Monday, June 29, 2009

ECB Watch

Lot of grumblings out of the ECB about potentially higher short term rates. One thing about Trichet and the boys from Euro Land, when they say something they mean it. The current base borrowing rate at the moment is 1.00%

If you do remember, last year they actually raised rates in the Euro Zone, which basically precipitated some pain.

Market Manipulation

Low Volume
Low Specialist Volume
Low Volatility
Program Trading Activity dominated by few firms.

The market looks like it wants to go up, why wouldn't it when the only ones buying are the U.S. Government along with Goldman Sachs, CSFB, and Morgan Stanley?

More on market manipulation soon.

Thursday, June 25, 2009

The Big LIBOR Failure.

LIBOR - London Interbank Offer Rate.

LIBOR rates have fallen drastically since surging to obscene levels in October, helping the uninformed to believe that the credit crisis was easing...silly rabbits.

The drop in LIBOR signals a sharp improvement in market sentiment at a time when central bank interest rates are at historically low levels.

Low LIBOR rates, the amount banks charge each other to borrow short-term from overnight to a year, should stimulate lending in the financial markets and therefore boost economic growth. Three-month LIBOR rates are used to price Trillions in financial products worldwide. Hence lower LIBOR rates should also reduce the cost of issuing billions of dollars of bonds, loans and structured products.

The current 3 month LIBOR is at .60125

Also OIS Spreads (3M LIBOR to Over Night Risk Free Rate), which is measure of credit risk has improved greatly since the Lehman/AIG mess.

But is LIBOR telling the whole story? Is LIBOR painting a totally different lending picture then what is actually happening in credit markets?

That is because there are wide differences between the rates at which individual banks can borrow. The biggest institutions are able to fund themselves at around LIBOR levels while smaller institutions have to pay, in some cases, more than 100 basis points above LIBOR. This is explained by continuing counter party risk in what remains an uncertain economic environment. This is in sharp contrast to before the credit crisis when all institutions paid similar rates to borrow.

So, is the fall in LIBOR a positive sign for the markets? Not really, because we have a very tired credit market, where many smaller banks are still having to pay relatively high rates to borrow, as what we are seeing is a huge difference in the price of borrowing for individual banks. There is a higher proportion of banks paying above LIBOR.

The British Bankers’ Association or BBA which sets LIBOR by compiling an average cost of lending from the 16 banks, have been defends its rate, stressing that the market understands it is a reference point for the strongest banks, but even the BBA has found some flaws, and they are in the midst of revamping the dissemination of LIBOR.

But then again, LIBOR is so low because US Short Rates are so low, is really 100 basis points above stated LIBOR a bad thing? That's open to discussion.

Also, Central banks have helped the market, too, by providing vast amounts of liquidity in secured lending, where banks and institutions can raise money at low rates in exchange for collateral.

However, the higher rates the smaller institutions have to pay in the unsecured lending markets, which were the most flexible and easiest to access before the credit crisis, will slow recovery as the higher costs will act as a drag on their earnings and mean institutions will take longer to recapitalize. Institutions also face difficulties funding much further out than three months as banks are reluctant to lend beyond this period due to counter party risks. And when they do so, it is at punitive rates.

At the same time, funding in the longer-term corporate bond markets is very expensive.

The bond markets, where bond funds and asset managers are the main lenders rather than the banks, may be open with issuance at record levels, but the costs for an investment grade company is nearly 200 basis points more than it was at the start of 2008.

The average rate for a triple-B rated company to issue bonds in dollars is 7.75 per cent compared with 5.92 per cent in January 2008.

So funding and debt issuance is actually more expensive then it was before.

LIBOR currently is very misleading. The published levels may be very low compared with recent history, but in reality most are not convinced much volume is going through beyond the one-month maturity. Furthermore, if institutions want to fix their debt over a longer term they have to pay enormous rates to do so. The fall in LIBOR rates is not a great guide to what is happening in the overall economy. The credit system is definitely in for a long haul, and it won’t get back to a situation where banks are lending in the way they were before the credit crisis for a long, long time.


Repo Market Changes Soon?

With the news that the Federal Reserve Board is planning a major revamp of the huge REPO Market, the market where banks around the world raise overnight dollar loans, does this mean that the FED actually is doing something about "RUNS ON BANKS"?

On the surface it does look like they woke up form their ultra low rate stupor and are working on a utility that will eventually replace Wall Street Banks.

The basic idea is was partly motivated by what happened to both Bear Stearns and Lehman Brothers. Both Lehman/Bear were huge participators in the Over-Night lending/REPO Markets, and both firms were doomed when the collateral they used to finance their daily lending, dropped precipitously, making margin selling inevitable.

The basic REPO structure that is in place at the moment on Wall Street can be best described as "DEN OF THIEVES." When one company is in trouble (Bear/Lehman), there is blood in the water, and the Wall Street sharks (GS/JP) go to work.

The Fed is looking into the creation of a mechanism to replace the clearing banks, the biggest of which are JP and BONY, that serve as intermediaries between borrowers and lenders. In the repo markets, borrowers, such as banks, pledge collateral in return for overnight loans from lenders, such as money market funds.

The clearing banks stand between the parties, providing services such as valuing the collateral and advancing cash during the hours when trades are being made and unwound.

The Fed fears that this arrangement puts the clearing banks in a difficult position in a crisis. As the value of the securities falls (Bear/Lehman), clearing banks (JP/BONY) have an obligation to demand more collateral to avoid losses. But in doing so, they could hammer a rival. The Fed is stating the system currently doesn't protect the interest of all parties....I cant believe they came to this understanding? It only took the total annihilation of Bear/Lehman, and the whole system general to get them going on this issue.

The system’s complications were evident during Lehman’s collapse. JP one of Lehman’s biggest trading partners, acted as its clearing bank in the repo market and along with BONY, served as the clearing bank for the New York Federal Reserve’s credit facility for securities ­companies.

Everyone knows the system is flawed and there is huge conflicts of interest here, but if not the clearing banks, who would facilitate repo transactions? The FED surely can, as they have the no how and trading skill, but do you actually think JP/GS/BONY are going to give this up without a fight? Why would they? The banks have gotten everything they wanted in this crisis from the beginning, they will fight these changes.

Its a great idea on the surface, but its not happening.

More On GS and The Boys At AIG

I posted a few days ago about GS demanding more collateral from AIG, thus making life hell for everyone else on the planet. It was all too obvious to the Non Reality Show Watching/No Head In the Sand crowd that Goldman and SocGen caused the AIG Fiasco demanding AIG pay up on bad CDS bets. Now I am not blaming GS and the French for AIG's troubles in general, but they did spread about 50 tons of salt on AIG's gaping wounds.

If you remember (in between Jerry Rice dancing on TV) Goldman Sachs got $5.9B and SocGen received $5.5B of the roughly $18.5B in collateral paid out of AIG in the 1 1/2 years years BEFORE the September bailout, These payments "helped' settle AIG's obligations on some ridiculous $62B in CDS Swaps that the FED magically removed from AIG's books after the rescue.

The subsequent drain of liquidity to GS and SocGen put AIG in a horrible position, thus rolling them into the governments grip. Thanks to Uncle Sam's backstop, nearly $10 Trillion of worthless assets were propped up.

The strange thing here is after this debacle, every sycophant on Wall Street is praising GS for seeing the potential problems and protecting themselves. Even the former St. Louis (Hate the Cardinals) Fed Governor William Poole bent over backward in his musings about GS...."It's not the responsibility of any private firm to determine what the public interest is - that is why we have government."

