Thursday, October 2, 2008

Global Panic/Credit Freeze

Good evening everyone!

Quite a day today wasn't it? The stock market plummeted over 3% today as credit continues to tighten globally. I saw fear and panic in the eyes of the traders today as they practically got on their hands and knees and begged Congress to pass the rescue plan.

I think you saw the market sell off big for three main reasons today:

#1 The credit markets are virtually shut down.
#2 Many believe the rescue plan is too little and too late.
#3 The continued financial meltdown in Europe.

I also think the markets sold off because they wanted to send a strong signal to Congress that they seriously need help.

Credit Markets

The credit markets are flat out ugly folks. You practically need a crowbar to pry money away from a bank right now. Corporate lending has almost come to a complete halt. How bad is it?

Well lets put it this way: Last month was the worst month ever for corporate credit despite the world's central banks pumping an unprecedented $1 trillion dollars into the financial system:

"Oct. 2 (Bloomberg) -- Interest rates on three-month dollar loans rose to a nine-month high, short-term corporate borrowing fell by the most ever and leveraged loans tumbled, exacerbating the credit freeze that's paralyzing businesses around the world.

The crisis deepened after the worst month for corporate credit on record. Leveraged loan prices plunged to all-time lows, short-term debt markets seized up and even the safest company bonds suffered the worst losses in at least two decades as investors flocked to Treasuries. Credit markets have frozen and money-market rates keep rising even after central banks pumped an unprecedented $1 trillion into the financial system.

``It's going to get much, much worse,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York. ``The credit markets are effectively shut, the CP market, which there's not enough focus on, is under complete duress. That can't be sustained, as that's the lifeblood of corporations funding themselves.''

The market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 as banks and insurers were unable to find buyers for the short-term debt amid the worst U.S. financial crisis since the Great Depression. Financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent, to a two-year low."

Quick Take:

What can I say folks. This is terrifying. The credit markets are how many companies fund themselves for things like payroll and buying inventory for things like the holiday season. If they have no availability to credit, they can no longer operate.

There is practically no money out there folks. Zero. Zilch. Squadoosh. The central banks pumped $1 trillion dollars into the banks and it did nothing to free up lending. This leads me to a little question here: If a $1 trillion liquidity injection did nothing to cure this problem, how in the hell is our measly $700 billion rescue plan gonna help?

Take a Look at this additional piece of data on Fed loans to the banks:

"Oct. 2 (Bloomberg) -- Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60 percent from the prior week amid a worsening credit freeze.

Loans to commercial banks through the traditional discount window rose about $10 billion to $49.5 billion as of yesterday, the Fed said in a weekly report today. The total surpassed the previous record after the 2001 terrorist attacks."

One week borrowing from the banks was nearly half the amount of the bailout bill! This "rescue plan" is like giving a guy a twenty when he is short $1000.

The problem in the credit markets is two fold. One, the banks have no money to fund the credit markets because they are sitting on too much debt. Two, they don't trust each other. Every bank is afraid they are lending to another bank because they are worried they are insolvent. As a result, they refuse to lend and hoard the cash to take care of their own funding issues.

The problem with the Paulson plan is its not enough money to rid the world's banks of their mortgage debts, and it does nothing to restore trust. Regardless, I fully expect Congress to pass this bill after watching what happened in the credit markets this week. Its not going to work, and this little blogger can't wait to write about it when it fails!

European Slowdown

Just a couple stories here from Europe. Take a look at the ECB's Trichet's comments today. He was much more dovish on interest rates. Inflation worries look to be off the table. Expect rate cute across the pond folks. Currencies will be interesting to watch over the next few weeks. The dollar soared today today based on Trichet's comments and further signs of European weakness.

How bad is it in Europe? Take a look at the bank runs that are occurring in Greece:

""The Greek government has issued a blanket guarantee of all bank deposits after panic withdrawals by customers in Athens and Thessaloniki, creating an unstoppable stampede across Europe for an EU-wide bail of the financial system."


Bottom Line:

Be prepared for a Japan like classic deflationary death spiral folks. I hate to say it but the signs are everywhere. Gold and commodities were pummeled again today. This is a classic deflationary signal. Houses, cars, and all other assets continue to drop in price and value. Students are unable to get school loans. Expect education long term to also drop in price as a result. These are all signs of deleveraging and deflation. Its going to be painful process, but it is inevitable.

