Saturday, June 14, 2008

Mortgage Rates rise half a point in 30 days

Good afternoon!

Mortgage rates are rising! Investors were in a buying mood on Friday(I have no idea why). The bond market however is getting increasingly more bearish. The 10 year note has now risen to 4.26% which is the highest rate this year.

Mortgage rates have risen as a result as seen here on Bloomberg.

As you can see, rates have risen from 5.82% up to 6.3% month on month. Mortgage backed securities have also risen to the highs seen last summer as seen in the graph below. This doesn't always correlate with mortgage rates but its a good indicator.

Consumer sentiment also seen below is putting further pressure on rates rates because the bond market is becoming increasingly more skeptical of the massive debt bubble that's been created over the past 20 years.

As a result, yields are rising which pushes up rates. Never bet against the bond market. They almost always get it right. The catalyst for the tech bubble bursting was created in the bond market by rising rates. When things look ridiculous like the current debt bubble does, yields on bonds rise especially when inflation is in the picture.

Great read and bottom line:

I recommend that everyone reads the following commentary from Doug Noland from Prudent Bear. Make sure you read his conclusions at the bottom. Its a great read.

One of his conclusions:

"The risk that our economy has entered a substantial downturn has actually increased markedly over the past several weeks. Importantly, energy costs have risen significantly to the point of being economically destabilizing. The combination of spiking energy and food costs has created the worst global inflationary backdrop since the seventies – a dangerous predicament only belatedly appreciated by global policymakers. Central banks across the globe have begun to react, and vulnerable global bond markets are under heavy selling pressure. There is today great uncertainty as to the consequences of a global spike in bond yields.

Importantly, the Fed’s aggressive “reflation” is being stopped dead in its tracks by market forces. U.S. market yields are moving sharply higher, with benchmark MBS yields now all the way back to last summer’s levels. This is forcing another round of speculative de-leveraging in the highly leveraged mortgage Credit market, which is tantamount to a further tightening of already tight mortgage finance conditions. This is another huge blow for the vulnerable Bubble Economy."

Bottom Line

Rising interest rates in the bond market are a long term phenomenon and I don't see this changing anytime soon. This will be a crushing blow to the economy and the Fed will have no way of controlling it.

Consider this a big "kiss my behind" to the Fed from the bond market. Including inflation, the Fed funds rate is already at zero. If they drop rates again the bond market may take mortgage rates even higher with increasing yields.

Housing has much further to go on the downside with the bond market now starting to panic.

You ain't seen nothing yet when it comes to dropping home prices.

Friday, June 13, 2008

Consumer Sentiment Hits a 28 Year Low/Foreclosures soar

Sometimes I feel like Bill Murray in the movie Groundhog Day when it comes to giving everyone updates on consumer sentiment and rising foreclosures. Consumer sentiment hit a 28 year low of 56.7 which was down from the previous month according to the University of Michigan Survey.

So why are consumers feeling so bad?

Here is a great graph from Calculated Risk that shows the amount of equity that was extracted from homes over the last 18 years. Look at the amazing amount of wealth that was spent during the "golden housing bubble" years of 2002-2006. This is how consumers were affording that Hummer and 58" plasma TV!!

As you can see, now that home prices are free falling, the housing ATM card that came from home equity loans has been shut off. Banks have ZERO desire to do home equity loans now that housing prices are free falling and foreclosures are soaring.

Note in the right hand column that at the peak, these home equity extractions accounted for almost 10% of disposable income. That number is now down to about 2% which is close to where it was during the last bursting housing bubble in the early '90's. The bottom line here is the consumer has been cut off from equity extractions.

That's a big hit to the wallet of the consumer on top of soaring gas and food prices.

I think this will end up being well below the 1990's lows of 1% because this housing bubble was so much more severe than the 1990/91 bubble. A % close to zero is not out of the question.

This is why touching any company that is sensitive to discretionary spending is suicidal. The consumer is 70% of the economy!

I have to admit guys and gals. When I see the impact of the housing bubble on the consumer combined with soaring inflation, I start to get sick to my stomach because I just don't see how we get out of this without a major major recession.

