Tuesday, November 4, 2008
Tuesday, October 28, 2008
The Recession Inside the Crisis
As discussed prior, the recession coupling this crisis was the real short term threat to equities. Credit is one thing, but earnings (current and projected) move markets. As we predicted, the market slumped in reaction to earnings.
To brighten your mood, Roubini is now sounding more gloomy. First, he predicts stag-deflation, then yesterday, he does this interview.
My outlook remains wait for earnings projections to come back to reality (they're still too high) and get ready to buy equity between Q1-Q3 2009.
To brighten your mood, Roubini is now sounding more gloomy. First, he predicts stag-deflation, then yesterday, he does this interview.
My outlook remains wait for earnings projections to come back to reality (they're still too high) and get ready to buy equity between Q1-Q3 2009.
Sunday, October 19, 2008
WEEKEND ROUNDUP:
$700 Million in 2008 bonuses for bailed-out banks? I find this hard to believe, but here it is. I hope we don't end up back at the guillotine.
Roubini takes his first steps away from the ledge here. But, he calls for 1) monetary easing 2) large fiscal stimulus, and 3) mortgage relief. Notably, the fiscal stimulus is obvious. Getting cash into spender's hands is obvious, as is middle class tax relief. Structural stimulus in jobs and infrastructure is likely after the election.
Besides soup, other recession-proof products.
Fair value stocks or 50% more to go? Analysis here.
FedRes Beige Book says economy sucks but they don't apologize for doing it.
How big is this recession? Good analysis, goodies and charts here.
Roubini takes his first steps away from the ledge here. But, he calls for 1) monetary easing 2) large fiscal stimulus, and 3) mortgage relief. Notably, the fiscal stimulus is obvious. Getting cash into spender's hands is obvious, as is middle class tax relief. Structural stimulus in jobs and infrastructure is likely after the election.
Besides soup, other recession-proof products.
Fair value stocks or 50% more to go? Analysis here.
FedRes Beige Book says economy sucks but they don't apologize for doing it.
How big is this recession? Good analysis, goodies and charts here.
Friday, October 17, 2008
Banks: Hoarding Government Money
The remedy of cash injections isn't motivating banks to loan to consumers or other banks, as advertised. The treasury is not pushing banks to write down. Banks will hoard the money and plug their own holes. TED spread remains high.
Nouriel Roubini on Charlie Rose last night.
Nouriel Roubini on Charlie Rose last night.
Thursday, October 16, 2008
Tale of Two Problems....
While the news mainly follows the credit/banking crisis, the other news, serious problems in the actual economy. Industrial output is down 2.8%, largest decline since '74. Chart above shows retail sales slump. This will lead to calls for economic stimulus outside of the bank credit stimulus. Yet, this issue remains essentially unaddressed. That coming fight will be structural stimulus v. checks. Pehaps we'll get some bridges and infrastructure this time, instead of Sony getting the money for their government check-for- plasma TV program.
Compounding the problem, S&P may downgrade 280 billion in alt-a mortgages.
Tuesday, October 14, 2008
Paulson v. Buffet
How is it that Warren Buffet can cut a better deal with the best run bank in the country than the Treasury can cut with the worst?
Answer: Regulatory Capture.
Answer: Regulatory Capture.
Nouriel Roubini: Precise predictor
Nourial called this crisis, exactly, years ago. He was shunned. Now, he's the most in demand economist in the US. He's on Bloomberg video here. His opening line is right out of Silence of the Lambs. He's part Turkish-American, part Hannibal Lector, NYU.
He is asserting thus:
The $250 billion bank recapitalization is only the beginning. The government will soon have to re-up (because it hasn't dealt with the huge writedown problem), and it will eventually have to take a much more active role in bank management. Otherwise, we'll just have a plague of zombie banks, like Japan.
House prices will fall 40%, worse than the Great Depression. (Sounds horrifying, but we're more than halfway there).
Worst recession in 40 years, now projected to last 18-24 months.
Stock market rally will sputter
Economy is "really tanking"
Total bank losses from crap debt will be "closer to $3 trillion" (up from previous estimate of $1-$2 trillion). This compares to about $650 billion of writeoffs so far.
Source.
He is asserting thus:
The $250 billion bank recapitalization is only the beginning. The government will soon have to re-up (because it hasn't dealt with the huge writedown problem), and it will eventually have to take a much more active role in bank management. Otherwise, we'll just have a plague of zombie banks, like Japan.
House prices will fall 40%, worse than the Great Depression. (Sounds horrifying, but we're more than halfway there).
Worst recession in 40 years, now projected to last 18-24 months.
Stock market rally will sputter
Economy is "really tanking"
Total bank losses from crap debt will be "closer to $3 trillion" (up from previous estimate of $1-$2 trillion). This compares to about $650 billion of writeoffs so far.
Source.
Tuesday: 250 Billion Directly to Banks..
Weeks later, Treasury finally cuts a deal with the US banking lobby, the banks are forced to accept some capital instead of just buying their bad assets. However, it appears the US, unlike Europe, cut a better deal for the banks, making taxpayers less-than actual equity shareholders. See here.
Monday, October 13, 2008
RECORD DAY, GOOD NEWS ON CDS, MARKET DIRECTION...
Sucker's rally or a real bottom? See both arguments here. Julian Robertson loads up on select stocks. The DTCC reports good news on the Lehman CDS, suggesting the numbers are far lower than projected, at 6 billion, not the 400 billion numbers reported. Not sure what to make of this disparity of reporting yet, but will keep at eye on DTCC reports and the pay date of Oct 21.