The take home message here folks is that Bill Poole and the band of Wall Street thieves he usually lunches with believe that precipitating the biggest financial collapse in history, GS was doing an admirable thing, and while making money for itself it put the fate of every other bank at the forced mercy of America's taxpayers.

What was the outcome:

1-Orchestrating the most devastating horrific global correction in equity prices ever.

2-Forcing Taxpayers to socialize bank losses.

3- Then switching to Bank Holding Company status, rolling all of their losses to December, a month they didn't consolidate in their 1st Qtr report, thus subsequently making earnings inflated.

4-From this the Wall Street thief machine was in full effect, rapid upgrades and positive talk about the dead financials lifted that index 100%, which precipitated a 40% bear market rally.

5- Which enabled GS, JP, and others paying back TARP (Something they needed desperately, even before raiding AIG), so they look like hero's being the first to do so.


6- Guaranteeing its employees record bonus payments.

Everything on Wall Street is back to normal until the next and potentially final collapse.

Likely anticipated and once again monetized by Goldman, Thanks Bill Poole.

I have one question? What is Goldman Sachs shorting now at this very moment? What are they shorting so they can take full advantage of the next major meltdown at the expense of Joe Taxpayer?

Monday, June 22, 2009

Charts, Charts, And More Charts.

The Dow Has Broken its 200 DMA and 50 DMA, next up is its 100 DMA at 8000. If there is not any good news (Quantitative Easing/Earnings Smoke & Mirrors), this market is headed for the whole number of 8000.

The SPX is in a similar situation as the Dow. 200/50 DMA's have been broken. 850 looks like a possibility here.

The NASDAQ looks a little better, just barely.

My personal favorites - The Banks. These guys like I have stated before stopped going up 6 weeks ago, now they are firmly on the sell side.

Recent Secondary offerings like I stated before are all under water except for BOFA, which is painfully close.

What ever has been done by the government to fix the situation has only moved the deck chairs on the Titanic from the front of the ship to the back. I will stand by this statement.

If we get bad earnings or guidance from Wells, BOFA, JP, MS, or GS, we can have a serious down spiral here. The back up in rates which has killed REFI applications doesn't help.

Good News - I THINK?

Gold broke both its 50/100 DMA. So much for Inflation? or Just Long Liquidation?

Your guess is good as mine.

I am always happy to see Crude go down for obvious reasons. The recent rally in Crude/Tech led the global markets higher, it wasn't Banking folks. Crude can drop to low 60's and still be in good shape but the subsequent liquidation in the energy stocks can leave us in some pain.

The Good Days are gone in Energy Land.

Bonds are way oversold and trying to bounce. This is also a key barometer. If the bonds can someone how find a bid, it will deflect some of the pain away from our markets.That is a big if with the new supply coming in this week. It will also relieve some stress for the financials as they can go back and make loans/mortgages. But the off shoot of this is you don't want a repeat of sell equities and hide in bonds trade.

Top 10 Worst Cramer Moments

Here you go.

Jimbo is positive on the markets again, proudly proclaiming that today's decline is a huge buying opportunity.

OK..I give him credit for having an opinion and stating such, but come on, how many times can a man be just wrong on the markets? How did this guy make all of that money for his investors at his hedge fund all of those years? I can only say there were massive shenanigans going on at Cramer Berkowitz.

How many times can Lucy swipe the football away from Charlie Brown, before CB realized he is being duped?

If this man is positive on the markets...The Apocalypse is really amongst us.

CRE - No Uptick Till 2017?

Report out today from the head of Commercial Mortgage-backed Securities and
Asset-Backed Securities Synthetics Research at Deutsche Bank stating that he sees no uptick or recovery in the CMBS Market until 2017.

Deutsche must be short the market. In all seriousness, the report makes some very good points.

The good points:

The froth is still working itself out in the CRE space.

We are currently in something which is comparable to what we saw in the 1990s and
potentially worse.

U.S. commercial real estate values could fall by more than 50 percent from the peak in 2007. - Does BOFA/Morgan Stanley investors know about this before they invested last week in a huge tranche of CRE garbage?

Although asking rents are down about 28 percent in New York, factoring in free rent and other perks by landlords, rents are down about 50 percent.

Have you walked down Madison Avenue of late?

Rents will be back to where they were in 2007 in 2017. Building prices also will take six to eight years to recover

The U.S. commercial markets are deteriorating at an increasing pace as rent dries up and demand plummets. That is leaving borrowers struggling to make their monthly mortgage payments. The number of new loans that are becoming delinquent each
month are defaulting at rates between 5 percent and 8 percent per year, with the most loosely underwritten loans of 2007 defaults at 8 percent per year. That puts accumulated losses at about 4 percent this year, and 12 percent over the next four years. Loans loses ranged between 7 and 11 percent a year during the commercial real estate crash of the early 1990s.

So there is no stability at all happening in the CRE space, yet there are portfolio managers willing to invest hard earned investor money in more CRE garbage.

Maximum Deterioration.

Big Spike Up in VIX/VXN....

...Shows us what I though last week was slightly on the money. Yes...Even I am surprised!

VIX and VXN have spiked about 9% across the board on a less then 1% move downward on the averages. What Gives?

Like I said...After Futures/Options Expiry last week, market participants and investors have started to leverage up risk assessment once again.

It looks like derivative premiums are on the rise.


Goldman and French Stuff

From the I know this because I am well informed, am a cynical non-believer, don't watch Reality TV, and don't have my head in the sand department:

I also must say that I never got really riled up over "Freedom Fries", but the French really didnt do us any favors here.

Xetra Dax Gives Us A Hint.

Now that Germany's Xetra Dax Index has broken its uptrend, 100 DMA, and is resting at its 200 DMA, are we back to bear market swoon business?

I only say that it could be a hint for our markets because historically there has been a high correlation between the Dax and the SPX, but that correlation as of late has been unwinding.

Crude Oil is also down today, but it looks like it wants to hang in there. Watch Crude here as it could hold the key to what happens next.

This is a big day for the markets, the news flow is not great, Iran problems, and 2ND Quarter Earnings coming up could spark some selling.

Sunday, June 21, 2009

Obama Financial Regulatory Plan

The Obama Administration is moving to tighten U.S. financial regulation to prevent another banking and market crisis, below in a nutshell is what they are trying to accomplish.

My thoughts in Bold.


The Obama administration wants the Federal Reserve to monitor systemic risk in the economy, with the idea that it could head off future crises. No single agency is now
designated to do this.

This is a horrible idea. Why give more power to incompetent people who missed the entire crisis in the first place? The reason we have a credit crisis is because the FED totally overlooked Wall Street. They left interest rates low because that is what Wall Street wanted. The Fed has lost objectivity and is completely a political entity at the moment.


The administration wants financial institutions to thicken their capital cushions to absorb losses when times are tough, and make themselves more liquid, or able to move quickly in and out of various holdings, "with more stringent requirements for the largest and most interconnected firms."

This is only implemented if markets get correct information on security pricing from institutions.


The administration is proposing that asset-backed securities issuers face new reporting requirements, as well as a rule requiring originators, sponsors or brokers of securitized instruments to retain at least 5 percent of the performance risk in them.

This is good on the surface, as it makes financial institutions have skin in the game, but 5% is a ceremonial figure, there will always be ways in the forms of more complex derivatives that firms will employ to subvert this. 20-30 percent would have have cleaned up securitization, but it would surely hinder lending. I am on the fence on this one.


Reliance by investors and regulators on credit-rating agencies would be reduced, under administration plans. The SEC is already considering reforms on potential
conflicts of interest at credit rating agencies. Final action is likely months .

I don't know where to begin? The credit rating companies completely failed the public. These companies also should have some skin in the game, they should be made to take stakes in the securities they monitor and rate.