Foreclosures rise 48% in May

Foreclosures continue to soar rising 48% in May versus last year and up 7% from last month.

Here is the foreclosure data from Bloomberg:

Some highlights:

"June 13 (Bloomberg) -- Bank repossessions more than doubled in May and foreclosure filings rose 48 percent from a year earlier as previously foreclosed properties dragged down housing prices, trapping borrowers in mortgages they couldn't afford, RealtyTrac Inc. said in a report today.

Foreclosures add to inventory and crowd out regular sales, Michelle Meyer and Ethan Harris, economists at Lehman Brothers Holdings Inc. in New York, wrote in a report yesterday. Foreclosures will account for 30 percent of national home sales this year as 1.2 million foreclosed single-family homes will eventually enter the market, they said. They estimate foreclosed properties, which typically sell for about 20 percent less than other homes, will depress home prices nationally by 6 percent."

My Take:

Gee, should we be surprised at these foreclosure numbers? The one thing that stood out to me was the fact that 30% of all home sales are foreclosures. 1 out of 3. Amazing. I still think its way too early to be buying these by the way. Can you say "catching a falling knife".

Realty Trac said on CNBC this morning that there are about 700,000 foreclosed homes for sale right now and they expect that number to rise to 1 million by the end of the year. That's only going to push prices further down folks!

Its supply and demand people. Stay away from these foreclosures! Inventories continue to rise which will mean much cheaper prices down the road. We are very early into the foreclosure cycle. Let these suckers buy at a 20% discount. You will be getting them for 40% off in a year or two.

Bottom Line

The market is up today but its not an impressive move. New lows outnumbered new highs in the market by 3-1. We have a Lehman led relief rally in the financials. This has no legs and I wouldn't be surprised to see this rally fade going into the weekend.

Enjoy your Friday

Thursday, June 12, 2008

Look out Housing Bubble Creators! Here comes the FBI!

What a wild ride in the markets today. Everything looked just peachy for the bulls today until rising oil reared its ugly head late in the day.

Lehman can breath a sigh of relief. They have now officially made it to Friday! Congrats! Lets shoot for the weekend now boys! The blame game now begun at Lehman with a series of firings:

"June 12 (Bloomberg) -- Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory after the firm failed to quell speculation about mounting losses and stem a 65 percent plunge in the stock this year.

Callan, 42, who has been Lehman's public face in television appearances and magazine profiles since she was promoted to CFO six months ago, will return to the firm's investment banking unit and be succeeded by co-chief administrative officer Ian Lowitt. Herbert ``Bart'' McDade, the 48-year-old head of the equities business worldwide, will replace Gregory, the New York-based firm said today in a statement."

Quick Take:

Lehman's stock was down again today despite the announcement that they finalized their capital raising and shook up the management team. The price action on this stock tells you they are in serious trouble.

I am guessing they either go boom ,or get bought out at a Bear Stearns like price by the a large bank or a group of pigmen aka Long Term Capital. I can't see the Fed bailing this one out.

We might be calling this the Wall St. stick save. Remember folks, they have a vested interest in not letting Lehman go under because all of them have so much counter party risk to Lehman. They also fear that it might cause a panic and/or run on the bank. Time will tell. Interesting to say the least.

Here comes the FBI!

I tell you what. I wouldn't want to be a realtor, appraiser, mortgage broker or builder right now. There is a good chance some of them are going to end up in a jail cell sharing a room with a Crip or a Blood.

Here is the FBI news from Bloomberg:

"June 12 (Bloomberg) -- The U.S. Federal Bureau of Investigation, confronting a surge in mortgage fraud, has ordered more than two dozen of its field offices to stop probing some financial crimes so agents can focus on the subprime crisis.

Kenneth Kaiser, chief of the bureau's criminal investigative division, issued the directive late last week on a video conference call with the heads of 26 offices in areas where mortgage crime is rampant, said Bill Carter, an FBI spokesman in Washington.

Carter said the shift was made after an analysis of how agents are spending their time. The FBI traditionally has moved investigators to address urgent needs, he said. About 150 agents were working on more than 1,300 mortgage cases before the change.

