Financial mayhem

[Brant Gaede]

The Fed cuts 75 basis points pre-opening. It had some mild, temporary effect on the futures. It'll just be sell the rallies.

--Brant

[Wolf DeVoon]

Watch list to buy ?? after dead cat bounce, maybe next week

Defense/Aerospace RTN LMT GD NOC

Health Care BD BAX SGP JNJ

Energy/Refiners MRO VLO SUN TSO

Financials WFC JPM GE CB

Retailers WMT TGT M SVU

Edited January 22, 2008 by Wolf DeVoon

[Brant Gaede]

I covered my short and made some money. I also got some Altria for two different accounts. I hope nobody panicked. There are two big problems: mortgage insurers (looks like the Fed is addressing this somewhat) and the yen carry trade. The lowering of interest rates this morning helps the former and hurts the later. Overseas markets are probably all panicked out and are set up for a big snap-back. Obviously the US is not the tail that wags the dog. The US is still the dog. There won't be any big panic down in US markets now. Grind down is another matter. The Fed kept me from making a lot of money today, but it did what it had to do to stop the panic down, but the more basic problem of a weakening dollar has been made worse. You can't stop an equity market panic by raising interest rates. Quite the contrary. I forgot that most people don't think and then act in a panic. They just collectively act.

--Brant

[Wolf DeVoon]

Fed cuts, cuts again. Congress + Bush hand out cash. Then what? Shampoo, rinse, repeat. It's gotta stop eventually, maybe as soon as April. I think the plunge protection team will be out of ammo long before the nominating conventions. This looks worse and worse. I retract the stock picks above. Cash and gold for the foreseeable future, until the Dow tests 10,000.

[Brant Gaede]

Fed cuts, cuts again. Congress + Bush hand out cash. Then what? Shampoo, rinse, repeat. It's gotta stop eventually, maybe as soon as April. I think the plunge protection team will be out of ammo long before the nominating conventions. This looks worse and worse. I retract the stock picks above. Cash and gold for the foreseeable future, until the Dow tests 10,000.

It's called pushing on a string, Wolfo.

--Brant

[Wolf DeVoon]

Fed cuts, cuts again. Congress + Bush hand out cash. Then what? Shampoo, rinse, repeat. It's gotta stop eventually, maybe as soon as April. I think the plunge protection team will be out of ammo long before the nominating conventions. This looks worse and worse. I retract the stock picks above. Cash and gold for the foreseeable future, until the Dow tests 10,000.

It's called pushing on a string, Wolfo.

--Brant

Some facts and figures on risk of default

http://www.bloomberg.com/apps/news?pid=206...&refer=bond

According to IMF bigshot John Lipsky, not as much risk was placed outside the traditional banking system as many believed. He figures that banks themselves bought lots of securitized paper as did their SIVs. And even though banks don't own all the paper, it's not as if problems in a financial instrument held elsewhere have no relationship to that same financial instrument held on the bank's balance sheet. That's why those Too Big To Fail Banks didn't blow out the assets in their SIVs -- they would have knocked down the prices of the very securities that resided in plain view.

And besides that, banks weren’t shy about loaning money to other players in that market. Mr. Monga quotes Andrew Senchak of Keefe, Bruyette & Woods who points out, "The money to buy CDOs, CLOs had to come from somewhere."

Rob Peebles, Prudent Bear

Another important article about $45 trillion at risk, just posted:

http://seekingalpha.com/article/61099-cred...eal-action-s-at

Forget consumer pain, the Fed freaked out because of potential bank failures.

:twitch:

Edited January 23, 2008 by Wolf DeVoon

[Brant Gaede]

Other markets are only weakly rebounding. Jakarta is up over 4.5%, but it's the exception. The Fed debased the dollar to prevent a 1000 point decline on the Dow average today. The Fed, Treasury dept., financials and Wall Street are doing some kind of death dance. I suspect we'll get the 1000 point decline regardless. I was able to re-establish my short at a higher price than I profited from today. Because this is an election year I bet further rate cuts are coming and gold will go up significantly. GLD is the conservative way to invest in gold. It only tracks the price. Mining companies magnify upside and downside and risk.