Daily analysis: There are two broad overhang fears. 1) total banking/financial collapse 2) deep recession. The first fear was addressed by the G-7, we will not let banks fail, the market is reacting. Addressing this may shallow the recession but not stop it. The second question must still be addressed in the weeks ahead. What damage has already been done and what damage will be done to earnings, what drives markets in the mid-term.
Daily analysis: There are two broad overhang fears. 1) total banking/financial collapse 2) deep recession. The first fear was addressed by the G-7, we will not let banks fail, the market is reacting. Addressing this may shallow the recession but not stop it. The second question must still be addressed in the weeks ahead. What damage has already been done and what damage will be done to earnings, what drives markets in the mid-term.
Unlimited US Dollars....
The market is responding well to England's plan and Paulson's partial capitulation to bank equity plan. But, don't get too comfortable with Paulson, he is still resistant.
The headline of the day, however, is this plan. Unlimited dollar funds continue in the shadow bailout. Functionally, this is unlimited and unsecured loan by the US FedRes to other central banks. Per my earlier prediction, the world's central banks will be the world's only de facto lenders by this time next month, making it the biggest centralization of central bank power in history.
Part of the reason for this need in Europe is that's their banks short term debt is equal to 100% of their GDP, unlike 15% in the USA. See data here. England's leadership role on this package may be borne of out sheer desperation and necessity.
The headline of the day, however, is this plan. Unlimited dollar funds continue in the shadow bailout. Functionally, this is unlimited and unsecured loan by the US FedRes to other central banks. Per my earlier prediction, the world's central banks will be the world's only de facto lenders by this time next month, making it the biggest centralization of central bank power in history.
Part of the reason for this need in Europe is that's their banks short term debt is equal to 100% of their GDP, unlike 15% in the USA. See data here. England's leadership role on this package may be borne of out sheer desperation and necessity.
Saturday, October 11, 2008
When to buy, when to buy.....
Are we at a bottom? Historical medians and averages would suggest not quite. The bubble was that big. Fortunately, we're approaching median prices in relation to PE. The next question is Earnings for the next 2 quarters. Therefore, median prices should not be a standard, but rather the poing when you begin to ask the follow-up question: Projected earnings.
US Banking Lobby Threatening the US Economy
The hidden story in all this mess is: The US banking lobby and Secretary Paulson are putting our economy at risk amidst complete disagreement by nearly all global players and a strong preponderance of economists, they still persist with self-motivated plans to benefit banks first, economy and taxpayers, second and third. The story is only beginning to crack through network media, but the real story dominates academic and business media. Even European banks and governments have fully recognised that cash-for-equity is the only proper course.
The bank lobby and Paulson have cost us weeks of critical time and confidence. Productive corporations should be at war with the banks and Paulson, watching their stock prices plummet while Paulson dithers and holds out on behalf of the bank lobby. Two days ago, he finally publicly accepted re-capitalizing banks, but without discussing how much of the 700B he would use for one and the other. Days continue to pass without the market having the details. Productive, non-financial corporations and the American people can squarely put the blame for the cause of this crisis and the greed in the middle of the crisis on the American banking lobby and Paulson. The fact that the banking lobby and Paulson have not yet fully capitulated to the super-majority (backed by the science and data of prior crisis') on October 11 shows just how entrenched and shameless these interests have become.
It's starting to crack through here, here .
But, Paulson and the bank lobby will not give up on the free lunch of taxpayers buying toxic assets without equity in banks. The US government remains the final holdout for this position and Paulson will not relent no matter how much confidence we are losing around the world.
The bank lobby and Paulson's position is a clear and present danger to this country. You will not find one recognized economist who agrees with their position. Yet, amazingly, these economists are not invited on the major networks to lobby for the correct plan. Bush, Paulson and the bank lobby still manage to dominate network news and America's perceptions of this crisis. That could be the most significant problem of the past two weeks.
The bank lobby and Paulson have cost us weeks of critical time and confidence. Productive corporations should be at war with the banks and Paulson, watching their stock prices plummet while Paulson dithers and holds out on behalf of the bank lobby. Two days ago, he finally publicly accepted re-capitalizing banks, but without discussing how much of the 700B he would use for one and the other. Days continue to pass without the market having the details. Productive, non-financial corporations and the American people can squarely put the blame for the cause of this crisis and the greed in the middle of the crisis on the American banking lobby and Paulson. The fact that the banking lobby and Paulson have not yet fully capitulated to the super-majority (backed by the science and data of prior crisis') on October 11 shows just how entrenched and shameless these interests have become.
It's starting to crack through here, here .
But, Paulson and the bank lobby will not give up on the free lunch of taxpayers buying toxic assets without equity in banks. The US government remains the final holdout for this position and Paulson will not relent no matter how much confidence we are losing around the world.
The bank lobby and Paulson's position is a clear and present danger to this country. You will not find one recognized economist who agrees with their position. Yet, amazingly, these economists are not invited on the major networks to lobby for the correct plan. Bush, Paulson and the bank lobby still manage to dominate network news and America's perceptions of this crisis. That could be the most significant problem of the past two weeks.
The Depression of 1870
This crisis is more like the Panic and Depression of 1870 than 1929. The question that will soon be posed politically is: Will we come out of this, with policies that further underscore income inequality and asset value, like the gilded age that followed 1870 or a more equitable, balanced and productive recovery like the 1940's. This question can only be addressed by the next president and Congress and their mutual willingness to take on the Federal Reserve and global central banking, which are both gaining more power by the day though their own policies created both the 1929 crash (monetary policy restriction) and the 2008 crash (monetary policy expansion and failure to regulate excess).