``If you're seeing a significant crime problem, you have to move resources,'' Carter said yesterday. ``We've got a big problem with mortgage fraud.''

My Take:

All I can say is its about damn time. This was the biggest fraud I have ever seen. All of these housing bubble blower uppers were in cahoots with one another.

The realtors would call the appraiser and asks for a little help on the price, and would then threaten to take their business elswhere if he didn't come up with the right number.

The mortgage lenders would put lifetime renters people in loans at high interest rates knowing they could never pay them back. Greed makes you do crazy things.

The ratings agencies are just as guilty as far as I am concerned. They knew better when they rated these CDO's as AAA debt.

You already know my thoughts on the pigmen regarding their role in blowing up this bubble.

Anyone with a finance degree realized there were going to be defaults in subprime on a massive scale. The problem was the pigmen were paying them to rate the debt instead of the buyer of debt. Conflict of interest anyone?

Of course the agencies just went along with it and put some lipstick on that CDO pig and passed it on to investors all over the world.

When you create a ponzi scheme that forced $400 billion in losses and counting, you should expect to be prosecuted. Millions have been foreclosed on and thrown out of their homes. Millions more are in deep trouble. It will take years for many to recover.

26 offices is a lot of FBI agents. I would be shaking in my boots if I was one of the larger players in this scheme. I hope they throw the book at these scumbags. I feel safer buying a car right now than buying a house.

Angelo Mozillo better get out of that tanning booth and head to Mexico! There is someone from the FBI that might want to speak with him. Maybe he could be cell mates with an Enron Executive.

It would be a fitting ending.

The $4 Trillion Dollar Housing Bubble

Wall St. keeps asking itself: When is this credit crisis ever going to end? Some of the top credit analysts are predicting the credit crisis may last another two years. When it ends, $4 trillion in lost capital will have evaporated.

Here are the highlights from Reuters:

Home price drop means $4 trillion in lost capital

Wednesday June 11, 3:03 pm ET By Walden Siew

NEW YORK (Reuters) - No one knows when the credit crisis will end.

But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That's the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc, said in an interview that Wall Street write-downs and losses totaling at least $325 billion so far may ultimately mean $3.9 trillion in tighter credit conditions.

Moreover, home prices may fall as much as 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he told Reuters.

"The housing correction is in a down phase," Acciavatti said during a high-yield bond conference in New York. "We're now going through a phase of deleveraging and the pulling out of easy money."

A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years.

"There are a lot more mortgage defaults to come," said Glenn Costello, a Fitch Ratings managing director. "We see an ongoing high level of default."

My Take:

Its looking like 2010 is when you are going to find the best deals on buying a house. Whats crazy to me is as this credit crunch deepens, the recovery keeps getting pushed out. When this all started, 2008 was supposed to be the start of the recovery, then it was 2009, now 2010. Do I hear 2011? I feel like I am at an auction when I read about when the recovery begins.

$4 trillion dollars is an unbelievable loss isn't it? Anyone who bought from 2005-2007 will slowly start to realize that they made the biggest financial mistake of their life. The days of easy money are gone, and the defaults are going to keep rising in everything from subprime to prime loans.

Anyone that bought during this time may have to wait several decades to ever see their home be worth what they paid for it. Many will continue to "walk away" as a result of this realization until the BK laws make it more difficult to do so. As you can see, we are nowhere near the end of this crisis.

Interest rates rise on strong consumer sales

It looks like for the month, the stimulus checks worked pretty well. You need to pitch these numbers when you look at the health of the consumer. This is a short term fix for a long term problem.

The article below explains that there is a down side to this consumer strength. It gives the Feds the ammo it needs to raise rates. I will explain later.

Here is the bond news from Bloomberg:

"une 12 (Bloomberg) -- Treasuries fell, pushing the yield on the benchmark 10-year note to the highest level this year, after a report showed U.S. retail sales rose in May, bolstering the case for the Federal Reserve to raise interest rates.

Bonds fell for the third time in four days as the larger- than-forecast jump in retail sales added to expectations the Fed will boost rates as early as next month. Federal Reserve Bank of Philadelphia President Charles Plosser told CNBC today that it's ``certainly clear that rates will have to rise.''