--Brant

[Wolf DeVoon]

Jim Reid at Deutsche Bank said the severity of problems in the credit markets demanded government intervention:

On one hand it’s becoming increasingly clear that left to its own devices the credit bubble could easily collapse under its own weight and into a total “once in a generation” mess. However on the other hand, if we can see these risks then so can Central Banks, Governments and Regulators. The probability of a recession remains high though, but we expect to see initiatives, rate cuts, bail-outs, fiscal stimulus, etc., etc. along the way to attempt to reduce, or perhaps delay, the risks. While the unraveling of the monoline sector (bond insurers) is a realistic scenario and potentially catastrophic, there will be plans being devised behind closed doors to try to avoid it.

Hoo-boy, free money!

[Wolf DeVoon]

Har-de-har-har! Dow swings up 400 points in 40 minutes. Why?

Jan. 23 (Bloomberg) -- New York State's insurance regulators met today with U.S. banks to discuss raising new capital for bond insurers, said a department spokesman. Talks in New York with the unnamed banks are part of Insurance Superintendent Eric Dinallo's effort to stabilize the bond guarantors and bolster the market's financial condition, said agency spokesman Andrew Mais in an interview.

The banks are borderline insolvent, no capital to spare, much less a $15 billion bailout of monoline junk.

Edit: Did I say $15 billion? - try $2 trillion or more:

http://www.bloomberg.com/apps/news?pid=206...&refer=home

http://groups.google.com/group/PoliticalFo...1e3c51ece8feac7

Stay tuned, kids, it's getting goofier by the hour.

W.

Edited January 24, 2008 by Wolf DeVoon

[Brant Gaede]

I've been buying Altria last three market days.

--Brant

[Wolf DeVoon]

Pain goes through the roof (LA Times)

"When prices drop, some homeowners who owe more on their property than it is worth will often walk away, noted Leo Nordine, a Hermosa Beach broker who sells repossessed homes for banks. Nordine said his workload had doubled in the last year."

The monkeyshines in New York this afternoon, rallying banks and retailers in a 600-point Dow turnaround, really does begin to resemble 1929. Oblivious to real world pain, traders are hooked on the heroin fix of government, chanting Too Big To Fail, Get In Front of The Curve. I sincerely and honestly prefer to be wrong about this. I would rather look stupid than see the United States crash and burn financially, as I expect it will. Sorry. There was nothing to be done about it. The nation that scoffed at Ayn Rand and liked Ronald Reagan is about to get another (this time fatal) dose of Clinton or McPain.

:faceless:

[Brant Gaede]

The market rallied because it got the message that the government was not going to let the (big) banks fail. Even during the Depression no big bank failed, even though thousands of little ones did. Those failed because of contraction of the money supply in absolute terms. Today, inflation is on our side. Buy gold. (But only a little at a time--on pullbacks.)

--Brant

[BaalChatzaf]

The market rallied because it got the message that the government was not going to let the (big) banks fail. Even during the Depression no big bank failed, even though thousands of little ones did. Those failed because of contraction of the money supply in absolute terms. Today, inflation is on our side. Buy gold. (But only a little at a time--on pullbacks.)

--Brant

Is your favorite comic strip -Over The Hedge-?

Ba'al Chatzaf

[Wolf DeVoon]

FT Alphaville this morning on the monoline bailout:

NH: I reckon this rescue plan is plain fantasy

NH: if Wall Street couldn’t get the SIV rescue fund off the ground

NH: what hope for this?

NH: Still it’s good to that there is such a thing as a New York insurance superintendant

PM: Indeed! bet he has a good uniform

PM: So these are rescue talks — not a rescue plan , necessarily

NH: and you have to ask where will the banks get the cash from???

Updates

Jan. 24 (Bloomberg) -- Sales of existing homes in the U.S. fell more than forecast in December, capping the biggest annual slump in 25 years and the first decline in prices since the Great Depression.

Jan. 25 (Bloomberg) -- Banks that raised $72 billion to shore up capital depleted by subprime-related losses may require another $143 billion should credit rating firms downgrade bond insurers, according to analysts at Barclays Capital.