See here and here for historic analogy to 1870.
See here and here for historic analogy to 1870.
SATURDAY MORNING II
Monoline municipal bond insurers deserve separate attention. Big news is slipping through the cracks during this crisis. This article examines a lawsuit filed by San Francisco against top 5 muni bond insurers for scheme fraud. They claim of scam goes like this:
The insurers were in trouble with their other investments. They went to credit rating agencies and ccolluded to lower the credit ratings of cities like San Fran. When the ratings dropped from AAA to AA or A, the city would have to buy insurance to get the rating back up. A shakedown without a fundamental cause other than the insurers need for new premiums because of their deteriorating balance sheet, says San Francisco. See here.
THE DEVIL IN THE DETAILS: Amazingly, federal law shields the rating agencies from suit, according to the article, therefore, only the bond insurers could be sued. But, more suits are being filed anyway and the first amendment opinion theory will be tested . See here.
In separate but related news, the bond insurers are suing the mortgage companies claiming securitization fraud. See here.
The insurers were in trouble with their other investments. They went to credit rating agencies and ccolluded to lower the credit ratings of cities like San Fran. When the ratings dropped from AAA to AA or A, the city would have to buy insurance to get the rating back up. A shakedown without a fundamental cause other than the insurers need for new premiums because of their deteriorating balance sheet, says San Francisco. See here.
THE DEVIL IN THE DETAILS: Amazingly, federal law shields the rating agencies from suit, according to the article, therefore, only the bond insurers could be sued. But, more suits are being filed anyway and the first amendment opinion theory will be tested . See here.
In separate but related news, the bond insurers are suing the mortgage companies claiming securitization fraud. See here.
SATURDAY MORNING ROUNDUP...
You won't believe this.
...If the dollar and Treasuries get in trouble, it will because we ignored this.
...If you still don't understand CDO's, watch this video.
...Here's an entertaining Austrian economic blog.
Municipal bonds: We have an muni bond insurance problem. Will TARP cover Ambac and MBIA? See here.
Anotonmy of the Collaspe: The Economist chimes in with their causation.
...If the dollar and Treasuries get in trouble, it will because we ignored this.
...If you still don't understand CDO's, watch this video.
...Here's an entertaining Austrian economic blog.
Municipal bonds: We have an muni bond insurance problem. Will TARP cover Ambac and MBIA? See here.
Anotonmy of the Collaspe: The Economist chimes in with their causation.
Friday, October 10, 2008
MASS MARGIN CALLS EXPECTED MONDAY...
An interesting detail, the major investment banks (left standing) like JP Morgan have "arbitraily" increased margin requirements on prime brokerage accounts. Therefore, hedge funds have had to sell their only remaining liquid asset, stocks.
"These calls were not issued because of market losses, but more because the banks arbitrarily decided that they wanted their customers to use less leverage. Margin rates as low as 15% for broker dealers were raised to 35%; hedge funds who had been used to operating on high leverage were told that they had to bring accounts up to a much larger percentage of equity." See here.
It's interesting that JP Morgan and investment banks raised the margin requirments at this time. Perhaps the Fed could have worked out a deal to cover this risk spread, this limiting this rapid move to exit by all hedge funds at once?
"That is what really set this market over the edge -- as the first notice of these calls were issued on October 2nd and 3rd. There was something of a grace period to meet the calls, but funds realized they weren't going to be able to meet them other than by selling stock. There are rumors that the most massive of the calls are due Monday (October 13th). If so, this market could continue to decline through then." See above link.
"These calls were not issued because of market losses, but more because the banks arbitrarily decided that they wanted their customers to use less leverage. Margin rates as low as 15% for broker dealers were raised to 35%; hedge funds who had been used to operating on high leverage were told that they had to bring accounts up to a much larger percentage of equity." See here.
It's interesting that JP Morgan and investment banks raised the margin requirments at this time. Perhaps the Fed could have worked out a deal to cover this risk spread, this limiting this rapid move to exit by all hedge funds at once?
"That is what really set this market over the edge -- as the first notice of these calls were issued on October 2nd and 3rd. There was something of a grace period to meet the calls, but funds realized they weren't going to be able to meet them other than by selling stock. There are rumors that the most massive of the calls are due Monday (October 13th). If so, this market could continue to decline through then." See above link.
LEHMAN SWAPS SETTLE ON PRICE: PAY DAY OCT 21
No, it's not over today. While today set the price, the actual settlement of accounts (payouts) doesn't occur until October 21st, a fact previously unreported. See here. This is bad news because it will hang over the market. So, if you were a CDS protection provider, you learned today what you will have to pay in two weeks. Therefore, many will have to liquidate positions in the market if they haven't already. Expect some insolvencies and litigation.
The Price:
Protectors (insurance providers) will have to pay 91 cents on the dollar of default. This is steeper than expected which proves the underlying business was worse than expected. The estimates on totals are at $270 billion, which is lower than earlier estimates, but it is still unclear if this number is real because this market is not regulated. See here and here.
Finding out who the losers are is still a mystery, thanks to Greenspan and other deregulators.
The Price:
Protectors (insurance providers) will have to pay 91 cents on the dollar of default. This is steeper than expected which proves the underlying business was worse than expected. The estimates on totals are at $270 billion, which is lower than earlier estimates, but it is still unclear if this number is real because this market is not regulated. See here and here.