We simply don't make enough money to afford the level at which it costs to live. Something has to give and its going to be prices via deflation.

My advice is to get out of debt as fast as you can. If you have wealth, deflation actually will make you richer because everything drops in price and the world will be on sale when we come out of this. Make sure you protect your wealth in safe investments like treasuries and bank CD's. When we come out of this economic reset, you will then have money, and you will be sitting pretty.

Let me close by warning everyone that the deflation thesis can always be taken off the table if the government decides to print. All bets are off then folks. However, I highly doubt our government is that stupid, but if it gets bad enough they may consider some form of it.

Watch the vote tomorrow from a short term trading perspective. I think the market could move violently up or down tomorrow if the plan is approved. Confidence in the plan seems to be lacking so we could see a "sell the news" drop in the markets. However, never underestimate the "bubble boys" and how they love to take the market higher on bailout news!

I plan on entering some more short positions on any bounce from our FANTASTIC, WONDERFUL "RESCUE PLAN"! What a joke.

Always remember folks, when the government knocks on your door and says "hi we're from the government and we're here to help you" , lock the door and run as fast as you can!


Anonymous said...

Jeff, it's time you pay for your mistakes made as an American. The world will not take your shit and sitting there like a lame duck to be shot. You tagged everything with AAA and made the world believe it. Pay the piper, you American biyatch. LOL

Anonymous said...


Do you think the Fed will drop the interest rate? Looking at the history of prime rate in the past 20 years, it look like we are in a downward trend.

Right now Washington Mutual has a special 5% APY for their 1-yr CD. Since Chase has taken over the banking division, I assume the investment will be safe (< $100K).

If interest rate drops in the future, the CD rate will drop too. So I am trying to decide whether to open the account now or wait.

Anyway, thank you in advance for the feedback. And great job on the daily blog. I follow it daily to stay informed in this unstable and unpredictable market.

Jeff said...


Thanks. I am glad you are enjoying the blog.

I think an interest rate drop is a virtual lock. The bond market traders are pricing a 1/4 point cut at 100%.

You might even see a 1/2 point cut. I think your WAMU CD idea is a great one. 5% is a great rate and JP Morgan has your back.

The rate cuts will do nothing for mortgage rates because banks are still afraid to lend. It will however help the banks fix their balance sheets.

Inflation risks are low and the dollar is gaining strength due to the Europe fiasco so it probably won't change much.

Who knows, we may end up with a FFR of zero like Japan did during their deflation disaster!

teady bear said...

teddy bear said...

$$$ "In God We Trust" :)

Anonymous said...


Beside the Wamu CD, I am also thinking about the preferred stocks from Bank of America and JP Morgan. Right now one can get 8% return on these preferred stocks.

Such return is a lot better than the Wamu CD. But the risk is the suspended dividend. Do you think that could occur for BAC or JPM preferred stocks? Since these two banks are strong and should survive this credit crunch, I feel the probability of a suspended dividend is zero. But it is always good to hear other opinions.

My mom is going to retire soon. So I am looking for safe fix-income investment for her.

Any comment or feedback is greatly appreciated.


Jeff said...


Lets hope the man upstairs throws us a little love!

We need it! Great article. I bet there won't be a seat in the house before thid is over!

Jeff said...


Thats a popular trade right now. Everyone is piling into BofA JP and others.

I don't think its a bad bet. My only concern is they are taking on so many bad assets onto their balance sheet with the acquisitions of garbage like Countrywide, WAMU, and Wachovia.

The one I would avoid here is Citigroup. They were already in trouble before taking on the Wachovia baggage.. I think thats the highest risk among the mega banks.

That being said, I don't thinking owning the preferred's here is a bad play. I would make this a smaller part of her portfolio versus the CD's until the smoke clears.

There will be plenty of time to jump into these because its going to take a long time for their growth rates to come back.

Anonymous said...


I agree that Citibank is the weaker of all the mega-banks because of their recent Wachovia purchase and not so rosy Level 3 assets. So I avoid it completely.

