Saturday, March 22, 2008

The Nationalization of Housing?

Doug Noland from Prudent Bear had a great piece on Fanny and Freddy. I briefly mentioned the the fact that that both of these companies had their capital requirements decreased so that they could do an additional $200 billion in mortgages. As Doug explains this is a very risky proposition. So the question now becomes is the government quietly nationalizing housing? The graph above shows you dramatically Fanny/Freddie's book of business has grown.

First a comment from OHEO(the Office of Federal Housing Enterprise Oversight) director James Lockhart in an interview on CNBC:

"Lockhart: “Well, it may take awhile. The mortgage market is one issue, but there are some other markets out there as well. I think this is going to be a major step forward. As you said, they can do $200bn in purchases immediately. And to the extent they’re guaranteeing mortgage-backed securities - that could almost get into the trillions. We’re looking at that they would have the capacity – between what we did today and the significant capital raising that they committed to – they could do over $2 trillion in business this year if the market needs that money.”

This is a very risky statement. When they start talking trillions you need to ask yourself how big do they plan on getting and what happens if housing prices continue to drop? We the American taxpayer will be the ones that take the hit because both of these companies are backed by the government and look to possibly be taken over by the government. Mr. Noland explains the risk of what could happen if this occurs:

" Somewhere along line, I think the Fed came to appreciate the extent to which they had relegated monetary (mis-) management to the agencies (and their Wall Street enthusiasts). Meantime, some politicians belatedly came to recognize what an affront the GSEs had become to the pricing and allocation of system Credit, as well as to the functioning of free markets more generally. Especially after the 2004 revelation of massive fraud and gross system inadequacies, a consensus developed in Washington that the GSEs needed both restraint and a powerful regulator (although the legislative details were much too slow to materialize). Apparently, all these justifiable concerns were chucked out the window this week in the name of “system stability”.

After first reaching $2.0 TN in 1999, Fannie and Freddie’s Combined Books of Business surpassed $5.0 TN in January. This “Book” increased $638bn, or 16%, last year, in what will surely be the greatest transfer yet of risky mortgage Credit to the GSEs (only to be greatly outdone in 2008). Interestingly, OFHEO, Washington politicians, and Wall Street analysts are keen to play a dangerous game pretending that there is limited risk in guaranteeing MBS (as opposed to the obvious risk associated with mortgages retained on their balance sheet). The absurdity of Mr. Lockhart stating that the GSEs will be in a position to take on an additional $2.0 TN of mortgage risk this year is simply incomprehensible. Keep in mind that the GSEs are on the hook for the “timely payment of principle and interest” on more than $5 TN of American mortgages – and counting… Such obligations will, in the Post-Bubble Era, prove untenable."

Basically if the downturn continues and prices continue to drop this will end up being a disaster. The result of expanding their ability to lend when they already have 5 trillion on the books will result in making the economy more destabilized(GSE's FYI are Fanny and Freddie). It will also result in us paying for this mess as these become government entities. Doug further explains:

"Not surprisingly, the Fed could not risk a Bear Stearns failure - not with all of its derivative, “repo” and counterparty exposures. It really was not a difficult fix. Yet the rapidly lengthening line of vulnerable non-bank lenders (Thornburg, CIT Group, and Rescap come immediately to mind) and hedge funds will pose a greater challenge. There are some very substantial balance sheets at risk and significantly more “de-leveraging” in the offing - and the big banks will have no appetite.

The S&P500 is down a modest 7% from the much changed financial and economic world of one year ago. While having little impact on the Unfolding Credit Crisis (or home prices), policymakers have thus far largely succeeded in sustaining inflated U.S. stock prices. But, in reality, the profound deterioration in the U.S. and global Credit backdrop has greatly altered prospects for the vast majority of companies, industries, and the U.S. and global economies more generally. Despite any number of policy actions and all the good intentions imaginable, there is absolutely no way that the U.S financial system will now be capable of sustaining either the (pre-bust) quantity of Credit or the uniform flow of finance that levitated Bubble Economy asset prices, household incomes, corporate cash-flows, “investment” spending or consumption. Huge sections of the Credit infrastructures (notably throughout Wall Street-backed finance) are inoperable and disCredited. Prominent Monetary Processes have been broken and the resulting Flow of Finance radically revamped.

Prospective Credit and financial flows will prove insufficient for scores of companies, as well as for state and local governments and various entities all along the economic food chain. Enormous numbers of business downsizings and failures – many by companies that thrived during the Bubble Era – will lead to huge losses of jobs and incomes (many at the “upper end” where the greatest excesses transpired). I simply see no way around it – Nationalization of U.S. mortgages notwithstanding. It is fundamental to my analytical framework that efforts to subvert the Unavoidable Adjustment Process only extend the misallocation of finance and real resources, while adding greatly to the future burden of the financial institutions today aggressively intermediating very risky pre-adjustment Credit (certainly including the banking system and GSEs). And I certainly don’t believe this week’s rally in the dollar should be viewed as a vote of confidence for the direction of U.S. policymaking. Nationalization will prove a further blow to already fragile confidence."