Finding out who the losers are is still a mystery, thanks to Greenspan and other deregulators.
Paul Volcker: The Last Great FedRes Chairman
Volcker publishes some confidence today here.
Greenspan took all of Volcker's good (and hard) work and abused it. Volcker had tough decisions to make and Greenspan inherited the largess. But, before Volcker left, Greenspan led a movement which even resulted in overruling Chairman Volcker while he was still chairman. This goes all the way back to 1987 when the banking class of America was trying to gut Glass-Stegal regulations. Greenspan led the way on behalf of the banks.
" In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking."
In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a proponent of banking deregulation -- becomes chairman of the Federal Reserve Board. Greenspan wasn't just a man, he was representing a powerful banking movement which beat back Volcker and grabbed the tiller since 1987. Today's crisis is a DIRECT result of the activities of Greenspan representing the interest of investment bank's executives by not regulating them, whatsoever.
One the best histories of this period is recounted here.
Greenspan took all of Volcker's good (and hard) work and abused it. Volcker had tough decisions to make and Greenspan inherited the largess. But, before Volcker left, Greenspan led a movement which even resulted in overruling Chairman Volcker while he was still chairman. This goes all the way back to 1987 when the banking class of America was trying to gut Glass-Stegal regulations. Greenspan led the way on behalf of the banks.
" In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking."
In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a proponent of banking deregulation -- becomes chairman of the Federal Reserve Board. Greenspan wasn't just a man, he was representing a powerful banking movement which beat back Volcker and grabbed the tiller since 1987. Today's crisis is a DIRECT result of the activities of Greenspan representing the interest of investment bank's executives by not regulating them, whatsoever.
One the best histories of this period is recounted here.
Thursday, October 9, 2008
LEHMAN'S CDS: FRIDAY IS D-DAY:
As reported earlier, today is the Lehman credit default swap settlement. It's going to be big. In fact, I think this was the biggest reason for the market's collapse today. This was published by Morningstar yesterday.
It's interesting the the Treasury bailed Bear Sterns bondholders but not the bigger Lehman Bros. Bear's bailout undoubtedly incentivized CDS protectors into the Lehman market. If Bear's bondholders were bailed, certainly Lehman's would be. No. The Treasury's position (change of) is curious. Perhaps they'd now prefer to flush the market players to the surface and use TARP or other FedRes emergency measures for selected counter parties. It certainly puts the Treasury in a very powerful position. Who will get protection and not? This, unfortunately, incentivizes political corruption as Milton Friedman might suggest. Today's settlement is likely to create many insolvencies, hence the domino effect of the swap market and the reason they are the WMD of finance.
Details: 9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published. (Reporting by Karen Brettell; Editing by Chizu Nomiyama)
It's interesting the the Treasury bailed Bear Sterns bondholders but not the bigger Lehman Bros. Bear's bailout undoubtedly incentivized CDS protectors into the Lehman market. If Bear's bondholders were bailed, certainly Lehman's would be. No. The Treasury's position (change of) is curious. Perhaps they'd now prefer to flush the market players to the surface and use TARP or other FedRes emergency measures for selected counter parties. It certainly puts the Treasury in a very powerful position. Who will get protection and not? This, unfortunately, incentivizes political corruption as Milton Friedman might suggest. Today's settlement is likely to create many insolvencies, hence the domino effect of the swap market and the reason they are the WMD of finance.
Details: 9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.
10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.
12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest
2 p.m. The final price of the auction will be published. (Reporting by Karen Brettell; Editing by Chizu Nomiyama)
Weeks from Collapse?
Good thing there's a World Bank/IMF meeting this weekend in DC because the Economist has joined with Roubini, warning of total collapse, not just a recession. GM is down 31%. People and the market are not just preparring for recession, but for a possible economic heart attack.
Suspending mark-to-market has created even more distrust between banks as the TED spread goes higher. When no one trusts anyone with their money, not even bank-to-bank, businesses can't get any credit and the market freezes. How Goldman could suggest market lows while liquidity remains unaddressed is bizarre. If the Fed and central banks showing proof they can solve liquidity issues first is a prerequisite to ANY positive market move. Which, in my opinion means, by this time next month, the central banks of the world will be the primary lender (or insurer to the lenders) of virtually all short term credit. The superstructure of banking will be totally centralized regarding liquidity, risk and control. This will be an historic first.
We already lost a few weeks of time because the bank lobby was pushing back against the US government re-capitalizing the banks for equity while all economists screamed it was the only remedy. The good news today, Paulson finally agreed to modify/read TARP terms as cash-for-equity. This delay is the fault of Paulson and the Bank Lobby. No other country in this crisis delayed by avoiding this truth while trying to unload toxic assets on taxpayers for nothing. The banks wanted a free lunch and their greed cost us at least two weeks, which is a load of time at this point. You can't trust the king-banker to regulate or deal with banks. The new president must replace Paulson immediately.
Suspending mark-to-market has created even more distrust between banks as the TED spread goes higher. When no one trusts anyone with their money, not even bank-to-bank, businesses can't get any credit and the market freezes. How Goldman could suggest market lows while liquidity remains unaddressed is bizarre. If the Fed and central banks showing proof they can solve liquidity issues first is a prerequisite to ANY positive market move. Which, in my opinion means, by this time next month, the central banks of the world will be the primary lender (or insurer to the lenders) of virtually all short term credit. The superstructure of banking will be totally centralized regarding liquidity, risk and control. This will be an historic first.