A stronger framework for consumer and investor protection is being proposed by the administration. There is already legislation filed in Congress to set up a
Financial Product Safety Commission, similar to the U.S. Consumer Product Safety Commission, for products ranging from mortgages to credit cards.

Great!!! More useless uninformed government programs that do nothing. This is total fluff and waste of government money...there is something called "GOOGLE SEARCH". Try it, its great.


Oversight of over-the-counter derivatives would be imposed under administration plans, as well as unspecified "harmonizing" of futures and securities regulation, and stronger safeguards for payment and settlement systems. The administration has said it wants to process more trading through exchanges and clearinghouses, supervise dealers more closely, and make this opaque market more transparent.
The scope of OTC derivatives reform will be decided by definitions such as which derivatives are "standardized" and which are "customized," as well as which are moved through exchanges, which to central clearinghouses, and which are only subjected to increased disclosure.

Again..this is great if you have smart informed people who can sniff through the bullshit. Wasn't the SEC supposed to regulate Madoff? The ICE Exchange has already started clearing OTC CDS SWAPS so we will see how this goes.

The problem will be trying to distinquish between "standardized" and "customized". At the moment only standardized transactions will be monitored and cleared through central exchange.

Big EPS Charges for TARP Repayers.

The banks paying off TARP money during 2Q will see hefty charges.

From doing so Analysts estimate:

Goldman = $1.00 per share.
Morgan Stanley = $1.00 per share.
JP Morgan = 39c per share
BB&T = 15c per share
US Bancorp = 13c per share
Bank of New York = 20c per share
Northern Trust = 38c per share
State Street = 45c per share.

Orderly Unwinding...

...Is the only way to avoid "Systemic Risk"

Barack Obama's financial regulatory plan unveiled this week will be the first step on the way to some badly needed regulations on Wall Street. It's a grand plan that is currently flawed in the sense that it doesn't attack the root cause of the credit crisis which is far too many useless complex financial products that few really understand. Leverage and risk taking was never the issue, it was the absence of financial risk control on complex derivatives that led to the crisis.

More regulation is not the answer, the right kind of regulation is. Self regulation is an oxymoron. You cant let the inmates run the asylum, then after the prison break, have the same inmates figure out what happened and fix it.

In the current financial crisis, the handling of failing firms was a messy
business. Indeed, the disjointed nature of these resolutions stoked the magnitude
of the crisis. The shock of Lehman Brothers bankruptcy would have
been less severe had the Street not expected the U.S. government to step in,
as it did with Bear Stearn's.

So there has to be resolution mechanism that allows for the orderly
resolution of any financial holding company whose failure might threaten the
stability of the financial system. Perception is far greater then realty. In realty there is no systemic risk or too big to fail, but the financial markets are run by human beings not SKYNET, and perception always trumps realty.

Bankruptcy is not suited for Financial Firms as we know from the Lehman debacle. Money is fungible. It doesn't lend itself to what we call reorganization, and today's financial firms are a maze of complex financial transactions that would take many months as in the case of AIG, which didn't even file for bankruptcy.

Because there was no method of deferring Lehman's counterparties
from exercising their remedial rights, hundreds of millions, maybe billions
were lost in its bankruptcy.

In the case of Lehman, their exposure was instantaneous under their contracts. Also the volatile nature of Lehmans exposure made holding those securities risky, so financial institutions want the option to immediately exercise their claims. But in
Lehman's case, that behavior which was the un-orderly unwinding of structured products, the liquidating of collateral, which led to prices spiraling down, making the markets more volatile. Quite simply as I have stated before, the markets "freaked" out because all indications was that Lehman was going to be sold or at worst a bailout was coming.

So who is tasked with this type of unwinding when companies get in trouble?

FDIC - Not a good place to start. They are already way over their heads trying to bailout depositors. That is what their mandate is. They don't have the trading expertise to handle this type of unwinding.

Treasury - Have some expertise, but not enough. Too many Wall Street people on board at the Treasury.

Federal Reserve Board - Conflict of Interest with direction of short rates, but have the best expertise in orderly liquidations.

Friday, June 19, 2009

Calm Before the Storm

30 Day Volatility as measured by the VIX is getting smoked today down more then 8.25%. A lot of this can be attributed to options expiry, but after closer inspection, you will also notice that 3 month Volatility as measured by VXV is only down 3.4%.

I can only say that the VIX only looks at 30 day volatility, which most people are selling into, yet 3 month Volatility is not down as much. Maybe people are positioning themselves for a likely correction in September?

Just making a guess.

Goldman Sachs Is the Proxy

Watch Goldman here.

Goldman Sachs recently broke its uptrend.

It will be very interesting to see if Goldman can gets it barrings back in line. It looks like they paid back the $10 Billion in TARP on Wednesday. So that news is already factored in.

Goldman is also set to release earnings on July 13Th. Most of these companies paying back TARP, will have to take hefty charges to earnings, most of which is not currently factored in.

Goldman has been on a tear the last 3 months or so, it is currently trading about 37% above its 200 DMA.

Big Moves Next Week?

Today marks the end of not only Monthly Options Expiry, but also Quarterly Stock Equity Futures Expiry as well, technically Equity Futures expired yesterday.

Next week will be a very volatile week as fresh new supply ($104Billion) of Treasury Issuance is released. Yields have been pressured to the upside for many reasons, and it will be interesting to see how the bond junkies soak up the new supply.

We may very well see the trend of sell bonds to buy equity trade next week, but beware, sooner or later the back up in long term treasury yields will hit equity land.

Also of note, after options/futures expiration, traders generally revalue and re leverage capital and positions.

Again pay close attention to Bond Yields, this is the single most important metric we can use to judge the state of the economy/credit system. There are rumors that BBA LIBOR, which is in the process of adding more dealers to gauge/set rates will be on the rise, which is good for no one.

Also, the recent back up in Treasury Rates has an ugly 1987 like feel to it. You know what happened then.

Thursday, June 18, 2009

Bond Rally? Not Likely.

Well..They rallied for a few days...But that just looks like it was Short Covering.

September 30-Year Treasury Bond Futures recently down by about two points

While September 10-Year Treasury Futures were about 1 5/16 points lower on supply worries and stronger-than-expected economic data.

It looks like these future prices are really pricing in some serious damage.

Let the Tailspin/Downward Spiral begin.

I should have known better by looking at the 2s-10s spread which has been rising once again.

Mortgage Rates Back Up

So Long Re Finance.

Whats on Tap For Next Week? Surprise! More Supply.

$40 billion 2 Years on Tuesday
$37 billion 5 Years on Wednesday
$27 billion 7 Years on Thursday

Total: $104 billion.

Short Rates Are Going No Where.

Selling pressure in Federal Funds Futures reflects growing sentiment that the FOMC will tighten at the Fed Meeting on Nov. 3-4. November FFF Contract recently prices in about 40% chance for 0.5% funds rate target, from current 0% to 0.25% range. That's up from about 28% chance at yesterday settlement.

First of all:

1- The Fed is not raising Short Rates period. The credit system is still in a very precarious situation. I know a non existent short rate is no good for anyone, low rates got us in this mess, but considering there are no other alternatives other then 100% Nationalization and starting all over again, they cant afford a spiraling LIBOR MKT and tighter credit in the system. The credit/shadow banking system needs lending to flow, or the system dies. Period.

2-Fed Fund Futures Markets and corresponding derivatives are a useless product only there to make the Market Makers/Dealers wealthy. These are one of the complex contracts that need to be eliminated.