``It's the retail sales data and the comments by Philadelphia Fed President Plosser that's taking the reins,'' said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley's individual-investor clients.

The yield on the benchmark 10-year note increased 11 basis points to 4.18 percent as of 8:49 a.m. in New York, according to bond broker BGCantor Market Data. The 3.875 percent security due May 2018 declined 28/32, or $8.75 per $1,000 face amount, to 97 1/2. A basis point is 0.01 percentage point.

"Futures on the Chicago Board of Trade show odds of 92 percent the Fed will raise the target rate for overnight lending between banks by at least a quarter- percentage point to 2.25 percent. Last week the chance was 30 percent."

My Take:

The problem with any good news right now is the Fed is chomping at the bit to raise rates because they see inflation soaring out of control. Any signs of strength in the consumer or the economy gives the Fed the ammo it needs to raise rates.

They will raise rates followed by a statement saying that the economy is showing some strength and the concerns of inflation need to be addressed. These strong numbers are actually bad news long term in my opinion because it means higher rates.

The bond market immediately reacted as the 10 year note yield rose to the highest rate this year. Look for a nice bump on mortgage rates in the next few days. They also put the odds of a rate increase at 92% versus only 30% last week.

Meanwhile, the reality is the economy got a short term drug fix by the stimulus checks and the economy is still very weak. By the end of the summer when these checks are spent, we will be facing the same problems but with higher interest rates.

Sounds like a recipe for disaster doesn't it? Higher rates will put more pressure on the banks that are in the middle of a credit crisis, raise interest rates on mortgage loans killing housing, and shrinks the amount of money that can be borrowed by the consumer.

Bottom Line:

This is going to end ugly. I see no way out for the Fed. We are getting a nice bounce in stocks today because we were way oversold and the consumer data was strong.

I don't think this move has legs. Expect fear to be back next week. CNBC is reporting that Lehman may be forced to sell itself. The IB's have very few ways to make money right now. This lack of ability to make profit combined with a crappy balance sheet means Lehman has to make a move or its going to bite the dust.

Stay tuned!

Wednesday, June 11, 2008

Market Update/Is Lehman Toast?

Its great to be back home tonight!

Blood is starting to flow into Wall St. as the financials got buried again today. Homebuilders are also falling apart. I warned the contrarions in late April to sell the home builders on the post Bear Stearns bounce.

I want to briefly talk about where I think we are right now, and then touch on Lehman because the stock acted real bad today.

As we know, the market is always forward looking and I think that it decided it doesn't like what it sees for the second half of the year.

The market is still worried about subprime and the toll it will take on banks, but these numbers are close to being baked into the cake. Now Alt-A and Prime loans are not in this cake but they should be(thats when the fun really begins).

What the market sees now is massive doses of inflation, rising interest rates, and a collapsing consumer.

What did the market see that brought us to the lows in March?

Subprime, Bear Stearns, and the fear of inflation and the consumer tanking are what took us to the lows in March.

One stick save by the Fed and we were off to the races with a bear market rally. Well now here we are almost 3 months later, and the market now sees the consumer collapsing versus just worrying about it.

Subprime has destabilized many regional and investment banks, and inflation has pushed oil to levels that the Fed never dreamed of. This has them painted into a box. If they raise rates they risk the fate of the financials, housing, and the stock market.

If they lower rates they run the risk of putting the last few nails in the coffin of the consumer via inflation which is almost 70% of the economy.

My point here is what they were worried about in March is actually happening NOW. This is a big difference pschologically for the bulls. They also are not as confident that the Fed will save the financials because of the "Moral Hazard" risk that they are very close to crossing.

They had liquidity to play with to go ahead and save Bear Stearns, because inflation was high but bearable.

Now it looks like Lehman is in trouble, and throwing more liquidity into the system is risky due to the inflation threat. Whats a Fed president to do? He must feel like General Custer right now.


Lehman looks like they are in deep trouble. This was the last thing that Ben Bernanke needed. Their stock price free falled to $23 which is Wellllllll below $28 which was where the stock was priced for their $6 billion capital raising. Imagine investing $6 billion at a "discounted" price of $28 and then see the stock price drop almost 20% below what you paid for it a few days later. You think they might be just a little pissed off?