We already lost a few weeks of time because the bank lobby was pushing back against the US government re-capitalizing the banks for equity while all economists screamed it was the only remedy. The good news today, Paulson finally agreed to modify/read TARP terms as cash-for-equity. This delay is the fault of Paulson and the Bank Lobby. No other country in this crisis delayed by avoiding this truth while trying to unload toxic assets on taxpayers for nothing. The banks wanted a free lunch and their greed cost us at least two weeks, which is a load of time at this point. You can't trust the king-banker to regulate or deal with banks. The new president must replace Paulson immediately.
The Russia House
Russia has money to loan? So say the Russians. When everyone else turned down Iceland's loan ask, Russia was there. Paulson told Fuld he wanted to request G8 banking mandates. Is Russia a neccessary player to global reform and recovery seems to be a pressing question. If Russia's leverage increases, the U.S. will encounter foreign policy limitations, especially regarding Iran.
Federal Court Dismissing Foreclosure Trick?
Derivatives and loan origination issues are creating interesting legal opportunities for foreclosure defendants in federal court. In these cases, the court dismissed foreclosures because the plaintiff was not the holder/owner of the mortgage. In these cases, the originators didn't bring the lawsuit, but the derivative owner or assignee. They were dismissed and the courts jumped through some legal holes in the derivitive ownership nuances. These decisions stand for the principle that the assingee must have been properly assigned the mortgage and paid actual present or past consideration (sticky point), verified by affidavit. These forclosing parties could not meet this burden. Was your mortgage assigned and wrapped into the derivative system? You may have an argument to buy some time. Read the court orders here and here.
Federal bankruptcy judge uses same rationale here.
Federal bankruptcy judge uses same rationale here.
7% From the Bottom?
Goldman, the equity seller, says bottom. Some disagree , not only are we not at an historic P/E average but momentum will push below the averages (which creates averages). Why catch a falling knife or will government intervention in equity hold the averages this time around? Roubini is predicting another 20% by 2009. Not buying until the first default swaps get settled and at least 2009Q1 defaults are known.
Greenspan: Time to Assess Blame
It's Greenspans fault and he's on the defense in the FT. Even the NYTimes is taking on the sacred cow.
Greenspan's basic argument relies on the art of distraction. He will tell you that he can prove his monetary policy did not cause the crisis while completely ignoring or lying about the regulatory failure and total banking capture of the Fed. Greenspan's apologia pro vita sua in the FT is alarming. He led the retrograde move on Wall Street away from exchange traded instruments to OTC. He called these OTC instruments "innovation" and told Congress not to regulate. This took the US trading markets back to pre-1929 regulation and increased system wide risk.
Thus, Greenspan only wants to discuss monetary policy models, he engages in the fallacy of distraction from the real failure.
If commercial banks and ERISA funds were required to invest in SEC regulated exchange traded instruments, for example, this crisis might have been avoided.
Greenspan's basic argument relies on the art of distraction. He will tell you that he can prove his monetary policy did not cause the crisis while completely ignoring or lying about the regulatory failure and total banking capture of the Fed. Greenspan's apologia pro vita sua in the FT is alarming. He led the retrograde move on Wall Street away from exchange traded instruments to OTC. He called these OTC instruments "innovation" and told Congress not to regulate. This took the US trading markets back to pre-1929 regulation and increased system wide risk.
Thus, Greenspan only wants to discuss monetary policy models, he engages in the fallacy of distraction from the real failure.
If commercial banks and ERISA funds were required to invest in SEC regulated exchange traded instruments, for example, this crisis might have been avoided.
International Trade Crashing?
The Freight Index (above) shows the price shippers charge to move trade at sea. Int'l trade has ground to a halt as the prices have dropped 76% since May, the biggest decline in history. This is a leading indicator of economic problems, perhaps both demand side and supply side, a direct result of the global credit crunch.
Wednesday, October 8, 2008
Must Read Doom Scenario...
Infamous economist and NYU professor Roubini lays it out this morning, with emphasis on commercial paper backstop and default swap warnings....
Federal Reserve Balance Sheet:
Alas....someone's talking about the Fed's balance sheet and the ususual shadow bailout. The author, James Hamiliton is an economist, professor and visiting scholar to the Federal Reserve.
John McCain: The Sudden Socialist
In an act of political pandering without modern precedent, an act of triangulation that would make Bill Clinton blush, an act that can only be described as jumping the shark.....John McCain has pledged the biggest socialistic government consumer program in this political cycle, a plus $300 billion bailout of homeowners, a re-set of interest rates and relief from principal lost. Besides the fact that the program itself doesn't add up (WSJ puts it at over $700 billion), there is real import in this move. Ignore the talking heads on cable TV, THIS is the leading story out of this debate. This story legs and will now drive and dominate the campaign for the next three weeks. This is all McCain/Palin will be talking about tomorrow. The nightly news will lead with this story. It's that big. McCain is literally gambling, going against all ideological principle, and against the Republican base. He is using populism (or socialism) as a gimmick. It would be funny if it were not serious, but he is a serious Republican candidate for president and, as such, he makes and moves markets.
Therefore, this rates as relevant to an economic blog because McCain has moved the market in socialism or large government programs. This will create a debate in which the Republican candidate will force the Democrat, incredibly, to respond "more liberally", depending on the reaction to this desperate change of course.