Edited January 25, 2008 by Wolf DeVoon

[Brant Gaede]

I sold my Altria at a profit and took a small loss on my short. This leaves me all in cash except for 60 non-tradable MDR.

The markets have absorbed the 75 basis point cut and discounts another 50 next week. It's like a junkie waiting for the next fix while the city burns around him.

I'm just waiting for the next inflection for another trade. I can do this all year. It fits my "investing" personality. Altria goes down with the market; it's like pushing a ball down to the bottom of the bathtub. Let go and it pops back to the surface.

--Brant

[Wolf DeVoon]

Two new items on US and global finance:

Wall Street has not only screwed customers but their own shareholders as well. At one time all of our major investment banks, such as Goldman Sachs, Lehman Brothers, Morgan Stanley, Bear Stearns, Smith Barney, Shearson, E.F. Hutton, Kidder Peabody and Solomon Brothers, were private partnerships. However, during the 1990s they all went public (of course many merged first so they no longer exist as independent firms). Goldman Sachs was the last to go public in 1999. The transition allowed Wall Street partners to cash out, transferring future risks to new shareholders. In so doing they were able to capitalize on bubble valuations, yet through lavish bonus compensation packages, still keep the lion's share of the profits for themselves. In other words they got to have their cake and eat it too. As a result of this transfer of risks, the business models of America's leading financial institutions shifted, with profits coming from riskier sources such as proprietary trading and structured finance. To line their own pockets, Wall Street willingly exposed its shareholders to risks that it would never have assumed with its own capital. This moral hazard set the stage for the enormous losses shareholders are now suffering, and are a direct consequence of the phony profits booked in prior years. However, while shareholders are left holding the bag, Wall Street's former partners now turned employees have already walked away with huge IPO and stock option windfalls, as well as lavish bonuses paid on phantom profits. The coming crash will plainly expose these conflicts of interest, and the reaction will be severe. In the end, finance and banking, like manufacturing, will be yet another industry lost to foreign competition. (Peter Schiff, 1/25/08)

Hard hit by multi-billion dollar losses tied to the collapse of the housing market, U.S. financial giants are selling their souls -- they call them stakes -- to China, Abu Dhabi and other foreign governments. Sovereign wealth funds, which control as much as $2.5 trillion in investments worldwide, have provided much-needed cash injections to Citigroup, Merrill Lynch, Bear Stearns and others. China, as major stakeholders in Bear Stearns and Merrill Lynch, can prod U.S. businesses to expand business ties with Chinese companies. Abu Dhabi, as a major shareholder in Citigroup, can steer the company toward supporting investments in the Mideast and broker business deals between U.S. and Arab companies. The U.S. isn't alone in facing this problem. German Chancellor Angela Merkel warned that her own nation was at risk two years ago after Russian-controlled firms began buying major oil and gas pipelines in Europe. "How do we actually deal with funds in state hands?" Merkel said. "This is a phenomenon which until now has not existed on such a scale." (Ken Stirling, 1/25/08)

Reuters update: "The big critical difference between a recession and slowdown is going to be the labor market. As long as labor markets remain in positive territory, the threat of recession may recede," said DailyFX.com's Schlossberg. "But if we see another weak nonfarm payrolls, all bets are off."

Edited January 26, 2008 by Wolf DeVoon

[Wolf DeVoon]

Why didn't I see this coming? Hat tip to LA Times real estate blog comments:

Stimulus plan may lead to higher mortgage rates

http://tinyurl.com/2jr98z

"Increasing the eligible loans to $729,750 from $417,000 would change the characteristics of mortgage-backed securities, leading traders to exact a premium for increased interest-rate risk...

"When you start throwing a lot of jumbos into a pool you spoil the fungibility of the collateral," said Linda Lowell, a mortgage market veteran and principal of Offstreet Research LLC.

Update from Business Week: "The real issue is that home prices are overvalued, and it gets uglier by the day. This might help on the margin, but it's not going to stop home prices from falling," says mortgage analyst Paul Miller of Friedman, Billings, Ramsey.