3-Most HELOC/Auto Loan are priced off of LIBOR, which takes its queue from US Short Rates, a corresponding rise in short rates, will make LIBOR rise, thus making interest payments on outstanding HELOC loans more difficult to service. I understand that LIBOR rate calculations do take into account other factors, but one of the most are the direction of US Short Rates. If there is any indication (Lehman/AIG/Bear) that the US System is in trouble, you will have a sudden dramatic rise in LIBOR. The FOMC is not going to chance this occurrence.

4-Political Risk - Obama and the boys are head first and own this crisis. They will not allow Bernanke to raise short rates. Its not going to happen until the credit system which is showing some signs of a heartbeat recovers.

Rates cant stay at near 0 levels for ever, but at least they will during the rest of this year...and partly next year.

Benedict Geithner Speaks

Right from the Horses Mouth-


"No, I don't think that would be appropriate nor do I think that would be necessary."


"We are giving the council the power to collect information, the
responsibility to look across the system and the power to recommend changes,
but not the power to compel or force changes because that would fundamentally
change and qualify the underlying statutory responsibilities of those agencies
and I think that would create the risk of more confusion and less
accountability, frankly. But you know that's a difficult balance to get, I'm
not sure we got the balance perfect, but I think that to invest in a committee,
responsibility to force those kind of changes would I think lead to more
diffusion of accountability and more uncertainty."


"A critical part of getting recovery in place is going to be to convince
the American people and investors around the world that we are going to have
the will, working with Congress, to bring those deficits down over time."
"We started with a deficit in the range of 10 percent of GDP when we came
into office ... and the additions we have made, proposed with the Congress to
get us out of recession will modestly contribute to those deficits and we
believe they were necessary to avoid the risk of a deeper recession and even
higher future deficits."


To require the Fed to seek Treasury approval to lend to firms it has no
supervisory authority over "is an important change; but we believe -- at least
the chairman of the Federal Reserve believes -- that is a very appropriate and
justifiable change, in part because of the concerns expressed by many of your
colleagues, understandably, about the Fed being pulled into doing things that
go well beyond its classic responsibilities of being the lender of last
resort. I think it is a very consequential act for the Fed to lend to an
institution that it has no supervisory relationship over. It creates an
enormous risk of moral hazard. To limit that authority in the future is a way
to help reduce the risk of moral hazard, by the exceptional response the
government's made in this case."


"I haven't made that judgment yet and I don't think we are in a position to
make that judgment. There are some important signs of stability, some important
signs of healing in the financial sector, but I think it's too early, premature
to make that judgment."


"Institutions that do things that are basic banking activities, they
transform short-term liabilities into long-term assets, need to come within a
common framework of standards and restraints and oversight. If we do not do
that then all the risk in the system will migrate to those parts of the system
where you can do similar activities but not be subject to the same basic
standards. So our basic principle is a simple one. We want to eliminate those
gaps and loopholes that allow institutions to evade those basic standards."


"It is very important ... that the Fed preserve its independence and
accountability for achieving sustainable growth and price stability over time.
At its inception, the Fed was given this mix of responsibilities, both for
price stability and for a range of responsibilities that stray into the area of
financial stability -- it is the lender of last resort to the country. I don't
believe there is any conflict between those two responsibilities. I think the
record of the Fed justifies that judgment. But we want to preserve that.
In part because of that, being careful that we make sure that the Fed isn't
overextended, we're scaling back some of their responsibilities even as we
tighten accountability and responsibility in those core areas."


"We are very committed, and it is very important, that we preserve the
independence of the Fed, and its basic credibility of its responsibilities for
monetary policy. And we would not recommend proposals that would limit or put
that at risk in some sense because that is important to any effort to build a
well-functioning economy in the future. If we lose that credibility, that would
be very damaging."


"Fannie and Freddie were a core part of what went wrong in our system.
Congress did legislate last year a comprehensive change in oversight regime and
just to be fair, we did not believe we could in this timeframe lay out central
or federal reforms to guide or determine what their future role should be after
the crisis. We want to do that carefully and well. We are going to begin a
process of looking at broader options for what their future should be and what
the future role of those agencies in the housing market will be.


"Central banks everywhere and in this country are vested with the dual
responsibility for both monetary policy and some role in systematic financial
stability. That's true here and it's true everywhere. There is no necessary
conflict between those two roles. For the example, the Fed has an exemplary
record of keeping inflation low and stable for the last 30-years even though it
had these kind of responsibilities you have outlined that take it into the area
of financial stability. So I see no conflict. The second point I want to make
is the following. If you look at the experiences of countries in this crisis,
who have taken away from their central banks and given those responsibilities
for financial stability and supervision to other agencies -- I think they found
themselves in a substantially worse position that we did as a country. A worse
crisis, with more leverage in the banking system, less capacity to act when the
crisis was unfolding. Our proposal for additional authority within the Fed are
actually modest and build on their existing authority.


"With decision-making authority dispersed to the (Fed) Board and the
reserve banks, who will be accountable to Congress for the systemic risk,
regulation function, as the 'system' cannot appear to testify right here before


"I know that some suggest we need to ban or prohibit specific types of
financial instruments. ... In general, however, we do not believe you can build
a more stable system based on an approach of banning on a periodic basis
individual products because those risks will simply emerge quickly in new
forms. Our approach is to let new products develop, but to bring them into a
regulatory framework with the necessary safeguards in place."


"I do not believe we can reasonably expect the Fed or any other agency to
effectively play so may roles. In addition, the Federal Reserve was provided a
unique, independent status to ensure world ... markets that monetary policy
will be insulated from political influence."
"The structure of the Federal Reserve involves quasi-public reserve banks
that are under the control of boards with members selected by banks regulated
by the Fed. By design, the board and the reserve banks are not directly
accountable to Congress and are not easily subject to congressional oversight.
Recent events have clearly demonstrated that the structure is not appropriate
for a federal bank regulator, let alone a systemic regulator.


Consumer protection is a critical foundation for our financial system. It
gives the public confidence that financial markets are fair and enables policy
makers and regulators to maintain stability in regulation. Stable regulation,
in turn, promotes growth, efficiency, and innovation over the long term.


Under our proposals, the largest, most interconnected, and highly leveraged
institutions would face stricter prudential regulation than other regulated
firms, including higher capital requirements and more robust consolidated
supervision. In effect, our proposals would compel these firms to internalize
the costs they could impose on society in the event of failure.

What Obama Is Really Saying About Reforms.

Much has been made of President Obama's big speech he made yesterday about Financial Reforms. It was quite an eloquent speech like all of the Presidents speeches are, but one thing is certain....The more rules, regulations, reforms are made...the more things stay the same. Its always been business as usual on Wall Street.

Why do I feel this way? Well...After spilling nearly $3 Trillion unto the banks and making every possible socialist accounting trick magically appear on Bank Balance Sheets, you actually think they are going to kill the golden goose? Or what ever is left of it? No chance! Obama and his boys have too much riding on Wall Street malfeasance. There is too much at stake now to inflict anymore crippling pain. Like it or not...The Tax Payers, Blankfein, Dimon, Lewis, Obama, Geithner, and Bernanke are all uneven partners in this mess. They need to come out and again placate the masses to pull the wool over peoples eyes like they have been doing for centuries.

What really is happening is that even though Obama didn't conjure up "Too Big To Fail" or "Systemic Risk", he has created "To Big To Succeed".

President Barack Obama outlined what he envisions for future regulation of the financial system. He called his plan "a new foundation for sustained economic growth. His plan, if adopted, will fundamentally change the nature of our financial system and economy, for good or for worse.