Either way, this is now the "it" issue of the presidential campaign. Real conservatives will be roiling in agony, not knowing what to do or say. In fact, some may stay home to avoid conversation about this issue. Real conservative think tanks and base supporters will either 1) run for the hills 2) call McCain out or 3) lie and hope McCain's lying. We will be able to separate the real conservatives from those that just want Obama to lose. It's a real test and once again, McCain "the Maverick" is testing his own people. The question that will be whispered among conservatives: Is McCain a maverick or a man without any principle, a man who will do or say anything to win a competition?
I can't wait to hear the answers.
Therefore, this rates as relevant to an economic blog because McCain has moved the market in socialism or large government programs. This will create a debate in which the Republican candidate will force the Democrat, incredibly, to respond "more liberally", depending on the reaction to this desperate change of course.
Either way, this is now the "it" issue of the presidential campaign. Real conservatives will be roiling in agony, not knowing what to do or say. In fact, some may stay home to avoid conversation about this issue. Real conservative think tanks and base supporters will either 1) run for the hills 2) call McCain out or 3) lie and hope McCain's lying. We will be able to separate the real conservatives from those that just want Obama to lose. It's a real test and once again, McCain "the Maverick" is testing his own people. The question that will be whispered among conservatives: Is McCain a maverick or a man without any principle, a man who will do or say anything to win a competition?
I can't wait to hear the answers.
Tuesday, October 7, 2008
Tuesday News Roundup...
ETF's now have 35% of the equity market.
Emerging markets (chart) are getting crushed which is why the US may actually hold up, comparitively.
The FED continues it's at least 1 trillion shadow bailout, now of commercial paper to save companies like GE. Roubini agrees.
JP Morgan is accused of putting the hit on Lehman. Add Bear to that and a few billion in default swap bets and you have your book, fiction or non-fiction?
Did Dick Fuld get punched in the face?
Daily Irony: The fed funds rate is one hundred basis points HIGHER than it was in May 2004, if you can believe that.
Monday, October 6, 2008
Short ETF's: Money on the Downside
Can you make money shorting the market without shorting specific stocks and exposing yourself to individualized risk? Yes. It's still dangerous and requires quick timing for a few reasons: inherent bias that markets usually go up, recent political intervention in markets, and risks within the ETF product itself. But, if you're convinced the market will go down during a specific time period, you can participate in that market.
Here are some basic resources regarding Short ETF's.
List of Short ETFs.
Yes, there is some counter party risks in ETF's. Pick the right ones.
Double short pro-shares here.
ETF Index.
Inverse funds here and here.
Here are some basic resources regarding Short ETF's.
List of Short ETFs.
Yes, there is some counter party risks in ETF's. Pick the right ones.
Double short pro-shares here.
ETF Index.
Inverse funds here and here.
CDS: October 10th, First Ticking Time Bomb....
Credit Default Swaps are the very dangerous side-bets (unregulated insurance) that Buffett called the "WMD's" of finance. The value of this market is estimated to be $65 Trillion, up from a few hundred billion 8 years ago, a dangerous number. The total credit market debt is less, 51 trillion. See here. Those who sold the derivatives (like sub-prime) would often offer their own "insurance policy" if the buyer feared a default.
Buyer: "I'd buy your derivative if I could protect myself if it defaults."
AIG: "Lucky you, we also insure you from default on our own derivative product with another product, called a swap."
That was only the origin of the swap. Then, third parties could come in and place their bets on whether any company would or would not default. Can you imagine how many people might have bet that a 100 year old company like Lehman would never default? Well, they defaulted and someone has to settle all these contracts on October 10th.
Because the swap was cleverly conceived not to be "insurance", AIG and the sellers didn't need to keep cash reserves to back this new insurance product. Therefore, now there is a $65 trillion unregulated market betting on defaults without cash reserves. The more companies that default, the more the system will be tested. A few serious defaults, especially accelerated defaults, could wipe out the participants in this market causing aggravated losses to both the sellers (investment banks, insurance) and the buyers, pension funds, etc... See here.
OCTOBER 10, 2008 could be the start of the hard testing, triggering third party defaults on these bets. See here. This could mark the start of the swap crash. If you add 30-to-1 leverage and a CDS market, arguably, these bankers could have been betting 1, 2, or 10x's each dollar on swaps. The market at 65 trillion suggests exactly that.
Buyer: "I'd buy your derivative if I could protect myself if it defaults."
AIG: "Lucky you, we also insure you from default on our own derivative product with another product, called a swap."
That was only the origin of the swap. Then, third parties could come in and place their bets on whether any company would or would not default. Can you imagine how many people might have bet that a 100 year old company like Lehman would never default? Well, they defaulted and someone has to settle all these contracts on October 10th.
Because the swap was cleverly conceived not to be "insurance", AIG and the sellers didn't need to keep cash reserves to back this new insurance product. Therefore, now there is a $65 trillion unregulated market betting on defaults without cash reserves. The more companies that default, the more the system will be tested. A few serious defaults, especially accelerated defaults, could wipe out the participants in this market causing aggravated losses to both the sellers (investment banks, insurance) and the buyers, pension funds, etc... See here.
OCTOBER 10, 2008 could be the start of the hard testing, triggering third party defaults on these bets. See here. This could mark the start of the swap crash. If you add 30-to-1 leverage and a CDS market, arguably, these bankers could have been betting 1, 2, or 10x's each dollar on swaps. The market at 65 trillion suggests exactly that.