Bottom line is the government realizes that the bubbles of credit they created can no longer be supported by Americans with flat incomes and unemployment that continues to rise. Giving Fanny and Freddie these massive additional resources pretty much tells you that the gameplan is to attempt to nationalize housing that we can no longer afford. They have realized we are in way over our head.

The problem here is instead of stabilizing everything it will just confuse the situation and make everyone less confident in the housing market. The government doesn't know what to do other then to throw money at the problem. This could take decades to figure out.

Think about it this way. Would you buy a house if half of the block is being subsidized by government supported housing? How could you ever trust that the value of the house will stay flat or go up. Also, if the government backs all of this debt at inflated prices then who will be able to afford these houses? I am afraid that this is a problem with no good answer. I might live my whole life as a renter if nationalization happens. I am not convinced it will happen but maybe this is such a mess that its the only answer.

Friday, March 21, 2008

Goldman, Lehman Credit Ratings cut by S&P

Happy Friday everybody. Well well well, on a nice quiet holiday Friday, S&P quietly dropped a bomb on Goldman Sachs and Lehman Brothers. S&P lowered their credit ratings outlook to "negative" saying that profits at the firms could fall by as much as 30%. I find it funny how Wall St. loves to release their bad news on a three day holiday weekend when the markets cannot react.


``Our current expectation is that net revenue could decline'' at least 20 percent for independent securities firms, S&P said in a statement today. S&P affirmed its long-term credit rating of AA- for Goldman and A+ for Lehman. Both companies are based in New York.
The Federal Reserve's decision last week to open a lending facility for brokers and provide financial support for JPMorgan Chase & Co.'s emergency takeover of Bear Stearns Cos. ``mitigates liquidity concerns,'' S&P said. ``Nonetheless, we see some possibility, were there to be persisting capital markets turmoil and sharply weakening economic conditions, that financial performance could deteriorate significantly."

S&P also commented on the market conditions:

"`Market Sentiment'
The ``near-term earnings prospects remain at least somewhat brighter'', S&P said in its statement today. Goldman, Lehman and Morgan Stanley have ``benefited from the strength of equities trading activity,'' while wealth management and asset management businesses have also ``remained relatively strong,'' the ratings company said.
S&P said it still can't ``rule out the possibility that market sentiment will turn more severely against some firms, undermining the effectiveness of even the most extensive preparations against liquidity stresses.''

My take:

Well this is just more proof that the market conditions for the banks look to be deteriorating. Wall St. keeps talking about a two quarter recession followed by a second half recovery. S&P is telling you the exact opposite: Things are ok for now but it looks shakey down the road. I think all of 2008 will be rough and 2009 down't look so hot either. The housing bust is just now starting to hit. Foreclosures are accelerating and this is why S&P had to drop their outlook to negative.

What Wall St. is trying to do is to get everyone to think that this crisis os over and we are back better then ever. The truth is its just beginning. S&P did not want to throw Goldman and Lehman undeer the bridge as Wall St. struggles. These are the pockets that pay them! They had to do it to keep their credibility and I think also to protect themselves as the SEC starts to get involved in this. The Fed is just trying to clean up this mess. Since its too late and the problem is too big the blame game will start.

As this crisis detiorates into a severe slowdown Congress will rule with an iron fist and look for someone to blame. When you are looking for clues as to where the market is going look at the forclosure rates, the bond market, and certian financial news sources like Bloomberg. Short term treasuries being at a 50 YEAR LOW at .3% in the bond market should tell you everything you need to know. Think about that for a second. Most big invetors would rather earn 1/3 of 1 percent in guaranteed treasuries versus owning stocks. The bond market is basically telling you the SKY IS FALLING.

This ratings negative outlook on two os the big investment banks is another warning sign of whats about to happen. I urge you to look at the data and start tuning out Wall St. The worse this gets the louder they will be yelling everything is ok. Folks, everything is far from being OK. Please invest accordingly and avoid debt at any cost.

Pressure on Builders mounts as Deliquencies Rise

The Wall Street Journal had a great article today on how pressures are beginning to mount on builders as inventories rise. As you can see from the chart, contstruction loan deliquencies have more then tripled rising from 2.1% in the last quarter of '06 up to 7.5% in 2007. From the WSJ:

"Delinquencies on loans to build single-family houses reached 7.5% of the value of all such loans in the fourth quarter, up from 2.1% a year earlier, according to Foresight Analytics, an economic and real-estate research firm. There's likely more pain ahead. The Commerce Department reported this week that permits for new housing construction, a barometer of future building activity, fell 7.8% in February to the lowest level in 16 years. Also this week, the Federal Deposit Insurance Corp. said it had "increased [its] overall concern" about banks with high concentrations of construction loans, particularly those for residential developments, its strongest warning to date about these banks.
Federal Reserve Chairman Ben Bernanke warned Congress late last month that he expected some small U.S. banks to fail due to the housing stress. Analysts say as many as 150 banks could fail over the next three years. By comparison, about 900 banks and savings-and-loans associations failed from 1990 to 1995, according to the FDIC."

As you can see by February's data, this debt is forcing the builders to stop building. This trend should only get stronger as their balance sheets continue to deteriorate.