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are "too big to fail". It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

Simply stated, the Obama plan would create what are essentially GSE like Fannie Mae and Freddie Mac in every sector of the financial economy, from insurers, securities firms, finance companies, bank holding companies, to hedge funds. Where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners like JP Morgan, Goldman Sachs and BOFA.

Moreover, the administration's proposal to provide a special bailout mechanism for large firms confirms the likelihood that these firms will never be closed down or liquidated, they will be just propped up, tax payer funded, and put in a zombie status for years like AIG.

Citing the market turmoil that followed Lehman's collapse, the administration will argue that failures like this are "disorderly." and are "Perfect Storm Situations".

But failure only comes from taking non calculated and unquantifiable risks, The idea of Risk is the central theme of Wall Street, Credit, and our Economy. This is ultimately the Country's greatest asset, it failed but that doesn't mean we have to eliminate it once and for all. And it is ultimately risk-taking and its consequences that the administration's plan is intended to prevent.

I am all for Risk taking, but losses cant be socialized, yet Risk cant be eliminated all together. There has got to be a point where Risk Taking and Risk Management meet.

Going back to the Lehman debacle, the entire situation was handled horribly, it was done so violently, so hap hazardly, that the whole planet freaked out over it. We had created this perception that all financial companies would be bailed out like Bear Stearn's, all the chatter leading up to Lehman's Bankruptcy was that there were 5-6 suitors for Lehman, that the government would eventually step in and force a shot gun wedding like they did for Merrill. Well didn't happen, and what we saw was total liquidation globally across the board. When Lehman wasn't bailed out, all market participants were required to recalibrate the risks of dealing with all others, causing a freeze-up in lending and hoarding of cash. Lehman's failure itself did not cause any great substantial losses, and within two weeks of its bankruptcy filing Lehman's trustee sold its brokerage, investment banking, and investment management businesses to four different buyers. The collateral damage from the way the situation was handled caused that particular crisis.

I have always stated that the entire financial system needs to be gutted and re tooled. Wall Street is rotten to the core. That the complexity of financial products is the main reason not Risk Management/Leverage that directly led to the meltdown. Outdated quantitative models that don't properly gauge the risk of these complex products were the root cause. Yeah...Yeah...Yeah...Sub Prime can be the root, but Wall Street firms are the ones who dodged regulation and pressured the powers that be to keep rates low so that predatory lending can be inflicted. I understand that ripping apart the system is Politically unfeasible, but any talk of reforms go on deaf ears if when we are still writing checks to subsidize bank losses.

China Selling Treasuries.

Data out from the Treasury this past Monday stated that China owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March.

It was the first month since June 2008 that Beijing failed to purchase more US Treasuries.

The decision to do so by China to reduce its US Treasury holdings is suggestive that Beijing is voicing their concerns about the US's attitude towards its own economic woes, Chinese economists were quoted as saying in state media Yesterday.

The remarks, coming after US data showed a modest decline in Chinese investments in US Government bonds, were in contrast to an earlier statement in Beijing which had said the recent sell-off was a routine transaction.

China's foreign ministry said Tuesday that its purchases of US Treasuries remained based on "security, liquidity and value preservation".

For Zhao Xijun, deputy director of the Finance and Securities Research Institute of People's University, China may have reduced its holding of US Treasuries simply because it needed the money.

Zhao said the sell-off could have been in order to pay for its own economic stimulus package.

"The reduction was a result of composite factors, such as the investment need and the market change," Zhao told Global Times.

The New Power Lunch Special

Its Bankruptcy Court!

Great Article in WSJ.Com

Just Google Search: Barbarians in Bankruptcy Court - to get entire article.

More Bad CRE News.

The next shoe to drop in the credit crisis is going to be Commercial Real Estate. You cant stop it nor can you contain it. The only thing to do is resecuritize the debt and sell it to a different class of morons who didn't lose their shirt the first time.

Yes folks...CRE is going to be the next Bruno Magli to reek havoc on the credit system.

The following is from a REALPOINT RESEARCH

In April 2009, the delinquent unpaid balance for CMBS increased by an unprecedented $3.26 billion, up
to a trailing 12-month high of $17.15 billion. Overall, the delinquent unpaid balance grew for the eighth
straight month, up over 329% from one-year ago (when only $3.99 billion of delinquent balance was
reported for April 2008), and is now over seven times the low point of $2.21 billion in March 2007. An
increase in four of the five delinquent loan categories was noted in April, including over $1.96 billion in 30-day delinquency. The distressed 90+-day, Foreclosure and REO categories grew in aggregate for the
17Th straight month – up 15% from the previous month and over 260% in the past year. This increase far
overshadows the $65.9 million in loan workouts and liquidations reported for April 2009 across 18 loans. Nine of these loans at $40.99 million, however, experienced a loss severity near or below 1%, most likely related to work out fees, while the other nine loans at $24.9 million experienced an average loss severity near 61%. Were main cautious regarding the increased delinquencies,loan workout activity, and reported loss severity's when considering our expectations for the remainder of 2009. As
additional pressures are placed on special servicers to maximize returns in today’s market, true loss severity's are expected to be high while liquidation activity is expected to slow as fewer transactions occur. This would be the result of reduced or distressed asset pricing, lower
availability of take-out financing, and increased extensions of balloon defaults through the end of 2009
into 2010.The total unpaid balance for all CMBS pools under review by Realpoint was $830.1 billion in April 2009,down from $834.5 billion in March. Both the delinquent unpaid balance and delinquency percentage over

Bloomberg also has this nugget this morning:

The Federal Reserve received no requests from investors for loans to buy new commercial mortgage-backed securities under an emergency program aimed at reducing borrowing costs and reviving U.S. economic growth.

The New York Fed announced the absence of loan requests yesterday, the first monthly deadline for investors to apply for loans to buy new CMBS through the Term Asset-Backed Securities Loan Facility, or TALF. No issuers have publicly announced debt that’s eligible for the program.

New York Fed President William Dudley set expectations low, saying in a June 4 speech that he didn’t foresee any activity because the securitization process “takes quite a while to ramp up.” He asked his audience not to “take that as a mark of the success of the CMBS effort, please.”

The stakes of TALF aid for CMBS extend beyond the markets for office and retail space. Worsening problems in the commercial mortgage market may accelerate the drop in property values, increase defaults and weaken banks’ finances, Dudley said in the speech.

The Fed has made $25.2 billion in TALF loans for other securities, including those backed by auto and credit-card debt.

“This is not an embarrassment for the Fed, but it does show there is a slow discovery process on the part of investors and originators,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

‘Toughest to Crack’

Among asset classes targeted by the Fed through the TALF, “commercial real estate is going to be the toughest to crack as its financing is very long-term in nature,” Rupkey said.

Yesterday’s deadline applied to securities issued this year. In late July, the Fed will start accepting investor requests for loans to purchase older CMBS.

The Fed, acceding to an industry request in May, authorized TALF loans of as long as five years, up from three years for other parts of the TALF. Real estate groups including the Mortgage Bankers Association had lobbied the Fed for the extended loan terms.

Fed officials hope the TALF -- an emergency program that may make as much as $1 trillion in loans -- will help revive the $760 billion market for CMBS. That in turn may lower interest rates and expand the availability of loans for the commercial real estate market.

“The revival of the CMBS market is essential to stabilizing the commercial real estate market,” Dudley said in the speech.

Slow Start

A slow start for the TALF’s CMBS support would mirror the first phase for other asset-backed debt, which began in March with $4.7 billion in requests followed by $1.7 billion in April. Loan requests exceeded $10 billion in both May and this month.

Demand in March and April was hampered in part by investor opposition to government restrictions on hiring foreign workers for firms that accepted the subsidized loans, and concern that Congress would try to tax earnings retroactively.