Merrill Lynch then comes out and downgrades Lehman a week after they had just given them an upgrade. Here is the downgrade:

"June 11 (Bloomberg) -- Lehman Brothers Holdings Inc. fell the most since the takeover of Bear Stearns Cos. as Merrill Lynch & Co. analyst Guy Moszkowski cut his rating on the firm to ``neutral'' a week after telling clients to buy the stock.

Lehman, which lost 64 percent of its market value this year, fell $3.75, or 14 percent, to $23.75 at 4:15 p.m. in New York Stock Exchange composite trading. Options traders increased bets that shares of the fourth-largest U.S. securities firm will fall to $15 by next month.

Other analysts lowered ratings on Lehman yesterday because of the second-quarter loss. Wachovia Corp. shifted to ``market perform'' from ``outperform'' and Credit Suisse Group switched to ``neutral'' from ``outperform.'' Oppenheimer & Co.'s Meredith Whitney reduced her estimate for the year to a loss of $3.34 per share from a gain of $1.58

`Fire Insurance'
``People are taking a shot that it could go down to $15,'' said Stefen Choy, founder of Maxima Financial, a market maker on the NYSE Arca exchange in San Francisco. ``Everyone smells the smoke so they're buying fire insurance. People got so scared about what happened to Bear Stearns that they just grab those now.''

Final Take:

Is Lehman toast? Time will tell but the price action sure seems to indicate that the risk of this happening is very possible. If this stock gets to $15 I don't think Lehman survives. The bets by the options traders that it drops to $15 are really bets that Lehman is done.

Hell, Bear Stearns was sold at $10 a share. If Lehman goes to $15 it will be because its gobbled up by someone else with some help from the Fed. The big question is will the the Fed just let them die?

Lehman's portfolio was very similar to Bear Stearns with similiar leverage. Meredith Whitney did point out tonight on CNBC that they do have a stronger brokerage house than Bear, and they were also were more diversified. She wasn't ready to put them in a body bag.

All I know is the fact that the shares went almost 20% below the discounted offering price of $28/share today is a very bearish sign. Something stinks here!!!

Folks, if investors keep getting burned on capital raising's like this, the money flow is going to stop.

As the losses mount, the only thing Wall St. will be raising in the future is the American Flag every morning. You can only sucker an investor so many times. Most of the major banks have burned all of these guys. The SWF's have turned into Casper after losing billions on these sucker deals.

If this happens then what will the financials do? This is when the real fireworks go off. Consider these problems the sparklers in the park before the fireworks show starts.

Inflation Worries Spook Wall St/Interest Rates Rise

We are off to a rough start this morning with the DOW down 100 points. As i briefly discussed yesterday, bond yields are beginning to rise as Wall St. begins to really worry about interest rates. The drop in AAA CDO's is weighing on the banks today as well as the threat of these higher rates.

The 10 year is up to 4.14%. India raised interest rates for the first time in 15 moths which added to the inflation anxiety this morning. As I have explained before, rising interest rates will start raising mortgage rates which will add to the carnage in housing as they become even less affordable.

Here is the news from Bloomberg:

June 11 (Bloomberg) -- Government bonds will fall in the Americas, Asia and Europe over the next six months as global inflation accelerates, a survey of Bloomberg users showed.

The results show investors are more concerned about inflation than mounting losses related to subprime mortgages, which sparked demand for the safety of government securities earlier this year. The average yield on global sovereign debt climbed to 3.67 percent from 2.77 percent in March, according to indexes compiled by Merrill Lynch & Co.

``The market is shifting from a flight-to-quality mindset to one of looking at inflation and real rates,'' said Andrew Harding, who helps manage $18 billion as chief investment officer for fixed income at Allegiant Asset Management in Cleveland and a survey participant.

Investors became more bearish as central banks signaled they may raise interest rates to curb inflation. Treasury 10- year yields reached 4.14 percent on May 29, the highest since Dec. 28 and up from this year's low of 3.28 percent on March 17.