Saturday, October 4, 2008
Nouriel Roubini: He was Right
The US government should hire Nouriel on a permanent retainer... I get him cheaply here.
"NYT: On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer."
"NYU professor Nouriel Roubini, PIMCO bond guru Bill Gross, and Invesco strategist Diane Garnick all think that banks will have to write off $1 trillion of losses before the credit crash is through (and Diane and Nouriel think this is a floor)."
"NYT: On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer."
"NYU professor Nouriel Roubini, PIMCO bond guru Bill Gross, and Invesco strategist Diane Garnick all think that banks will have to write off $1 trillion of losses before the credit crash is through (and Diane and Nouriel think this is a floor)."
MARKET TIMING: FINDING THE BOTTOM
What happened to the US market after the last RTC bailout? Here's your answer .
David Rosenberg's view.
David Rosenberg's view.
GE stock: A Big Hedge Fund, Including 8-K warning
Did you notice that Buffett got better terms with GE than he did with Goldman? That raised some eyebrows...the great industrial company getting sharked more than the shark, Goldman during a banking crisis. Well, GE's revenues are over 40% from their hedge fund, GE Financial Services. They have promised their shareholders to reduce it to 40% soon. My opinion, GE is hiding serious losses.
Remember, Buffett has not invested in equity yet, not Goldman or GE. He's betting on the debt side (and the bailout). He has also been acquired "on the team" to sell said bailout. My opinion is certain people are also buying Buffett's reputation which is officially an American commodity.
Notwithstanding, GE released an 8-K with an unusually timed warning.
But, it's not gravy on the debt side either. Bill Gross of PIMCO would not touch 25% yield Morgan Stanley even after Japan's re-cap. More on Bill Gross and PIMCO.
Remember, Buffett has not invested in equity yet, not Goldman or GE. He's betting on the debt side (and the bailout). He has also been acquired "on the team" to sell said bailout. My opinion is certain people are also buying Buffett's reputation which is officially an American commodity.
Notwithstanding, GE released an 8-K with an unusually timed warning.
But, it's not gravy on the debt side either. Bill Gross of PIMCO would not touch 25% yield Morgan Stanley even after Japan's re-cap. More on Bill Gross and PIMCO.
History Of Bailouts
Here's one great history of all bailouts, big industrial nation bailouts, some work and some not. Oddly, our bailout doesn't seem to fit the mold of the successful kind.
Advice from Japan....
Kenichi Ohmae has an article here in the FT about Japan's experience under similar circumstances. He says THREE phases: 1) liquidity crisis 2) sorting the banks 3) massive operating company failure. Reading this makes me believe again Paulson is viewing this 800B as the first round to buy the crap off the Reserve's balance sheet from the term loans (the foot in the door), the next round being cash-for-equity after the gov assesses what the banks are hiding.
More Pain and Defaults to Come....
Two reports here: 1) "option ARMS" 2) Alt-A.
1) Option arms are predicted to be another ticking time bomb which may be the reason so many normally conservative folks are calling for total socialism in the form of universal mortgage re-sets. Read about the bomb here.
2) S&P shows that Alt-A (above sub-prime) delinquencies are also going up, here. This causes serious concern, if the housing market continues to fall (it will) it will incentivize people to walk away from even alt-A and other loans putting more asset into default and on the market where the only buyer appears to be the government.
That's why even conservatives and the WSJ are allowing use of their pages to promote an old liberal idea: The Feds re-setting EVERY AMERICAN'S mortgage to 5.25% for 30 year fixed. Read here. That article going from the Nation to the Wall Street Journal in a few months is a paradigm shift which bends the mind. Now that socialism has been kicked off by the American conservative party, will any politician be able to say 'No' to any populist proposal such as this?
1) Option arms are predicted to be another ticking time bomb which may be the reason so many normally conservative folks are calling for total socialism in the form of universal mortgage re-sets. Read about the bomb here.
2) S&P shows that Alt-A (above sub-prime) delinquencies are also going up, here. This causes serious concern, if the housing market continues to fall (it will) it will incentivize people to walk away from even alt-A and other loans putting more asset into default and on the market where the only buyer appears to be the government.
That's why even conservatives and the WSJ are allowing use of their pages to promote an old liberal idea: The Feds re-setting EVERY AMERICAN'S mortgage to 5.25% for 30 year fixed. Read here. That article going from the Nation to the Wall Street Journal in a few months is a paradigm shift which bends the mind. Now that socialism has been kicked off by the American conservative party, will any politician be able to say 'No' to any populist proposal such as this?
Whe the US Dollar May Surprise; Euro-banks are Worse
"The problem for European regulators is that European banks rival or in some cases exceed the economic size of their native European economies, making a rescue package in Europe difficult, according to Gros and Micossi. For example, Deutsche Bank, with an overall leverage ratio of 50, has liabilities of €2 trillion, over 80% of the entire German economy. The liabilities of Barclays PLC, at £1.3 trillion - with a leverage ratio of 60 - exceed the entire U.K. economy, they say."WSJ blog
MUST READ interactive chart here which explains the Euro banks are both too big to fail and perhaps too big to save. A dozen individual banks with more assets than their nation's total GDP. European bank centralization problems, a reminder of the anchient Euro-banking oligarchy.
Leverage decisions made in 2004..
Who doesn't love a good "government meeting in the basement to do the bidding of investment bankers" stories?
Finally, the NYTimes does some journalism regarding Paulson's plea on behalf of investment banks to increase leverage limits in 2004. Decision made by the SEC in the basement, where they would soon all end up... Read here.