“This will take a while,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm. “It may very well be that when we see sharp increases in TALF participation, that that’s going to be a signal that the markets are in fact healed.”

Sales of CMBS plummeted to $12.2 billion last year, compared with a record $237 billion in 2007, according to estimates by JPMorgan Chase & Co. There have been no sales of the debt since June 2008.

Fed Chairman Ben S. Bernanke said in congressional testimony on May 5 that lending conditions in the commercial real estate sector are “still severely strained.”

Deals have been few partly because it can take as long as six months from the time a loan is originated to when it’s securitized.

In addition, the Fed posted the legal forms for CMBS in the TALF on June 9, leaving little time for participants, said Chip MacDonald, a partner at law firm Jones Day in Atlanta.

But It looks like Bank America and Investors are totally ignoring the warning signs.

Another Bloomberg Nugget.

Bank of America Corp. and Morgan Stanley are marketing securities backed by commercial mortgage bonds.

Bank of America is selling $368 million in debt backed by nine commercial mortgage bonds, according to a person familiar with the offering. Morgan Stanley plans to sell $210 million in similar securities backed by a single commercial mortgage bond, according to a person familiar with the sale. The people declined to be identified because the terms aren’t public.

Banks are turning to so-called re-REMICs for commercial properties to create securities that offer protection from rating cuts and losses. Standard & Poor’s said it may lower the rankings on as much as 90 percent of the highest-graded commercial mortgage-backed bonds sold in 2007. A record $237 billion of the debt was sold that year, according to JPMorgan Chase & Co. data.

“This could be the start of something you see more of,” Eric Johnson, president of Carmel, Indiana-based 40/86 Advisors Inc., said in a telephone interview. “It will get more interesting when these deals use bonds that are rated below AAA.”

The Morgan Stanley and Bank of America offerings consist of portions of debt already rated AAA, according to documents connected with the sales.

The top-ranked portion of the Bank of America debt may price to yield 550 basis points more than the benchmark, the person said. The most senior part of the Morgan Stanley offering may price to yield 500 basis points more than the benchmark swap rate. A basis point is 0.01 percentage point.

Loan Vehicles

REMICs, or real estate mortgage investment conduits, are vehicles used to turn loans into bonds by passing payments from the debt to different investors in varying orders of priority or at different times. Re-REMICs repackage some of those securities, or a single class, into new bonds.

The yield gap, or spread, relative to the benchmark on top- rated bonds backed by commercial mortgages fell 73 basis points to 7.5 percentage points today, according to Bank of America data.

About $27 billion of Re-REMIC repackagings of home-loan bonds have been issued this year, up from $17 billion for all of 2008, according to a June 12 report by Bank of America Merrill Lynch.

Sales of commercial mortgage bonds plummeted amid concern about rising defaults. There have been no sales of the debt this year, according to data compiled by Bloomberg.

Obama is front and center with Financial Reforms, but this kind of stuff is borderline criminal.

When does it become readily apparent that this is the type of behavior that got us in this mess in the first place. How many more hedge funds, mutual funds, state pension funds, and banks need to blow up before any action takes place?

Wednesday, June 17, 2009

Bonds Firming Up

Looks like the unwinding of the Bonds to Equity Trade is feeling a little less pain today.

30 Year Bond Futures is up 29/32 to 116 19/32
10 Year Bond Futures is up 14/32 to 115 17/32

I expected this trade as to much hot/dumb money was going into equities.

I believe this trade will continue now that negative news flow is creeping back into stock land, and that major index values have broken support.

Banks Under The Gun...Once Again.

We spoke about how precarious the situation is in the financial sector. How the back up in long term interest rates have put a dent in the banks refinance mortgage business. Capital One didn't do the sector any more favors when they announced that charge offs were up 9.4% in May. The S&P 500 Financial Index also was also sitting just below its 200 DMA. The markets have rallied of late for many reasons such as unwinding of safe trades into equity, as well as lack of negative news flow.

Well today the negative news flow is back in business as S&P has downgraded 22 US banks.

Here is the Press Release from S&P:

Standard & Poor's Ratings Services said today that it lowered its ratings and revised its outlooks on 22 rated U.S. banks. The actions reflect our belief that operating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles, and tighter regulatory supervision. The changes also reflect our ongoing broad-ranging reassessment of industry risk for U.S. financial institutions (see "How The Credit-Market Crisis Is Changing The World Of Banking," published Nov. 25, 2008, on RatingsDirect).

Our overall assessment of the U.S. banking industry incorporates the following key points: The industry is now in a transition and will likely undergo material structural changes; the loss content of loan portfolios should increase, but recent capital rebuilding should help banks defray these losses; stress tests point to more pain in the future; we don't view regional banks as being highly systemically important; and potential losses could increase beyond our current expectations. "We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions," said Standard & Poor's credit analyst Rodrigo Quintanilla. "Financial
institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace's new reality. Such a transition period justifies lower ratings as industry players implement changes." Possible changes include increased regulatory oversight and lower profitability.

In addition, we reassessed the relative creditworthiness of many institutions based on their abilities to deal with the increased risks during this transition period. "We believe some firms may be better able to weather the risks ahead than others," Mr. Quintanilla added. "In the long term, we could foresee ourselves raising ratings if lower earnings and reduced risk are accompanied by stronger risk-adjusted capital and effective governance." As a result of the downgrades this week, as well as those since mid-2007, the counter party ratings on U.S. banks (at the operating subsidiary level) have fallen by an average of two notches, to 'BBB+' today from 'A' before the crisis began in June 2007. However, said Mr. Quintanilla, "the high number of firms with negative outlooks suggests that the ratings could still decline if the credit cycle is longer and/or deeper."

Mr. Market Needs To Make A Stand.

SP 500 Near 200 DMA

If the SPX can hold 907.92, then we can have a successful test of the 200 DMA, if not we will have some serious program selling to protect recent profits.

The Banks which had recently stopped going up over a month ago hold the keys to the fate of the market. All is lost for the Government, Treasury, Fed, and the Credit System if the banks have another downward spiral. As we all know the perception is far worst then reality, as these banks sink further, there is serious catastrophic fear of another major bank run. The System is already bulging at the seems and any more stress is something that Barack and his boys don't want to visualize.

Tuesday, June 16, 2009

Another Bank Down Leg Imminent?

Not withstanding another foolish thief like Wall Street upgrade of these mutt stocks, the financial sector is looking very vulnerable to a severe correction.

PHLX BANK INDEX about to Roll Over like Lassie

Broader S&P 500 Financials Index also broke its 200 DMA today.

Do I have to remind everyone that the secondary offerings that were priced by JP Morgan, Amex, Wells Fargo, and Capital One are all under water?

Speaking about Capital One, did they let anyone know when they priced their secondary that their Net Charge Offs for May was a record 9.4%?

Did Wells Fargo alert their suckers (Shareholders) the potential repatriation of $1 Trillion notional value of toxic loans back unto their balance sheets?

Did JP Morgan alert any one on their syndicate team to alert the shareholders of severe loan losses going forward?

BOFA is the only secondary offering that is in the black so far. Actually, I have to admit BOFA does look $3 bucks mind you.

I would not be suprised to see another upgrade tomorrow morning in these mutts.

More Housing Starts is BAD!

Can we all get to the point where we can have a decent frank conversation about the state of housing?

We have too many talking heads on TV as well as in the Print/Web Media proclaiming that they see an end to the housing slump.

We have to come to a point where we agree that the problem in housing is the following:


Where in the world do we see any abatement in any of these trends?

So with this backdrop, this morning we got more static coming out on the state of housing.

