC, the largest number of failures since the crisis began. Included was California National Bank, the fourth-largest U.S. bank failure this year.

Banks are expected to come under additional pressure. In a speech on October 14th, 2009 Sheila Bair said revealed the following:

The FDIC Deposit Insurance Fund (DIF) is out of money: "The FDIC estimates that as of September 30, 2009, both the fund balance and the reserve ratio were negative after reserving for projected losses over the next 12 months, though our cash position remained positive."

The FDIC is expecting a lot more bank failures: "The negative fund balance reflects, in part, an increase in provisioning for anticipated failures. The FDIC projects that, over the period 2009 through 2013, the fund could incur approximately $100 billion in failure costs. The FDIC projects that most of these costs will occur in 2009 and 2010."

The FDIC is raising money by charging the banks more: "For the first quarter of 2009, the FDIC raised rates by 7 basis points. The FDIC also imposed a special assessment as of June 30, 2009 of 5 basis points of each institution's assets minus Tier 1 capital, with a cap of 10 basis points of an institution's regular assessment base. On September 22, the FDIC again took action to increase assessment rates -- the board decided that effective January 1, 2011, rates will uniformly increase by 3 basis points."

With CRE imploding even as delinquencies and defaults among home owners continues to rise, and with the FDIC expecting more failures is it any wonder that regional banks have started roll over?

Monday, November 2, 2009

Passing Thru the Eye of the Storm

We've been in the eye of the storm for months now.

The relative calm and tranquility had lulled everybody into complacency.... until last week, when the cracks became too large to ignore.

On Friday 9 banks failed and were seized by the FDIC, the largest number of failures since the crisis began. Included was California National Bank, the fourth-largest U.S. bank failure this year.

Then over the weekend, a mortally wounded CIT finally succumbed to its self-inflicted wounds. The death of this lending behemoth will leave small and medium sized businesses suddenly without access to credit. CIT is also a lesson in throwing good money after bad, as taxpayers lose $2.33 billion in bailout money.

Slowly but surely, the eye of the storm is passing overhead....

1) Volatility - VIX climbed higher all week, from a crisis low of 20.10 to 30.69. Friday also marked the first time the VIX crossed the 200 day EMA (green line) since April. Clearly market participants smell something ugly and are loading up on protection.

2) Major Distribution Days - Wednesday and Friday were both Major Distribution Days, and on good solid volume too. Down volume has been exceeding up volume in general for weeks now.

3) Volume - On this last push up, volume all but disappeared... only to re-appear on the way back down. Buyers couldn't find compelling value at these lofty prices and stepped back, while sellers couldn't wait to lock in these lofty prices and stepped up.

4) The Banks are Still Furiously Hoarding - Bloomberg: "Citigroup Inc. and JPMorgan Chase & Co. are hoarding cash as if another crisis were on the way."

They know that the next crisis will be in CRE and that it will dwarf the residential mortgage crisis. Bloomberg: "Billionaire investor Wilbur L. Ross Jr,, said today that U.S. is in the beginning of a "huge crash in commercial real estate."