Friday, June 20, 2008

Financials continue to pound the Markets/Oil Soars

Good Morning

What a morning. Stocks are down sharply on more horrendous news from the financial sector. What I find frightening about this sharp move south over the last three weeks is we haven't had any banks begin to fail to any large degree.

Trust me folks, many of these regional banks are toast. Recapitalizing will become much more difficult as investors have gotten continually burned throwing capital at these banks.

Going forward only the best of breed are going to be able to raise capital, and this will put many regional banks in deep doo doo. The fact that we are near the 11,600 lows on the DOW without a major trigger should raise some eyebrows..

Lets take a look at some of the news today.

Merrill Lynch reports Regional Banks are capitulating

Here is a nice summary of the financial news:

"June 20 (Bloomberg) -- U.S. stocks slid, extending a third straight weekly drop for the Standard & Poor's 500 Index, after analysts said worsening credit losses will reduce earnings at financial companies. Shares in Europe and Asia declined.

Wachovia Corp. retreated after Merrill Lynch & Co. said U.S. regional-bank stocks are in ``capitulation mode'' and cut share- price estimates, while Lehman Brothers Holdings Inc.'s prediction that losses may grow at Fannie Mae and Freddie Mac sent the two largest U.S. mortgage-finance companies lower. MBIA Inc. and Ambac Financial Group Inc. decreased after Moody's Investors Service stripped the bond insurers of their Aaa ratings. Merrill, Goldman Sachs Group Inc. and Lehman also dropped.

Trading volume may be higher than normal before today's expiration of futures and options on indexes and individual stocks. So-called quadruple witching occurs once every three months. The quarterly rebalancing of the S&P 500 after the close of exchanges also may spur trading as investors whose funds mimic the index buy or sell shares to reflect the adjustments."

Quick Take:

As you can see, the whole world sold off today. Regional banks are capitulating according to Merrill Lynch and this is without any failures! Where are these banks going to be when the failures start? Remember folks, in 1990/91 there were hundreds and hundreds of bank failures. Many were merged into stronger banks.

This bubble was 10 times worse than the 1990/91 bubble! There were no subprime loans or 100% negative am loans in the previous cycle. There were no zero doc alt A loans that allowed speculators to leverage up and buy seven $500,000 houses on a $100,000 income.

All of this financial innovation in lending was created to keep the game going. It was pure greed plain and simple.

Oil Soars on Israel Military Exercises

As if the news in the financials wasn't bad enough today, Israel decided to start preparing for an attack on Iran. Oil soared over $4.00 a barrel on the news.

Here is the Israel news from Bloomberg

"June 20 (Bloomberg) -- Crude oil rose as the weaker dollar enhanced the appeal of commodities as a currency hedge and the New York Times reported that Israel held a rehearsal for a potential bombing attack on nuclear targets in Iran.

Oil futures have nearly doubled over the past year as investors sought refuge from a declining dollar. Traders have pared bets for a Federal Reserve rate increase on June 25. Iran, OPEC's second-biggest oil producer, would respond to an Israeli attack with a ``heavy blow,'' a senior cleric said.

An Israeli military exercise involving more than 100 F-16 and F-15 fighters seems to have been a rehearsal for a bombing attack on Iran's nuclear facilities and long-range conventional missiles, the New York Times reported, citing several unidentified U.S. officials.

``If enemies, especially Israelis and their U.S. supporters, wish to speak in the language of force, they should rest assured they will be dealt a heavy blow on the face by the Iranian nation,'' said Ayatollah Ahmad Khatami, leading Friday prayers in Tehran, according to the state-run Islamic Republic News Agency "

Final Take:

If Israel attacks all hell is going to break loose in the oil and stock markets. Israel has the best intelligence agency in the world and they must see something they don't like. I am sure the USA deep inside would love to see Israel do the "dirty work" that eventually needs to be done.

Lets be realistic, Iran cannot have the bomb. I can't see us getting in the way of trying to stop this attack as a result.

The stock market is obsessed over three things right now: Oil, the financials, and inflation. The news was grim this week on all three fronts. Stocks are taking a beatdown as aresult.

Bottom Line:

The Nasdaq is down over 2%, and the DOW is down 1.3% as I write this post.

Be careful trading here because there is a big risk of some intervention by the Fed. However long term, I am very afraid of what we are going to see.

Housing is going to end up slaughtering the banks. Rates continue to rise and this story only keeps getting worse.

I hope we can find a way out of this mess. Unfortunately, its going to be a very painful process. The destruction that I have already seen in the markets without a major trigger like another Bear Stearns type failure is alarming.

Hold on to your hats folks, its going to get worse from here.

2 comments:

Avl Guy said...

All the bank mergers and acquisitions since 1990 have left the universe of banks in 2008 much changed. Kinda like converting dog years into human years: 7 bank failures in 1990 might equal only one failure in 2008...that kind of math except I don’t know what the appropriate ratio will be, and that's before adjusting for inflation and population growth.

However, it's time to re-read the original language on the FDIC Insurance that I posted months ago. It's very limited insurance, there’s presently only $50B in the reserve; there’s no timeframe commitment to make depositors whole again...there's lots of 'outs' as well for the feds. It's more market psychology assurance as it is depositor insurance.

Jeff said...

Avl

I just got back to you on the forum.

I think we look for more mergers first as a leading indicator. Its easier for the Fed to clean up via mergers.

Regarding the $50 billion, that really concerns me.

There has been some tinfoil out there that thinks FDIC may not be whole if the crap hits the fan and things get bad enough

I believe the FDIC must return this money in order to keep order.

I am sure the government will do what needs to be done when we get to that point.

Wow what an ugly day today. Geez this is getting scary