The pressure will continue to mount on the banks because builders will start going bankrupt as they are forced to sit on houses and land that they cannot sell. As a result, expect some regional banks to fail as they have to battle two fronts: the mortgage crisis in housing, and now they face pressures from the builder side of their loan portfolio's. I think 150 bank failures is on the low side as this crisis starts spreading into prime loans. (BTW The UBS insolvency rumor is gaining momentum but I still cannot confirm that they are toast.)

This will hit the regional builder first because they don't have the cash reserves that the larger builders like Lennar and Pulte have.

The good thing for buyers is this should force prices lower because these builders face BK if they don't sell off their current inventory. Now is not the time to buy however! These building defaults will continue to get worse as inventories continue to rise. So keep sitting on your hands and let this whole disaster play out. I wouldn't even be looking right now as a buyer of any type of real estate. The pressures continue to mount.

Thursday, March 20, 2008

3 Month Treasuries Drop to Lowest Rate since 1954

So where is the smart money? Hiding in three month treasuries. Fear in the markets has driven investors to short term treasuries that are now offering a return of only .38%.

This is a negative return when including inflation. Karl Denninger described it best by saying the Fed interest rates are basically at zero when you look at short term treasuries in the bond market. The Fed is running out of bullets. The three month treasury is a great indicator for fear as investors normally flock to treasuries when equities do not look attractive. A quote from the article:

"U.S. Treasury three-month bill rates dropped to the lowest since at least
1954 yesterday as investors sought the safety of government debt. Bill rates
declined as low as 0.387 percent as finance company CIT Group Inc. drew on $7.3
billion in credit lines after being shut out of short-term debt markets.
``This is all about money,'' said Leonard Kaplan,
president of Prospector Asset Management in Evanston, Illinois, who has been
trading gold since 1973. ``The Fed can control the price of money but the banks still don't want to lend.''

Betting against the bond market has never been a very successful trade. 99% of the time they are dead right. The smart money wants no part of this market.

The Fed is Playing With Fire

The market roared today as the cheered the Fed's moves this week of cutting rates, bailing out Bear Stearns, and allowing investment banks to borrow from the discount window. The road the Fed has decided to take is full of danger according to many expert. It also in my opinion sends the wrong message to the banks.

CNBC reported the data showing how much borrowing was done at the Fed discount window by the investment banks. The data was disturbing:

"Those large firms averaged $13.4 billion in daily borrowing over the past week from the new lending facility. The report does not identify the borrowers.
The Fed, in a bold move Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, got under way Monday and will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

On Wednesday alone, lending reached $28.8 billion, according to the Fed report."

I almost fell out of my chair when I read how much was borrowed. These are HUGE amounts of money!!! This told me all I needed to know about how bad things really are with the banks and their balance sheets. In the past the banks would never borrow from discount window because they were worried it would look like a sign of weakness. I guess when you are bordering on insolvency things change and that discount window doesn't look so bad anymore!!

All the big names including Goldman, Lehman, JP Morgan and Merrill Lynch were all shown to have used the window. Based on the amount borrowed, my guess is at least one of these banks would have gone down with Bear this week if the Fed hadn't changed the rules and done something for the first time ever and lend to the slime that got us into this mess to begin with.

Think about the message you are sending to these investment banks if you are the Fed. You are basically telling the banks "Its ok that you committed fraud and put millions in homes they cannot afford. We will have your back when they cannot afford to pay." When will the Fed realize that they may have crossed the line of moral hazard? How can you reinforce such horrible behaviour? It really boggles my mind.

What the Fed is allowing the banks to do is take bad debt to the discount window and turn it into cash. This is flat out WRONG and who do you think pays for this? That's right the taxpayers. This is going to turn into a nightmare if the Fed continues this bailout behaviour. No one can afford houses right now! No one wants to lend money to buy at these prices! By feeding the banks money and allowing them stay afloat the Fed is doing nothing but freezing up the system which will make things MUCH WORSE down the road.

Economics professor Noriel Roubini who has been dead right on this crisis from the beginning explains it best here:

"The Fed response to this run has been to provide the Bear Stearns bailout and provide both liquidity and swap of illiquid and toxic assets for safe Treasuries to the non-bank primary dealers. But these radical and risky actions of the Fed - as the collateral for this lending is now toxic – are not achieving their goals: in the short run the risk of a run on a Lehman may have been reduced; but what is happening in the money markets and in the agency markets shows that the Fed can only affect partially liquidity premia, not credit premia; and spreads are widening for a wide range of money markets and credit markets because of widening credit spreads driven by sharply rising counterparty risk.

The lack of trust of financial institutions in their counterparties is surging in spite of all the Fed actions as panic is setting in money markets and credit markets. Thus, providing access to a dozen broker dealers who are primary dealers does nothing to ease the credit risk and liquidity/rollover risk of thousands of US and global institutions that are part of the shadow financial system. In a mark to market world many of these highly leveraged institutions – including large broker dealers other than Bear Stearns – are effectively bankrupt and no Fed action can rescue them. And the run on the shadow financial system has barely started.

Thus the piecemeal approach to crisis management taken by the Fed, the Treasury and other financial authorities is going to fail miserably. A severe recession and a severe financial crisis cannot be avoided at this point. Only much more radical government action will limit the financial meltdown and start to put a floor on the financial markets collapse. This government intervention would not be aimed to prevent the necessary adjustment of asset prices; it would be aimed at ensuring that the necessary adjustment is not disorderly."