The headlines were as follows:

U.S. May housing starts surge, biggest gain in 3-months
Housing permits rise fastest since last June

It goes on to state:

New U.S. housing starts and permits surged in May from record lows, while wholesale prices were muted despite higher gasoline prices, indicating the economy was moving closer to the end of a deep recession.

The Commerce Department said on Tuesday housing starts jumped 17.2 percent, the biggest rise in three months, to an annual rate of 532,000 units. This was as ground-breaking activity for multifamily homes surged 61.7 percent after diving 49.4 percent in April.

Even more encouraging for the housing sector, which is at the center of the longest U.S. output decline since the Great Depression, new single family starts rose 7.5 percent, the largest gain since January 2006.

Ground breaking activity for single family homes has now risen for three straight months, an indication that housing investment will be less of a drag on the economy in the quarters ahead, if the trend continues.

Now...I cant fault the government for putting out these absurd reports, that is what they do. They are in the business of vote gathering for what ever party is in power. What I do fault are the ones who have been constantly wrong on housing stating that this is one more data piece that tells us that housing has bottomed.

Lets get this straight....

Rising housing starts is good for economic growth, but the notion that more housing starts is good for the housing market is so patently wrong and disingenuous that I don't know where to begin.

Housing prices must bottom for the economy to truly recover, but that can't happen if
more homes keep getting built. How will supply and demand meet if we build more supply when the problem has been (and continues to be) an excess supply of unsold homes in the system? They won't, which is why a pick up in housing starts will only serve to prolong the housing recession, not help to curb it.


If you notice the powers that be (JP/Goose/Moose) are trying their best Under Armor (We Must Protect This House!) impression by supporting SPY at these levels.

If you ask why are you picking on JP/GS/MS? Very Easy.... as they are the biggest players in the IOI market as well as huge participants in NYSE Program Trading, they can always push and move...bob and weave...float like a butterfly these ETF's around the entire day.

Where is Gold Going?

Gold which has been weaker of late.
Deflation Fears > Inflation Fears.

Gold Futures

But it just looks like a pullback to its 50/100 Day Moving Averages.

Now if it breaks those levels...your on your own.

Watch 920 On The SPX

920 Is The Number the Market Needs To Hold.

So far this morning the Futures are slightly (3.5) Higher.

Don't be surprised to see JP Morgan who has been gunning the SPY the last month, try to push the market higher . That is why the market always seems to rally violently at the end of day. Looks like most of the IOI (Indication Of Interest) trades are being gunned and ran up by Jamie's Boys.

Yes...I know...No one cares when the market goes up.

Monday, June 15, 2009

VIX AND VXN Perking Up.

Volatility Finally may be catching up to equity prices.

CBOE Volatility - VIX

CBOE NASDAQ 100 Volatility - VXN

Lots of people talking about Market Maker manipulation in SPY....Nah...Not On Wall Street...Never!

From the looks of it, these guys don't want a break of these levels on the SPDRS (SPY)

Dumb Money Index

The Technical Take Blog has a very interesting piece about the cattle move into equities.

DUMB MONEY - Jim Cramer and CNBC

SMART MONEY - Every one else not named Jim Cramer

Green Shoots Goodness From Cap One.

Capital One Financial (COF) this morning announced that annualized U.S. credit card net charge-off rate hit 9.41% for May. Which is a record (Way To Go)! Of course the company is trying to let people know its just an aberration, what are they trying to hire a "Green Shoots/Geithner/Bernanke PR Firm"? Also is Ken Lewis at BOFA and Jamie Dimon at JP urging their analysts to upgrade COF, so that their net charge off figures will look better compared to COF?

I found this very interesting footnote (Needed my dads magnifying glass) form their press release.

"A change in bankruptcy processing resulted in an improvement in the U.S. Card charge-off rate that is reflected in the May results. The impact was approximately 50 basis points. While our internal guidelines require bankrupt accounts to be charged off within 30 days, our practice had been to charge off customer accounts within 2 to 3 days of receiving notification of bankruptcy. Due in part to an increase in the volume of bankruptcies, we have extended our processing window to improve the efficiency and accuracy of bankruptcy-related charge-off recognition. The new process remains within Capital One’s internal guidelines, as well as FFIEC guidelines that bankrupt accounts must be charged-off within 60 days of notification."

Like I said....25% of all Credit Card Holders will default on at least 1 credit card by year end. The problems at Cap One is peanuts compared to the size of the potential problems at Both JP and BOFA.

Watch The Banks.

The Financials stopped going up over a month ago.
The entire recent market rally was on the backs of Crude/Energy and Tech, which also look very vulnerable for a correction.



Parabolic Crude Rally Unsustainable.

Black Swans and Unthinkable Stuff.

In previous posts I have touched upon my concerns over the US Treasuries ever bulging balance sheet. Its ludicrous to blame Wall Street for over leverage and balance sheet risk when Daddy is sniffing the glue more then the kids down the hall.

Our current overstretched Government Monetary Policy, even in the face of it trying to maintain its independence and its ability, or willingness, to dry the U.S. Economy of the current excess liquidity, is very fragile. Furthermore, we heard last week the Fed Chairman’s congressional testimony on the perils of excessive fiscal deficits and the effects these deficits are having on interest rates at a time when the Federal Reserve is intervening in the economy to try to keep interest rates low...Basically Bernanke was warning of excess liquidity and how that can back fire on what ever stabilization that they have achieved for the Financial/Credit System. does this play out "Taleb/Black Swan Style"? What is the "Unthinkable"?

What I call “Unthinkable” is basically the following:

What if, because of all these issues, individuals/entities across the world start dumping U.S. Dollar denominated assets/notes, like the U.S. Dollar bills? We have heard that “Rogue/Unfriendly” states, like Iran, Venezuela, Nicaragua, Bolivia, as well as "friendly" states like China, Brazil, Argentina, Russia, etc., have been discussing a way to go from a dollar pattern/platform for multilateral trade to another country’s or a combination/basket of country's currencies in order to achieve independence from U.S. monetary/foreign/fiscal policy decisions. While these attempts, or at least the noise they produce in the media, have increased during the last year or so, my biggest concern is not with what these countries may do, but what individuals across the world may do if they believe the U.S. Dollar is in actual trouble.

Why? Because one of the advantages the U.S. Federal Reserve has over almost all of the rest of the world’s central banks is that there seems to be an almost infinite demand for U.S. dollars in the world, which has made the Federal Reserve’s job a lot easier than that of other central banks, even those from developed countries. Furthermore, approximately three-fourths of U.S. dollar bills are in foreign hands or foreign safe deposit boxes, and an about-face by individuals across the world regarding these holdings of U.S. currency could be a huge blow to the value of the U.S. Dollar, U.S. Debt and the Federal Reserve’s monetary policy.

Why? Because all those holdings of U.S. Dollar bills are basically a free loan from foreigners to the U.S. government, and if there is a massive run against the U.S. dollar across the world then the Federal Reserve will have to sell U.S. Treasuries to exchange for those U.S. dollars being returned to the country, which means that the U.S. Federal Debt and interest payments on that debt will increase further. This means that we will go from paying nothing on our “currency” loans to having to pay interest on those U.S. Treasuries that will be used to sterilize the massive influx of U.S. Dollar bills into the U.S. economy, putting further pressure on interest rates.

Also if we add the nervousness from Chinese officials regarding U.S. Debt issues, then we understand the reason why we had Treasury Secretary/Traitor Timothy Geithner in China last week “calming” Chinese officials concerned with the massive U.S. fiscal deficits. I remember similar trips from the Bush administration’s Treasury officials pleading with Chinese officials for them to continue to buy GSEs (Freddie Mac and Freddie Mae) paper just before the financial markets imploded. But the situation today is even more delicate because of the absurd amounts of U.S. Treasuries s we will have to issue during the next several years in order to pay for all the programs we have put together to minimize the fallout from this crisis.