Finally, the NYTimes does some journalism regarding Paulson's plea on behalf of investment banks to increase leverage limits in 2004. Decision made by the SEC in the basement, where they would soon all end up... Read here.
Insurance company leverage kills...
Here's how its leverage (assets to equity) stacked up against other insurance operations as of December 2007:
AIG: 11 to 1.
Markel (NYSE: MKL): 4 to 1.
Berkshire Hathaway (NYSE: BRK-B): 2 to 1.
Montpelier Re (NYSE: MRH): 2 to 1.
Travelers (NYSE: TRV): 4 to 1.
White Mountains Insurance (NYSE: WTM): 4 to 1.
Chubb (NYSE: CB): 4 to 1.
AIG "knows money" commercial, comedy.
AIG: 11 to 1.
Markel (NYSE: MKL): 4 to 1.
Berkshire Hathaway (NYSE: BRK-B): 2 to 1.
Montpelier Re (NYSE: MRH): 2 to 1.
Travelers (NYSE: TRV): 4 to 1.
White Mountains Insurance (NYSE: WTM): 4 to 1.
Chubb (NYSE: CB): 4 to 1.
AIG "knows money" commercial, comedy.
$800B ASSET PURCHASE
There is no doubt this is a real crisis, see CFR blog.
But, it's widely believed that the $800B is only the first wave (2T more?), uses faulty methodology, and together with suspended mark-to-market, might prolong banking judgment day, keep insolvent banks afloat (like Japan) and thus, prolonging the recession. Remember, we don't need to save all banks, just some banks. Alternate (mostly equity plans) here and here.Buffett knows the real question is... will Paulson pay market for the assets or more-than-market thereby giving free capital to the banks without taxpayer equity in return. See here.
Most economists are confounded: WHY Paulson and the Bailout Gang never even floated the ONE idea with a successful track record in dozens of cases around the world...Capitalization of banks in return for short term taxpayer equity (like AIG deal). Worked in Sweden, will work with AIG, England, Iceland just last week, and many European countries are doing exactly that right now. Yet, in the US, banks enjoy a particular power. Paulson changed the plan when it came to the banks. My opinion, this change of course was to allow above-market asset purchases with no equity in return (Boon for banks). It was designed for the banks, not the banks-and-taxpayers (Sweden/Euro design). The major media outlets are not reporting on the fact that most American economists are in abject disagreement with our banker Secretary of the Treasury. Instead, the news outlets are still obsessed with asking political players to comment on expert economic issues. (Who do you want to hear, a Nobel wining economist or Paul Begala?) Therefore, American economists have banded together through blogs (outside media) to discuss why Paulson disagrees with most of our best economists. The burden must shift to Paulson to explain...
Special credit goes to NYU economist Roubini, who predicted the details of this crisis two years ago and has been used as a source and man in demand at NYT, BBC, FT, and most media. His name is popping up everywhere, including television interviews on the BBC and Bloomberg this week. His opinion here.
Is the FEDERAL RESERVE broke? Who is keeping tabs on the Fed's balanace sheet? This question is perking up lately, as some commentators suggest that the 800B bailout is really a reverse bailout of the FED balance sheet (because the FED has already extended nearly 800B in T-bills for toxic paper sitting dead on its balance sheet). If the 800B in toxic notes sit on the balance sheet, the Fed is hamstrung. Therefore, someone has to buy it....enter the taxpayer. Here is a bomb thrower going after the fed. He also writes this article for the conspiracy minded, suggesting the bailout is really for the plunge protection team (government buys equities directly to prop stock market). While evidence exists (Executive order 12631) suggesting the creation of a reactionary executive stock-buyers, there remains little evidence to suggest the PPT buys consistently in the market. Also, I do not see how the Treasury could conceal diverting purchases from assets to equity. That being said, how you define economic "emergency" is in the power of the executive, therefore, there is reason to believe the PPT has been abused in the past. If the federal government is on the buy-side of equity without transparency, that would be an assault on free market principles.
Bloomberg suggests here that AIG bailout was really a counterparty (investment bank) bailout. Paulson bailing Goldman, not that there's anything wrong with that.
Galbraith says no.
Lastly, here's a little light reading..... Ernest Hemmingway, 1923, on inflation.
OCTOBER MARKET TIMING (BUY, SELL OR HOLD)?
After reading Buffett books in the 90's, I soon came to the realization that there was not one fair value 1960's "Buffett opportunity" to be found in the 1990's. Thanks to Alan Greenspan's easy monetary policy, everything was expensive and an entire generation learned momentum investing. Now, due to this crisis, will real equity opportunities arise over the next few years?
The surprising truth may be that while equities are lower, they are still historically overvalued. Thanks again, Greenspan. This equity bubble is still not popped.
For example, CASH has outperformed STOCK under Bush, see here.
Should you hold CASH or EQUITY NOW? Here is a ten year prediction.
The Market is DOWN, but still NOT fair value. See here and here.
Royal Bank's good predictions and why deleveraging and downturn may be NEEDED to contain inflation. See here.
The surprising truth may be that while equities are lower, they are still historically overvalued. Thanks again, Greenspan. This equity bubble is still not popped.
For example, CASH has outperformed STOCK under Bush, see here.
Should you hold CASH or EQUITY NOW? Here is a ten year prediction.
The Market is DOWN, but still NOT fair value. See here and here.
Royal Bank's good predictions and why deleveraging and downturn may be NEEDED to contain inflation. See here.
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