Bottom line from Dr. Roubini: You can bring a potential lender to water but you can't make him drink. The Fed and banks can only provide the liquidity. The problem and ultimate failure of this charade is the demand to lend simply isn't there because people are tapped out and done lending. The Fed cannot create DEMAND no matter how hard it tries.

If the Fed continues on this path then we are in deep trouble. They cannot continue to bailout the banks forever because they will go bankrupt themselves. As I have said before the FED does not have enough money to cover the bank losses. They cannot continue to lend at $30 BILLION per day. The fact that the Fed is lending to the thieves that put us into this disaster should anger every American.

Freddy and Fanny yeterday

I have a long business day planned today but I wanted to mention this housing related item that came out yesterday. Fanny and Freddie's capital requirements were reduced by US regulators yesterday from 30% down to 20% to provide a boost to the housing market.

This extra liquidity can now be invested into the mortgage market. This is expected to allow Freddie and Fanny to do an addditional $200 billion in additional loans.

My take:

This should help but if housing is too expensive and people cannot qualify for the loans due to tighter lending standards does it really matter? Both companies added that you could see an additional 13-17% reduction in home prices.

With these expectations my guess is both companies will be very conservative with what kind of loans they do and the requirements will be quite stringent in order to qualify. The last thing Fanny and Freddie want to do is an additional $200 billion in bad loans. Their current loan book is a mess and I think these new loans will be done with old scool lending standards.

This means 10-20% down depending on the market and what prices are doing, plus documented income and excellent credit. They also may use some of this capital to shore up their balance sheet to protect themselves against all of the bad loans they did in the past.

Bottom line is this is just another band-aid that will do little to stop housing from dropping like a rock. Stay tuned.

Some morning news:

Credit Suisse announced about 3 billion in writedowns today. More good news. Rumor is out their that UBS may take a $ billion dollar hit. Since the market is closed tomorrow does anyone want to hold stocks going into the weekend? Could ge another red day in the stock market.

Wednesday, March 19, 2008

Today's Market

I wanted to talk a little more about todays action. As i discussed earlier today I thought the market would reverse today. I didn't see a 300 pointer however!! the lack of follow through on yesterdays gains was a very bearish sign. It seems to me that the market just wants to sell into any strength because no one has any convictions to hold stocks and they are extremely fearful.

I am fearful! I saw a lot of bad things today. Gold dropped $60 an ounce as it was time for the hedge funds to pay the piper. Margin Call City!!! What is happening in the markets right now is a massive deleveraging of debt.

Banks need cash so they call their hedge fund customers that leveraged up 10-1 or 20-1 in AAA debt and are telling them they need to get the leverage down to 5-1 and hitting them with margin calls. In order to raise cash to pay the margin calls the hedge funds must sell good assets like gold or other stocks/commodities. The majority of the drop in gold was margin calls. The strength of the dollar also brought it down a little as well.

I think you will start to see some hedge funds go under over the next few weeks. Many do not have the cash to deleverage down. What you saw today in the stock market was a liquidation of assets forced by margin calls. This can stop a market dead in its tracks.

The scariest part of the deleveraging is no one really knows how bad this will be because there is so much leveraged and bad debt thats been placed into derivatives and other investment vehicles that are a result of our financial "innovation". I have yet to find anyone who understands or can predict how this $500 trillion dollar derivatives market will unwind.

This is causing a lot of the fear out there. Because of the fear our financial institution's risk management teams are forcing margin calls and reigning in lending which tightens the money supply. Going forward cash will be king and being swamped in debt will be a nightmare. Its been the other way around for the last 20 years. When you paid 200k for your house and then you could sell it for 350k 3 years later then debt was great. You could borrow off it, turn it into cash, buy a Hummer. Well now when you buy a house for 400k and its now worth 350k its not so cool to have debt anymore. We will all become savers again as a result of this crisis.

This is the conundrum that we find ourselves in. The Fed has injected massive liquidity into the markets which means there should be tons of money out there to borrow. The problem is the banks are not making the money available because they are not confident in the market conditions. This is why the Fed cuts really don't have an effect other then the euphoria the day of the cut.

So could this deleveraging send the market down the tubes? Its looking more and more like the answer is yes because I don't see any confidence in the markets and it looks more and more like deflation similiar to Japan. The money supply is shrinking due to the banks tightning on lending and we are already in a recession IMO.

Some advice:

If you have debt pay it off as soon as possible. Banks are going to keep raising rates on balances in order to increase their capital. Have a little cash in the house. The banks are very shaky right now. If Bear Stearns can have a bank run so can your local bank so stash a little cash in the closet or a safe if you have one. Be very careful with your investments. Be very conservative and have a large position in fixed income. Right now nothing is working in equities. The commodities were working up until today but now it seems they might pull back. There is NOWHERE TO HIDE right now in equities.

Dennis Gartman who is one of the smartest guys on Wall St. said tonight that he is almost all in cash. He followed up by saying that he has NEVER seen as volatile a market in his 30 years on Wall St. If a guy like this can't trade right now none of us should be trying. Its a time to hunker down and ride out the storm. We have a ways to go before this hurricane is over.


