Stocks are moving higher today as everyone breathed a sigh of relief when the GDP number came in a little better than anticipated at .9% Anything under 1% basically is telling you that we have a stagnating economy that is not showing any growth. Here is the GDP news from Bloomberg.
We continue to flirt with dipping into a recession. Why stocks are jumping on this news is beyond me, but in this crazy market I guess I shouldn't be surprised.
I think the second quarter might be a different story. The reason I say this is if you go back to the huge 1st quarter miss by General Electric, they basically said the quarter was fine until March when the credit markets froze up due to the Bear Stearns debacle. I expect some of this to carry into the second quarter.
The gas crisis also hit in the second quarter which should have slowed down the consumer considerably as well. It will be interesting to see if GDP is negative in the second quarter when the numbers come out.
Wave 2 of the Credit Crisis
Here is what I wanted to focus on today. It appears that the debt markets are beginning to panic again. The costs of CDS's(credit default swaps) which are used by financial institutions to insure their debt has doubled since late April, and is now back to the levels of where they were when Bear Stearns blew up. Here is the news from The Telegraph UK.:
The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.
The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.
Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.
But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.
"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."
Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.
Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said."
My take:
Gulp. Gee you think maybe this is why the Lehman rumors are swirling again? The cost of CDS's are rising because everyone knows this debt is garbage. No one wants to insure garbage and its going to cost you if you insist on buying it. The CDS's are also rising because the Fed is running out of reserves, and may not be able to afford another bailout..
The financial system is hanging on by a thread and it looks like a second wave is about to hit. However this time its with a weak Fed that has a big fat dose of inflation and $130 oil sitting on its plate.
The 10 year bonds moved up to 4.10% today signaling the bond market has about had it with all of the bad debt and Treasury auctions. As I said yesterday, mortgage rates are going to go through the roof as the 10 year rises.
Get ready everybody. Credit tidal wave #2 is about to hit and there is no one to save the financials this time. !
I expect another blowup shortly and its not going to be pretty.
8 comments:
We seem to be in a phase where good news - however slight - is met with surging stock prices and traders reaching for the Champagne, while bad news gets sidelined and ignored.
One of the great things about this blog is that your approach is one they should take: be realistic, accept the bad news, and let's start figuring our how to repair things. Just ignoring the burning house doesn't make it go away. While we continue to operate in the Twilight Zone of numbers, suspicions abound and financial collapse is all the more probable.
The decimation of the Fed's assets is a real concern. It's reminiscent of when the Brits sold off all their gold in 1992 in an attempt to make the ERM work. As they found, and the Fed will also discover, these markets have colossal momentum that can drain the resources of a country's bank and not even notice.
On the Lehman thing, they've cleared accounted the loss out of the way for this quarter while the rumors are still flying. But the wonder of accounting is that the real numbers eventually catch up with you...
Btw, check out the car manufacturers today (going back to one of your recent posts). GM has finally understood that long-term expensive gas may actually impact them. Wow. And how much do they pay their board?!
Minton
Thanks for the kudos. I want this to be a place where we can all problem solve, and find ways to weather through this financial storm.
Great points. dindn't realize the Brits dilemma.
Fisher made it clear in his speech that the Fed will make tough choices when push comes to shove.
There will be a point where they walk away from Wall St. and tell the bouys they are on their own in order to stay solvent themselves.
I think we are closer to this moment than anyone wants to realize.
We seem to still want to just bury our head in the sand versus problem solving.
At some point they will be forced to face the music!
BTW did you see 19k GM workers took the package to retire? thats a big number!!
Jeff, you replied to Minton: "....where they walk away from Wall St. and tell the bouys they are on their own in order to stay solvent themselves."
Was "bouys" a Freudian slip or intended symbolism?
Are these NOAA bouys that contain weather-measurement instruments?
Let’s chew on the image of abandoned buoys bobbing up and down haplessly while a storm creeps closer.
AVL
I meant boys..lol I was short for time and didn't get a chance to proof read my comments. Got to work on that!
Funny how my typo still worked with your excellent analogy.
Jeff, FYI..(FDIC provides juicy quotes)
http://www.fdic.gov/news/news/press/2008/pr08037.html
From the FDIC: Commercial banks and savings institutions insured by the FDIC reported a decline of $16.3 billion (45.7 percent) in net income of $19.3 billion in the first quarter of 2008 compared to the first quarter of 2007.
...
Noncurrent loans are still rising sharply. Loans that were noncurrent (90 days or more past due or in nonaccrual status) increased by $26 billion (or 24 percent)
Jeff, didnt u write about this LIBOR uproar recently?
LIBOR Mess Promises to Squeeze ARM Borrowers
http://www.housingwire.com/2008/05/29/libor-mess-promises-to-squeeze-arm-borrowers/
avl
Yup..Sure did. When I wrote about it, the bank was investingating the accusation.
It appears now that the regulators are pretty positive that the reported Libor rates in question were a complete lie and a sham.
Who would have thought a bank could comit fraud?..lol
This could result in major jump in certian mortgage rates.
Did you see the link I put up in the comments section of the most recent post?
Foreign investors may be able to come to the Fed discount window with their garbage? this is getting crazy!
My guess is someone is in trouble across the atlantic...UBS perhaps?
It looks
great stuff from the FDI AVL... just finished that.
Small banks took a hit this week when Key Corp announced that big loss. I am not surprised.
thank god for the FDIC. Without them I would have a safe in my closet.
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