Edited January 26, 2008 by Wolf DeVoon

[Wolf DeVoon]

from a savvy trader:

"there is a pretty tight fit to the conspiracy theory that this massive market sell-off was orchestrated to take back the profits made by retail investors over the past year so the big boys can position themselves for the next leg of the global market rally"

It happened during the Great Depression, too. 1933 was the best time in history to buy stocks.

Edited January 28, 2008 by Wolf DeVoon

[Michael Stuart Kelly]

Wolf,

I have seen Donald Trump talk a few times recently. He says this is a great time to buy real estate if you know what you are doing.

Michael

[Kat]

Although I don't have a ton of money in the stock market, like many, I do have some in mutual funds and a 401(k) at work. It appears that a lot of what is happening now is based on projections and panic. Since I have a good twenty years or so before I retire, I'm not about to take my money out after this recent freefall. Sure, I have reallocated to better diversify more of my future 401(k) allocations to safer investments since I was heavily weighted towards growth and emerging market stocks. Since I believe the market will bounce back within a couple of years, and certainly before I retire, it makes no sense for me to pull out when the value is low. I'll just keep putting it in and buying while its cheap. What I have in the market is there for the long term. If it were short-term, I probably would not have so much in high risk investments anyway.

Back in 2002 after I had lost 50% in the market I got disgusted and took my money out of the market and bought my house. Thinking back, maybe that wasn't such great timing to withdraw when the market was so low. Like many at the time, I got a 5 year arm, but luckily I'm not in the subprime category and I refinanced just before real estate crashed and credit tightened up. It is probably a great time to buy property, but pulling money out of the market now to do it is probably not a hot idea. Do like Donald Trump and use other people's money if you can.

I think the best way to handle financial mayhem is to avoid acting out of panic and just to ride it out if you can. Things settle down eventually.

Kat

[Wolf DeVoon]

I liked Kat's post. Very sensible. However...

Jan. 25 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is proving powerless to prevent a deteriorating commercial real estate market. While the yield on 10-year Treasury notes fell 1.43 percentage points in the past three months to the lowest since 2003 following four interest rate cuts, the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 1.25 percentage points, according to David McLain, principal and chief investment officer of Palisades Financial LLC, a private equity firm in Fort Lee, New Jersey.

"The market is locked up right now because there's a huge overhang of leveraged assets of every type, development deals that won't meet projections made last year when things were rosy,'' said David Tobin, a principal at New York-based Mission Capital Advisors LLC, which was involved in $5 billion of asset sales last year. "It will end just like the residential housing market.'' Bernanke's easing hasn't stopped the $3.2 trillion commercial market from starting a slide that mirrors the housing decline, where prices have dropped for the first time since the Great Depression.

Jan. 28 (Bloomberg) -- Companies canceled or delayed at least 70 bond offerings following reported writedowns of at least $35 billion in the fourth quarter in the financial industry, according to data compiled by Bloomberg. The index measuring investor concern over U.S. defaults surged to its highest level ever last week, Frankfurt-based Deutsche Bank AG said. Short- term IOUs backed by home loans and credit card bills fell for 20 straight weeks, Federal Reserve data shows.

Factoid: Japan's asset bubble crash saw the Nikkei 225 Stock Average fall to 8,000 in March 2003 from a high of 39,000 in December 1989. The Japanese economy never recovered, despite their central bank dropping interest rates to zero. After a wave of bankruptcies, they're wrestling with rising food and energy prices. The coming world recession will hit Japanese exports. Think of it as an object lesson. Cheap money is economic poison. That's why the European Central Bank refuses to cut interest rates. That's why 'fiscal stimulus' and cheap money in the US is extremely dangerous.

Ooops, IMF flash: http://ftalphaville.ft.com/blog/2008/01/28...-fiscal-appeal/

Edited January 28, 2008 by Wolf DeVoon

[Wolf DeVoon]

NEW YORK (Reuters) - Home prices across big cities have now declined for 11 consecutive months and show little sign of bottoming, Robert Shiller, chief economist at MacroMarkets LLC, said in a statement. "We reached another grim milestone in the housing market in November," Shiller said.