Well what a difference a day makes. It didn't take the market long to realize that yesterdays "fixes" do not solve our markets issues. I could write a book based on todays action but I will try to limit it to a few things tonight.

One of the biggest news items of the day was the Merrill Lynch suing XL. XL is one of the bond insurers that sold insurance to the banks on CDO's. Other insurers include Ambac and MBIA. You have seen these "monolines" in the news a lot recently because many contend that they should be downgraded from AAA status. If this happened the banks were going to have to writedown a significant portion of the CDO's that these monolines insured. I think the nummber was somewhere around $70 billion in writedowns.

These insurers have been able to keep their AAA ratings through raising capitol thus preventing Wall St. from having to writedown the CDO's that were insured by these companies. Well today XL tried to back out of $3 billion in CDO's they insured for Merrill and Merrill responded with a lawsuit. This news is HUGE. If the monolines start backing out of this protection then you could see a whole new set of writedowns from the banks. The monolines most likely do not have the money to payout the claims. Merrrills take on XL's move:

``Apparently in light of the current dramatic downturn and deterioration
in the credit markets, defendants are having `sellers' remorse
,' ''
Merrill said in the complaint filed today in Manhattan federal court."

Folks, this is something to keep a very close eye on. Forget the lawsuit for a second. If the banks like Merrill think that the monolines cannot afford to pay these claims they may write CDO's off anyway because they don't want the risk on their books. The capital the monolines had versus the trillions in bonds they insured was ridiculous so I expected this to end ugly in some capacity. I didn't expect the mono's to just walk away. How ironic is it that the monolines are doing the same thing homeowners are??

Fed rate cut fails to instill condfidence

Well here we are less then a day later and we are already seeing a disappointing reaction from the markets. All of the European markets are down today and the US futures are now turning green because of JP Morgan but were in the red before JP's earnings. Here is a great Bloomberg article discussing the reaction from a rate perspective. A few comments from the article:

"The cost of borrowing in dollars, euros and pounds rose, in a sign that the Federal Reserve is failing to instill confidence in money markets.
The London interbank offered rate, or Libor, for three- month loans in dollars rose 6 basis points to 2.60 percent today, the first increase since Feb. 26, the British Bankers' Association said. The euro rate climbed 1 basis point to 4.67 percent, while the pound rate also added 1 basis point to 5.98 percent, both the highest this year."

My take:

The one number that caught my attention was the libor rate. I like like to look at libor because many mortgages rates are set in the US based on this rate and its also considered one of the benchmark rates to look at to measure fear in the markets. So the Fed makes a big cut and libor rises. Guess that didn't work too well did it. This is because its a trust issue not a monetary issue. This reaction shouldn't be a surprise. The article goes on further:

"Money-market rates are rising as banks hoard cash on speculation financial institutions will reveal more losses. Bear Stearns Cos. had to be rescued by JPMorgan Chase & Co. this week after a run on the bank. HBOS Plc, Britain's biggest mortgage lender, said today it has ``ready access'' to funding after the company plunged as much as 17 percent.
``The market is concerned about another Bear Stearns-type event unfolding in Europe,'' said Richard Bryant, a bond trader at Citigroup Global Markets Inc. in New York. ,'' People are ``on edge yet again", he said."

Like I said yesterday the banking crisis is not over people. I have heard speculation that UBS might be the bank in trouble but I have been unable to confirm. One more quote:

"Credit-default swaps on Edinburgh-based HBOS rose 19 basis points to 270, according to CMA Datavision.. The securities, used to speculate on a company's ability to repay debt, rise as credit quality worsens. A basis point is 0.01 percentage point."

Final take:

Well the Fed comes to the rescue for a fourth time and you are seeing the same results. One bullish day in the markets the day of the cut followed by the reality the next day that nothing has changed. The final quote on HBOS simply means that banks don't trust lending money right now because they are not confident they will be paid back. There are a lack of qualified buyers out there to lend to.

Wouldn't you be hesitant to lend to another bank after seeing the 5th largest bank in the US evaporate in 2 days? Every risk managament division at every bank is now scrutinizing every trade done by their institution. The backlash of Bear Stearns will only make this worse because they now know the risk is real. "Repo" trades are down considerably since this all went down. These are trades where for example one bank might lend another bank $1 million dollars cash overnight for $1 million in bonds at a price. These trades are done daily all the time between institutions. Expect these to decline further and if word gets out that one bank won't "repo" trade with another bank then everyone else might stop "repos" with the same institution. This was one of the things that brought Bear Stearns down. It could easily happen again.

The Fed made the moves they did to lower rates and provide liquidity to the markets. the reaction from the markets is the opposite!! Rates have risen instead of fallen and as a result there is less liquidity then before the Fed cuts. All of the liquidity in the world isn't going to help if the banks refuse to use it and lend.

So what did the Fed accomplish yesterday? Rates rose, the dollar stregthened because the cut was less then expected but it will eventually further weaken IMO. The credit crunch and fear still have hold and inflation will probably edge higher. Nice job guys.

One more little piece of info. Lehman and Goldman used the Fed discount window yesterday. Lehman borrowed $2 billion dollars. After such announcing such "strong " quarters sccording to the analysts I found this a little amusing.