Bank of America balance sheet is tainted with the Countrywide junk. But I think the recent acquisition of Merril Lynch is a big plus for them. In the long run, BAC should emerge as one of the strongest financial institution in the world.

In my opinion, JP Morgan will be the biggest and strongest bank. They got Bear Stearn at a huge discount comparing to how much BAC paid for MER. Then they got the "good" WaMU (banking division) for dirt cheap. Unlike C, JPM did not acquire the "bad" WM. So that should not affect their balance sheet.

Off the topic, I predict 2 additional big mergers to complete the future landscape of the mega-bankers.

#1 JPM + BSC + WM
#2 BAC + MER + CFC
#3 C + MS + WB
#4 WFC + GS + ??

#4 seems feasible since they both have Warren Buffet.

jeff said...


Great points.

JP did get a steal on WAMU and Bear Stearns.

The only concern here would be if housing drops further than JP expected. WAMU did a ton of loans in Cali where housing is free falling.

Will those large WAMU jumbo California loan portfolios continue to perform if housing keepas dropping?

Long term these will be great assets though.

If I were a betting man on the mergers, I would put my money on a Wells/GS combo.

Buffet jumped into GS, and he is a big shareholder of Wells. I can see him being bringing these two together.

Anonymous said...


"The only concern here would be if housing drops further than JP expected. WAMU did a ton of loans in Cali where housing is free falling."

Maybe I misunderstood the details of the transaction. I thought JPM only acquired WM banking assets (customer deposits + saving + CD accounts) while the bad stuff (mortgage loans) are left back.

jeff said...


I could be off too. I am not sure of the details here. I am not sure what happened to the pools of securitizations that were performing.

I found a great read here by the way for everyone. Is this the 1873 depression all over again versus 1929?

John Maynes said...

Jeff, could you please stop scaring people? Stick to the facts and stop this Great-Depression-mongering. Thanks.

ZMonet said...


I would agree with you 100% that we're in for some deflation and the gold/commodity markets are really showing that push. I'd be interested to get your thoughts on housing. When are you thinking of buying? I was originally looking to buy 4-6 months from now, but I'm now thinking of renewing my lease for another year. What do you think?

A house, especially with a 20% downpayment, would be one of my biggest investments and I'm wondering whether deflation will hasten the downturn in housing in Maryland. I also have concerns that before another 2010 we'll see inflation, maybe extreme, which could make buying a home after deflation but before inflation the way to go. Your thoughts? Am I seeing this right?

Jeff said...


I nowhere near ready to buy. I am thinking 1-2 years outfrom here. Maybe more.

One thing to take into consideration is housing cycles are very long and usually the bottoming process takes years.

Its not like the stock market where you have v shaped recoveries.

Of course you can never perfectly time the bottom but it doesn't matter because we will skid along there for a few years.

I wouldn't be concerned with inflation. remember, price inflation on things like food and gas causes further deflation in assets like homes.

The reason for this is price inflation leaves you with less disposable income to buy assets like homes. As a result, assets tend to further drop in an price inflationary environment.

Look at what happened to home prices during the huge bout of inflation we had earlier this year that took gas to $4 a gallon. Houses still dropped.

Another thing to keep in mind is mortgage rates will only be rising from here if there is inflation.

This will eventually force the Fed to take rates higher which will further pressure housing prices.

YOu are sitting in a perfect spot. I wouldn't buy a house until this whole financial crisis plays itself out. Be patient. Housing should get cheaper from here.


Jeff said...

Gotta love bailout bounces.

This will be the shorting opportunity of a lifetime when this rally begins to fade.

Jobs number was horrible. Watch the run to the exits when the Paulson plans bazooka fires blanks.

It will be historic.

John Maynes said...

Are you sure, Jeff?

Jeff said...


Enough already. Please comment when you have something constructive to add on here. If you disagree with whats discussed on here than move on.

Don't force me to start screening my comments.


Anonymous said...

Hey Jeff, we are waiting for your comments on today's action. Are you being lazy or what? LOL

Jeff said...


Typing as we speak.

I had a doctors appointment this afternoon!!

Whoa what a close!

John Maynes said...

If you disagree with whats discussed on here than move on."

Again this is not proper English. And semantically wrong again, too. LMFAO

teddy bear said...


he talks about possibility of ... martial law!!! 8)