Sunday, August 31, 2008
Friday, August 29, 2008
Monday, August 25, 2008
Problem: No one knows who the ultimate guarantor of these contracts is.
Saturday, August 23, 2008
Option ARMs - you know, those exotic loan payment schedules that enticed so many Americans into borrowing? Yup - a lot of them come due in 2010 and 2011. Conveniently, that is also when many Baby Boomers become eligible for Social Security...
Friday, August 22, 2008
2008's toll so far: 9 and counting.
Now, executives from the 3 companies are taking a page from the banking sector in seeking federal government assistance in the form of low interest loans. They claim that their bankruptcy would result in a chain reaction of closures in auto parts suppliers as well as downwind effects in the credit markets. Why? The $45T credit default swap market would take a severe beating if GM or FORD went bankrupt.
This however is unlikely. While the banks are deemed "too big" to fail, the automakers aren't. Foreign competition in the form of Toyota, Honda, and Nissan have bit deeply into Detroit's market share. And while the CDS market might take a hit, it will continue to trudge along.
More cynically, none of the Big 3 are represented at the helm of any regulatory agencies. In contrast, Wall Street can count on the likes of such star studded alumni as Rubin (Clinton's Treasury Secretary), Paulson (current Treasury Secretary), and Fuld (current NY FRB director).
"We are desperately in need of radical new thinking among the financial elite. We may not simply be at the end of an era, we may be on the verge of a reformulation of capitalism itself. However, the signs are that there are few iconoclasts among the policy elite. Central bankers in particular seem hopelessly stuck in their world views, starting with their conception of their role."
Thursday, August 21, 2008
Most equity investors don't know much about the debt markets, so they aren't paying attention to this. However, debt spreads, or the difference between corporate bonds and treasuries continues to widen. In fact, these spreads are worse than they were in March following the Bear Stearns collapse. This indicates reduced risk appetite resulting in credit drying up. Every time this has happened in the past, the equity markets have corrected and caught up to what the debt markets were telling them.
Why the temporary divergence? Simple, the market is ignoring this for the time being, but it won't last for much longer. Additionally, the government cannot intervene nearly as easily in the debt markets as they can within equity markets. After all, there are only 30 stocks in the DOW Jones Index, it's very easy to buy up some big names on very bad days to even out the supply/demand imbalances.
Where were these guys when I started making my predictions a few months ago?
"Targets Fannie Mae, Freddie Mac as among possible casualties...""
“We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one, one of the big investment banks or big banks,” said Mr. Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.
Tuesday, August 19, 2008
1) USD long positions on IMM hit 14 month high
2) Oil Prices Begin to Turn Higher
3) A Big US Bank Failure
We are experiencing a period of temporary - but noticeable -deflation. This is being triggered by the sell-off in the pound andEuro. The pound broke the 200 WEEK moving average on a downwardslide! Their sub-prime problems are just beginning. If the BritishCentral Bank cuts rates (as many expect them to), expect the pound tostagger and the dollar to rally.
Euro-land isn't really affected by the sub-prime related problems(w/the exception of Ireland and Spain which had extremely speculativehousing markets). Their main devil is inflation and a high euro that hurt exporters. The ECB is unlikely to cut rates as they don't have enough room to maneuver. Labor unions are against it as it will biteinto their workers' spending power (labor unions DOMINATE socialistWestern Europe).
Don't confuse the criteria to go to the discount window with any requirements to unload the commodity. Separate things. The only people who are allowed to go to the discount window are commercial and investment banks - not hedgies (although some hedgies could be run byinvestment banks their accounts are supposedly kept separate).
With that being said, both the investment banks and hedgies are desperately trying to re-capitalize. They don't have to unload commodities but many are choosing to do so. The CFTC raised the margin requirements for many commodities this summer - especially in agriculture and oil (they have no control over currencies as there is no exchange floor). Combine the new margin requirements with theFed's increase in collateral requirements and you have a perfect storm.
The IB banks are forced to do this since the traditional revenuestream: (M+A, IPOs, etc.) have dried up in this economy. Many of them are now heavily involved in the debt markets (Lehman and Bear springsto mind). As for hedgies, they are involved in all kinds of complex derivative transactions ( I can't speak for sure since their books are not open). When the IBs start to sell, it causes a chain reaction as hedgies try to cut their losses on overly-exposed derivative transactions.
Please remember these guys use system trading. That means theircomputers will automatically sell when a certain price is reached.
Friday, August 15, 2008
It is respecting the PERCEPTION of fundamentals.
Right now, we are seeing a period of dollar strengthening due to poor economic conditions in the EU, England, and Japan.
These 3 economies are also the main currency pairs with the dollar. Technically speaking, the dollar has become oversold against the Euro. Same for the Pound and Yen. All it took for a catalyst was the German economy report (bad) and Trichet's refusal to touch interest rates tosend the dollar higher. That in turn is buoying the equities -specifically financials - but also is crossing over into weakness inthe oil and gold trade.
This is all going on in spite of bearish government reports - CPI,unemployment, consumer sentiment, etc.
Another thing I've noticed is that we are going through a period ofde-leveraging. Big institutional money (e.g. hedgies and investment banks) are being curbed by the SEC, Treasury, and CFTC. Margin requirements are being raised not just in the retail commodities markets but also the lesser known credit markets (e.g. LIBOR, credit swaps, overnight lending, etc.). Basically, the government is forcingthe money managers to raise cash by liquidating their long positions in: oil, gold, and agriculture as well as short positions infinancials. This was part of the bargain they entered into inexchange for opening the discount window, getting short protection,and having the gov nationalize Fannie/Freddie.
This is why fundamentally gold is oversold DESPITE war fears, high inflation, etc. I don't think the equities market will truly enter a bearish phase until this fall (defined as post-Labor Day). A higher dollar will rally everything until then. Ironically, this higher dollar will also be the triggerfor the equities rout. Higher currency values will eat into ourexporters' strength and widen our trade deficit.
To repeat, we are entering a period of temporary deflation. That is..until the fall, when the feds turn the printing press full steam tosave the housing people. Then gold and oil will rise again on hyperinflationary fears.
*(I have been pessimistic about the EU's prospects for a long time. 3reasons: Demographics, socialism, and divided politics.Demographically, the EU is rapidly aging w/fewer births. This will strain government pension and health care funds worse than our Social Security and Medicare will. Socially, the EU nations are dominated bytrade unions that extort ridiculous concessions from the governmentand business. The cost of business is very high in Europe. Finally,the EU is a monetary confederacy divided by a centuries old legacy ofdifferences. England is far worse than the US. Up to 1/3 of theireconomy is dependent on financial svs and their housing bubble wasextended way beyond ours. Japan is shackled by aging demographics andan economy still recovering from the 1980s).
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- Why the Market Isn't Repecting Fundamentals
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