Once again the Fed's actions have not worked. Strike four! I thought you were out after three strikes. I guess if you are the Fed you get as many as you want. Back to the reality of the credit crunch and banks hanging on by a thread. I hope you enjoyed your one day vacation.

Tuesday, March 18, 2008

Rally time? Don't think so.

The stock market roared today as the DOW moved up 3.5%. The Nasdaq was up over 4%. If you listened to CNBC you would have thought we were in the middle economic prosperity. Everyone was cheering the Fed cut. Analysts were turning bullish and calling bottoms. The Visa IPO was priced at the high end of expectations at $44. This incited more cheering that this is a sign that the credit markets are coming back. The bulls also chirped about how mortgage rates will drop because of the Fed cuts. Everything is just fine an dandy after seeing the news today.

So after hearing all of this many are starting to ask themselves is the bull back and ready to charge ahead? Ummm NO, sorry, not buying it. What I see is the picture above.

My take on today was that the bulls put on their best Sunday suit and tried to spin the fact that we have found a bottom and we are ready to move higher. They also seem to insinuate that the Fed is ready to bailout everything and might even buy off the bad debt from Wall St.(never gonna happen). So I guess we are now to assume that the economy is ready to boom after a week of bailouts, bank bailouts, and rate cuts? It sounds like a reason to sell instead of buy in my eyes. These fixes are nothing but signs of weakness in the economy.

It sounds to me like the Fed agrees. How can anyone be on the bull side after hearing their statement?

Here it is take a read from 2:15 today:

"Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.Inflation has been elevated, and some indicators of inflation expectations have risen.

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability"

Downright gloomy isn't it? Its very rare that the Fed is this blunt about the state of the economy. Usually they like to tip toe around and not rock the boat. They are obviously seeing deep problems and the consumer pulling back. Remember the CONSUMER is 70% of the ECONOMY! If we stop spending then the economy goes nowhere.

Why did the consumer stop spending? Geez there are so many reasons. Let me try a few:

Higher mortgage payments, inflation pressures from food and gas, higher unemployment, stagnating wages, drop in house value which stops the consumer from pulling money out of appreciation, credit card default increases. Bottom line is the consumer simply can't spend anymore. Look at car and retail sales the last couple months if you want some evidence.

If you want more evidence just look around you. I see the financial pressures all the time with my own friends. Many are struggling with mortgage payments and can't sell their houses. One friend bought from a builder only to watch the same builder sell the same house a year later in the same development for $50,000 less. I watch the prices of things I buy go up monthly. When I am out in the city I never see cash anymore. I see nothing but credit cards. Are you seeing the same things? Sometimes I get angry with the financial press because they are so busy trying to sandbag us into thinking everything is ok that they forget that people are struggling out there.

A quick comment on the financials today:

I had to laugh when listening to the banks(Lehman and Goldman) talking about how strong they are. Goldman said today during their conference call that we have never had so much liquidity!!! Well then why don't you open up your books and show how many bad loans you have if things are so damn good? I ask the same question to every other institution!

The reason you are hearing such confident, bullish statements from the financials right now is because they actually feel the exact opposite and their balance sheets have never been so bad. This is a crisis of confidence and trust and they are trying to increase confidence by pounding their chest like King Kong.

Final conclusion:

Don't assume that this crisis is over. The DOW may rally 1000 points from here and it doesn't matter IMO. We will not see higher highs in this market until the following happens. The banks are transparent and write off their bad loans and allow trust to come back to the markets. Housing MUST return to affordability which would also go a long way towards getting the consumer back on its feet. The Fed MUST get out of this bailout mentality. These bailouts, arm freezes, rate cuts do nothing but delay the pain that is inevitably needed for the market to feel and then recover from. Recessions are healthy and bring balance back to our financial system. Until I see these changes I think the market will continue to churn in its choppy, violent,volatile ways.

Goldman/Lehman beat estimates.

It looks to be a bullish day in the stock market as both Lehman Bros. and Goldman Sachs both beat earnings estimates. Look for Wall St. to breath a big sigh of relief and move stocks higher as long as the Fed cooperates and cuts .75.

What I find interesting in the earnings reports is both companies reported revenues were down about 30% and profits were down about 50%. I have always believed that going forward its going to be harder for these firms to generate revenue because the housing game is over and there are not as many M&A deals because there are no credit markets!!

Goldman reported they consulted on $150 billion in M&A deals in the quarter vs. $300 billion the same quarter last year. Wall St cheered these numbers with beaten down expectations. I don't see any of the investment banks growing revenues going forward without the housing ponzi scheme and the credit markets creating deals for them to help put together. This will create problems down the road.

Quiet morning. Everyone is waiting for the Fed. I will be back after the announcement.

Monday, March 17, 2008

Fed tomorrow/Hombuilder Index remains at its lows

Well it turned out to be a surprisingly flat day in the markets. The market seems to be lost and looking for direction as it absorbs the Bear news and all of the new intervention from the Fed. The market is also waiting to hear what the Fed will do tomorrow with the FF rate.

I am starting to believe that the Fed might not give the street all it wants in cuts tomorrow after all the gifts the street got this past week. Think about it, in one week the Fed has set up a $200 billion dollar lending facility, bailed out Bear Stearns, dropped the discount window rate to 3.25% AND allowed the IB's to borrow from it. Wall St. must think its Christmas!!