NEW YORK (New York Times) - The F.B.I. said it was looking into possible accounting fraud, insider trading or other violations in connection with loans made to borrowers with weak, or subprime, credit. As part of its probe, the F.B.I. is cooperating with the Securities and Exchange Commission, which is conducting about three dozen civil investigations into how subprime loans were made and packaged, and how securities backed by them were valued. The New York attorney general, Andrew M. Cuomo, is investigating whether Wall Street banks withheld damaging information about the loans they were packaging.

NEW YORK (Reuters) - The credit crunch could see the commercial mortgage-backed securities market passing an ominous milestone -- the first month in its two-decade history without a single issue priced. Dealers sold a record $233.7 billion of U.S. CMBS in 2007. "All the dealers are trying to figure out what to do" to resume lending, Chris Lau said in a Monday trading commentary for RBS Greenwich Capital. Some may forgo issuance for the entire quarter.

Click here for charts on steepening commercial mortgage-backed lending spreads.

Jan. 30 (Bloomberg) -- Merrill Lynch & Co., the world's largest brokerage, will no longer underwrite collateralized debt obligations or other structured credit products. Merrill posted its largest-ever loss last year after writing down the value of its CDO holdings and other assets related to subprime mortgages. The New York- based bank was the biggest underwriter of CDOs from 2004 through 2006, and got stuck with some of the products as investor demand declined. The market for CDOs, which repackage assets into new securities with varying degrees of risk, has been frozen since last July when two Bear Stearns Cos. funds that invested in them collapsed.

LONDON (Reuters) - A housing market bubble of historic proportions is unwinding, raising the risk that the current period of poor economic growth in the United States could be measured in years not quarters. While the first problems emerged in subprime lending, it has become clear that housing is falling across geographies, price categories and borrower types. And with momentum now behind a fall, the implication is that the process will take a long time and destroy trillions of dollars of capital. "It is such a big crisis that it is of historic importance," Yale economist Robert Shiller said in an interview at the World Economic Forum in Davos last week. "It may represent a major turning point and we will see years of falling home prices and associated economic weakness."

House prices could fall by as much or more than they did in the 1930s, when an extended fall took them down by 25 percent in nominal terms.

http://www.reuters.com/article/reutersEdge...843721120080130

Edited January 30, 2008 by Wolf DeVoon

[Wolf DeVoon]

"It is an inconvenience, not a catastrophe.''

Andrew Liveris, chairman and chief executive officer of Dow Chemical

Jan. 30 (Bloomberg) -- Standard & Poor's said it cut or may reduce ratings on $534 billion of subprime-mortgage securities and collateralized debt obligations in response to rising home-loan defaults. The downgrades may extend bank losses to more than $265 billion and have a "ripple impact'' on the broader financial markets. The securities represent $270.1 billion, or 47 percent, of subprime mortgage bonds rated between January 2006 and June 2007. The New York-based ratings company also said it may cut 572 CDOs valued at $263.9 billion. The reductions may increase losses at European, Asian and U.S. regional banks, credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

Foreclosures Soaring:

http://seekingalpha.com/article/62338-hous...reclosures-soar

Feb. 1 (Bloomberg) -- William McCarthy, a mortgage broker in Parker, Colorado, said he has been against federal intervention his entire life. Now 62 and facing eviction Feb. 11 after his lender foreclosed on his $199,200 mortgage, he said the government has to take action. "This has reached the point of being catastrophic,'' said McCarthy, who declared bankruptcy in July when his business failed after 18 years. "I had a client who called me sobbing because his wife committed suicide rather than face eviction. Something's got to be done to help people.''

Edited February 1, 2008 by Wolf DeVoon

[Wolf DeVoon]

Financial humor:

Jan. 31 (Bloomberg) -- U.S. stocks rose, sparing the Standard & Poor's 500 Index from its worst January ever, after the nation's largest bond insurer said it expects to keep its AAA credit rating. Stocks rebounded from losses after MBIA Inc. Chief Executive Officer Gary Dunton's comments sparked a rally in bank shares.

[Wolf DeVoon]

Quote of the century:

"America's economy is faltering because of an exhaustion of free-market capitalism"

Bill Gross, founder and chief investment officer of PIMCO, the world's largest bond mutual fund

(Washington Post, January 31, 2008, Page A21)