Furthermore, if China and other countries do not keep buying U.S. Treasuries, then interest rates are going to skyrocket exponentially. This is one of the reasons why Bernanke was so adamant against fiscal deficits in his latest congressional appearance. Of course, the U.S. Government knows that the Chinese are in a very difficult position: If they don’t buy U.S. Treasuries, then the Chinese currency is going to appreciate against the U.S. dollar and thus Chinese exports to the U.S., and consequently, Chinese economic growth will falter. This is something that will probably keep Chinese demand for Treasuries elevated during the next several years. However, this is not a guarantee, especially if the Chinese recovery is temporary and they have to keep on spending resources on more fiscal stimulus rather than on buying U.S. Treasuries

All of these issues will have an important, weakening effect on the U.S. dollar, Most people are still bullish on the Dollar, partly because many other countries in the world, especially the European Countries, appear to be in even worse shape than the U.S. Economy. This means that these countries will also have to keep interest rates down while continuing to spend their way out of recession, pressuring their own currencies in the process.

However if plays out, the 30/50 Year Credit Cycle had its day of reckoning, thus my assessment of the U.S. Dollar is not great, no matter what ever does become the reserve currency, the socialization of Bank Losses on the backs of Tax Payers, while Tax Payers are being foreclosed on by the banks is BAD KARMA. I don't envision within the next 10-15 Years, the US Dollar losing its dominant status, no matter what Marc Faber or Jim Rodgers have to say. WHY? Who is going to trust the following?

Hugo Chavez’s Venezuelan Peso?
Putin’s Russian Rubble?
The Iranian Rial?
The Chinese Renminbi?
Kirchner’s Argentine Peso?
Lula da Silva’s Brazilian Real?
Congress Party and the Rupee?

I don't think so -

But we have seen painful dislocations happen, now that we have gotten to a point where these type of events are a daily occurrence, it might be prudent to consider all the alternatives.


The age old adage of:

If you owe a bank $1,000 and cant pay, your in trouble and a deadbeat.... but if you owe the bank $1,000,000, the bank is in trouble and you are partners. Nobody knows this better then Donald Trump.

But what do you do when you suddenly realize that you owe China $1.3Trillion? Let me rephrase, the US Treasury is not loosing sleep over this, but the Chinese are constantly tossing and turning looking for the other cold side of the pillow.

China knows they have a long term problem with the amount of money they have lent us. As a consequence, Beijing is diversifying its overseas investments and pressing U.S. officials for an "exit strategy" from the ultra-loose fiscal and monetary policies that China fears will eventually inflate away the value of its U.S. Bond Holdings and dollar denominated assets. But China's pragmatic policymakers also know there is no practical alternative to the dollar as the world's main reserve currency, hence the Chinese have a problem.

Which is also why most bankers say any rhetoric from Tuesday's inaugural BRIC's (Brazil,Russia,India, and China) summit in Russia about the need for the United States to cede power in global financial institutions should not be taken as a signal that Beijing is positioning the yuan to challenge the dollar's supremacy.

Its all hype.

Saturday, June 13, 2009

More Foreclosure News

Please can someone tell me there is good data here somewhere?

Friday, June 12, 2009

Money On The Sidelines?

All I have been hearing from the likes of CNBC and other Media Outlets is there is so much money on the sidelines waiting to be invested, there are far too many bears in this market, all your basic run of the mill gibberish. But from looking at the chart below from SentimentTrader, you will notice:

That traders had placed 2.4 times as much leveraged money in bull funds as bear funds, the highest level since November 2001.

So the next time someone waxes poetic about money on the sidelines and people being to negative, you can tell them to look at the chart below and shut up.

The Cost Of Green Shoots

In Economics there is always a trade off. You want full employment? Fine.. but what's the downside of prosperity? Too many people working and consuming to many goods and services which ultimately leads to higher prices. Nothing is for free and certainly the future risks of an out of control Fiscal/Monetary Policy will rear its ugly head. All of this talk of "Green Shoots" is really incomplete when not discussing the potential costs of achieving a stabilized economic system.

Anyone who believes that the impact from the unwinding of 50 years of progressively cheaper and pervasive credit will be resolved within a 1 year of the Lehman bankruptcy is either hopelessly naive, or ideologically conflicted, or both. As I have been saying, it's not the change in the trajectory of the global economy, but the cost of engineering it, that clouds the outlook.

On residential real estate, the foreclosure wave is hitting higher-end properties. The consequences for home price deflation, rental markets and bank losses are considerable. As long as Notice of Defaults are at all-time highs, we are nowhere near the bottom in housing.

As for the Dollar, I don't yet see the dollar losing its global status. We can put off that discussion of it losing its reserve status for much later time, but whats interesting is the following:

Joseph Yam, the storied head of the Hong Kong Monetary Authority, refers to the eras of reserve currencies as Portugal (1450-1530), Spain (1530-1640), the Netherlands (1640-1720), France (1720-1815) and Britain (1815-1920). 100 years looks like a long time.

"The notion that the Chinese yuan could replace the US dollar as the world's reserve currency may strike some as odd, or at least very premature. But in 1920, only 7 years after the creation of the U.S. Federal Reserve, the notion that the dollar would replace the British pound probably sounded even more bizarre, given the recent memory of US defaults on Civil War debts, a major depression in 1893 and the Panic of 1907. I thought it was notable that the Chairman of the state-owned China Construction Bank called on the United States and the World Bank to begin issuing yuan-denominated bonds, after several other steps taken this year to increase the yuan's convertibility".

Blackrock Buy Of BGI only Means Higher Fees.

With Blackrock buying Barclay's Global Investors from Barclay's PLC for $13.5 Billion, its really Blackrock having Barclay's over a barrel. Barclay's in dire need to rash cash to repair its balance sheet really couldn't afford to sell to anyone accept BlackRock. This is a great deal for Blackrock on the surface, as they will be almost double the size of their nearest rivals State Street Advisers and Fidelity.

But whats really worrisome is the near size of Blackrock after this deal is completed. Do we really need someone who is managing this much amount of money, with free reign to raise fees at any cost?

This deal will most likely add more M&A to this space. Fidelity will almost assuredly merge with State Street or some one else to gain assets. So we will have 2 assets managers in the US who will control half of all assets under management, which is always good for Wall Street, but bad for individual investors.

One more example of where things are headed.

Why We Look a lot like Japan in the 90's

I find it amusing that the CNBC market specialists are jumping up and down that the Nikkei 225 Index has cleared the 10000 level last night. Good...its only down 65% from its all time high posted nearly 20 years ago. At this pace, the Nikkei should get back in the black sometime when the CUBS win the world series in 2400.

NIKKEI 225 - 20 Year Chart

S&P 500 - 10 Year Chart

Now- You may ask? Why do you see a similar outcome for our wonderful country?

We love the Japanese because they are so much like us.

Outstanding Zombie Banks

We are basically TWINS, like Arnold and Devito.

Thursday, June 11, 2009

Futures Divergence

Stock Index Futures (E-MINI SP) have started to roll or trade into next Quarterly Expiry.

Should not September Futures ES/U9 be trading higher then June ES/M9?
Am I missing something?

Futures contract prices are derived from calculating Cash Market and accumulating dividends and taking into account a risk free rate of return.

The Cash Market (SPX) is at 953 even, so June Futures are pretty much trading in line with that, but September futures are trading at a 4 point discount to Cash Market...HMMMMM.

September Futures

June Futures