This is why I think the Fed might only cut .50 instead of the .75 the street wants. The Fed wants to be perceived as being strong and acting in an independent manner and going .50 would send that type of strong message. We know this is a joke and they always pander to Wall St. but they can't always give in.

The Fed also may think they need to slow down a little bit because of what they have done to the dollar and inflation with all of the liquidity they have already thrown into the system. They also may want to save some cuts for down the road. The Fed is running out of bullets. We will see what happens tomorrow.

The NAR released the Hombuilder index for March. This index measures homebuilder sentiment of market conditions. The index came in at depression like 20 in March after hitting an all time low in December at 18. Anything under 50 is considered to be poor market conditions.

So why do I bring this up? BECAUSE THE SPRING SELLING SEASON IS HERE!! The best time of the year to buy a house!!! Now is the time to buy!!! Its getting warm!!! We are almost sold out don't miss your opportunity to get in!!! Anyone hear these before? Gotta love the Realtors. I just found it interesting that at peak season the sentiment remains so bearish among builders. Until tomorrow everyone.

Global selloff overnight/US holds it ground

Happy Monday everyone. Well after Bear Stearns was sold at $2/share I figured all of the world markets would react to the news in a negative way. So I watched Asia open down 4% within a few hours of trading. As other world markets opened the reaction was the same. Gold was up $34!! Yen/carry was touching 96. It seemed all hell was breaking loose.

Before I knew it we had a global selloff on our hands and when I turned on CNBC at about midnight they had special coverage of the global selloff and were showing CNBC's International show live.

I then started thinking wow US crash on Monday? Futures were way down. So I watched the opening of the exchange today expecting fireworks. I figured maybe a Lehman or a hedgie might go under. So what happened? Nothing! I then tried to figure out why.

It didn't take me too long to figure out why. I read a little more into the Fed's actions today in a Bloomberg article. A little excerpt:

"In its first weekend emergency action in almost three decades, the central
bank lowered the so-called discount rate by a quarter of a percentage point to
3.25 percent. The Fed also will lend to the 20 firms that buy Treasury
securities directly from it
. In a further step, the Fed will provide up to $30
billion to JPMorgan Chase &
. to help it finance the purchase of Bear Stearns Cos. after a run on Wall
Street's fifth-largest securities firm.
``It is a serious extension of
putting the Federal Reserve's balance sheet in harm's way
,'' said Vincent Reinhart,
former director of the Division of Monetary Affairs at the Fed and now a scholar
at the American Enterprise Institute in Washington. ``That's got to tell you the
economy is in a pretty precarious state.''

Opening up lending to firms other than commercial banks represents a shift
in the Fed's 94-year history.
The so-called primary dealers include firms that
are units of commercial banks and several that aren't, including Goldman Sachs
Group Inc., Morgan Stanley and Merrill Lynch & Co."

Why did this help prop up the US markets today?

Because the Fed is now allowing the investment banks like Lehman and Goldman Sachs borrow from the discount window. This is pretty much unprecedented as you can see above. IMO this will probably save Lehman at least for now. As a result the markets opened very tame. Thats not to say things can't unwind later.

This is just another band-aid that is allowing the banks to hide their mistakes. The Fed should be forcing the investment banks to come clean. Instead, they are now allowing them to borrow from the discount window. The only reasoning for this is many of the IB's are probably in deep trouble and some might have collapsed today without this borrowing alternative.

Its a very desperate move and does not bode well for the future. Japan's 10 year deflation nightmare happened mainly because of one reason. The governement allowed the banks to hide their losses for years and years thus there was no trust and their market went from 38,000 down to 14000 in the process. It now sits at 11700 because of our recession risk. Lets HOPE we do not make the same mistake.

Sunday, March 16, 2008

Update:Bear Strearns sold for $2/share

I had to throw this up. Bloomberg and CNBC both confirm that Bear Stearns has been bought by JP Morgan for only $2/share. The Fed also lowered the discount window by .25 to 3.25%. The price is stunning considering this was a $160 stock a year ago. The Fed also agreed to fund 30 billion dollars towards some of Bear Stearns less liquid assets. One of the quotes in reaction to the news:

"This is going to go down in very historic terms," said Peter Dunay, chief investment
strategist for New York-based Meridian Equity Partners. "This is about
being overextended, and how bad it is for major financial
institutions and for
individuals. This is why we're probably heading into a

The world markets initially moved up but now are sharply down. Japans market is down over 3%. Gold is up almost $20 as more Fed intervention continues to weaken the dollar.

Well I think this sums up what a scam this whole housing game was. Mighty Bear Stearns, the #2 underwriter of mortgage backed securities in the US is now a few dollars from being a penny stock. What this tells me folks is once they got a chance look at the financials at Bear they realized there was nothing there. Selling BSC at $2/share is around $250 million and the Fed still had to partially bail them out. Their building in NYC alone is worth $1.2 billion!!! Bear made 2 billion in profit in 2006 at the peak of the housing boom.

This shows you what a house of cards the whole housing game was. Once prices stopped rising the bubble popped. Bear Stearns will most likely end up as the poster child for the housing bubble or as I like to say: the housing time bomb!

The Silence is Deafening

Well its Sunday night and I expected all kinds news over the weekend as Wall St. scrambles around trying to figure out what to do with Bear Stearns. So far there has been no agreement. This is a very hard company to buy because so many of their assets like their CDO's are so difficult to value because the market prices of these keeps changing. Expect losses in equities if this issue gets drawn out or Bear Stearns goes BK. The silence is a surprise as I would have thought they would want to sweep this under the rug as fast as they can.

Their was an interesting piece in a UK newspaper today. A couple quotes in the article that struck me that struck me:

A Goldman Sachs trader in New York said: "Everyone is in a total state of shock,
aghast at what is happening. No one wants to talk, let alone deal
; we're just
standing by waiting. Everyone is nervous about what is going to emerge when
trading starts tomorrow"

This is what happens when fear strikes. Everyone just waits so they don't make a mistake that could cost them their job. Some realize they may not have jobs a year from now. I had a trader tell me about a guy that was fired over buying one piece of bad debt that his bank didn't like.

Another quote from Strategist Michael Taylor:

In the UK, Michael Taylor, a senior market strategist at Lombard, the
economics consultancy, said on Friday night: "We have all been talking
about a 1970s-style crisis but as each day goes by this looks more like the
. No one has any clue as to where this is going to end; it's a
self-feeding disaster." Mr Taylor, who had been relatively optimistic, has
turned bearish: "It really does look as though the UK is now heading for a
recession. The credit-crunch means that even if the Bank of England cuts rates
again, the banks are in such a bad way they are unlikely to pass cuts on."

These types of problems when they are about trust can spiral downward very rapidly. Lets hope it doesn't get this bad but I am afraid we all should prepare that it might. Mark O'Sullivan from the same piece adds:

"This crisis is one of faith. We are going to see even more
problems in the hedge funds as they face margin calls
," said Mark
O'Sullivan, director of dealing at Currencies Direct in London. "What we are
waiting for now is for the Fed to cut interest rates again this week. But that's
already been discounted by the market and is unlikely to help restore

Until faith is back, expect housing prices to tumble and the stock market to struggle. The Yen/carry trade just dropped below $99.00 due to the crashing $$ which is also very bad. We have several negatives hitting the markets all at once. Expect a big Fed cut Tues. Lets hope the dollar holds. The market is as fragile as I have ever seen it. I will be here to fill you in all week.

Is Lehman Brothers next?

I want to thank Nouriel Roubini for this excellent research.

"Bear is only the first broker dealer to go belly up. Rumors had been
circulating in the market for days that the exposure of Lehman to toxic ABS/MBS
securities is as bad as that of Bear: according
to Fitch
at the beginning of the turmoil Bear Stearns had the highest toxic
waste ("residual balance") exposure as percent of adjusted equity on balance
sheet; the exposure of Bear was 54.5% while that of Lehman was only marginally
smaller at 53.3%; that of Goldman Sachs was only 21%. And guess what?
Today Lehman
received a $2 billion unsecured credit line from 40 lenders
. Here is another
massively leveraged broker dealer that mismanaged its liquidity risk, had
massive amount of toxic waste on its books and is now in trouble. Again here we
have not only a situation of illiquidity but serious credit problems and losses
given the reckless exposure of this second broker dealer to toxic

My take:

Well It looks like we know where the next bank blow up is. I found the timing interesting that Lehman quietly borrowed $2 billion from 40 banks knowing that Bear Stearns would take all of the news on Friday. Also, why did it take 40 banks to lend mighty Lehman a measly $2 billion dollars. Not exactly a show of confidence in Lehman from the banking sector. Lehman looks very very shaky. I think this has a good chance of happening especially after reading this Bloomberg piece.

Full article:

"March 15 (Bloomberg) -- S3 Partners LLC moved $25 billion of clients' assets
from Bear Stearns Cos. to other brokers in the past three months, the Wall
Street Journal reported, citing S3 managing partner Robert Sloan.Renaissance
Technologies Corp., which oversees more than $30 billion, also shifted its
assets from Bear Stearns to other Wall Street rivals in the past week, the
newspaper said, citing unnamed people close to the matter. The report didn't
give a figure.Debt investors yesterday also became ``more cautious''
about Lehman Brothers Holdings Inc., with the cost of five-year credit-default
protection on Lehman's debt rising to $450,000 annually for every $10 million in
debt, up from $395,000 the previous day, the Journal said.
wanting to buy this protection on Bear Stearn's debt at one point had to pay as
much as $1.1 million upfront to sellers and agree to pay $500,000 annually for
five years for the insurance, the newspaper said."

My take:

Why such a rapid increase in the cost to insure debt from one day to the next? Running low on cash perhaps?? Another question I have is why do debt investors pay insurance for something when they think a company might be insolvent? Insuring debt with insurance that most likely will never be paid sounds like a big waste of money.

Lehman looks like they are hangin on by a thread. If you own this stock, Run Forrest Run!! The speed at which all of this is happening is frightening. One more thing to take into consideration here is Lehman is a much larger bank then Bear Stearns. If they go then you can assume no IB is safe other than perhaps Goldman Sachs who managed their risk and is the best firm on the street. Have a great afternnon!