Federal Reserve Chairman Ben S. Bernanke said this week that policy makers will ``strongly resist'' any surge in inflation expectations. European Central Bank President Jean- Claude Trichet said on June 5 that policy makers may raise borrowing costs in July to contain inflation

``There's a global recognition now that the inflation genie is out of the bottle and it must be capped,'' Tony Crescenzi, a Treasury market strategist at Miller Tabak & Co., said. ``There's a sense the central banks have become very serious about fighting inflation. The galvanizing factor is oil and its abrupt move up. The credit market improvements have given Bernanke leeway.''

For developing nations, ``the inflationary risk and impact of high food and oil prices pose an even more serious challenge than the effects of the U.S. slowdown and financial turmoil,'' Hans Timmer, an economist at the World Bank, said in a report yesterday. Some of them are already ``feeling the heat of the international environment,'' he said. "

My Take:

Whats now happening is inflation is becoming a bigger threat to the economy than interest rates. The last quote above explains it perfectly. The Fed is now going to be forced to raise rates. The 10 year rates in the bond market are then forced to rise out of inflation fears in order to remain attractive as an investment.

As a result, bank stocks are free falling because higher rates kill profits and hurts housing. Higher ratesalso lessens the chance that the their CDO crap sandwiches will ever come back in value. Like that wasn't going to happen anyway!

Consider this a triple whammy for the banks. Washington Mutual looks like its on its last leg. All of the investment banks are down today as well.

Its pretty obvious that inflation is getting out of control. Steel has tripled in the last 6 months, and we already know the oil story. The language out of the Fed is warning you right now: They will let an explosion go off in our financial system before they let inflation destroy the economy.

You need to take this warning seriously. This isn't rhetoric. As I have said before, hyperinflation destroys everything and the government will shrink the money supply and take liquidity out of the system to save us from hyperinflation. The Fed will take the financials and the stock market out to the woodshed for a beating before they let this happen.

This will be painful but its the right thing to do.

I don't think anyone here has any desire to pay $1000 for a loaf of bread. This the devastating effect of hyperinflation and we cannot let it happen.

Tuesday, June 10, 2008

AAA Bonds Plummet to New Lows

Hello everyone. Its going to be a busy couple days so I may not have a chance to get on here as often.

Just a quick note on the prices of AAA rated debt that's not government guaranteed. The prices of these assets are starting to collapse to new lows as defaults continue to rise in housing. These bonds include all of the garbage CDO's that these banks are stuck with and fail to come clean on. They were hoping that these bonds would come back. Looks like thats not gonna happen! Take a look.

Here are the highlights from Bloomberg:

"June 10 (Bloomberg) -- Some of the U.S. mortgage bonds at the center of the yearlong credit crisis are slipping toward new lows, as climbing gas prices, unemployment and interest rates deepen concern that homeowner defaults will increase.

The benchmark Markit ABX index linked to the last-to-be- repaid of originally AAA rated non-agency subprime-mortgage bonds from the first half of 2007 fell today to a mid-price of 51.75, according to a note to clients from Merrill Lynch & Co., from almost 60 on May 19. Top-rated bonds of ``option'' adjustable- rate mortgages are also down, according to RBS Greenwich Capital.

May Rally
The debt, along with other credit markets, had generally rallied through mid-May after the Fed backed the bailout of Bear Stearns Cos. and began lending directly to investment banks in March, signaling the central bank's willingness to prevent bank failures and easing a logjam in debt markets. Markets have since reversed, as banks and securities firms including Lehman Brothers Holdings Inc. report fresh losses.

Subprime Index
The ABX-HE-AAA 07-2 subprime index fell as low as 50.67 in March, suggesting similar prices for similar bonds, and remains above its end of March close. New ABX sub-indexes created last month and linked to the second-to-last-to-be-repaid AAA classes have fallen to record lows for each six-month ABX series, with the latest declining from a high of 70 to 59.25 yesterday."

My Take:

Well,there goes the bull thesis that the Fed will save the financials after the Bear Stearns stick save. The markets didn't react to this today but this is a dig deal guys and gals. I have been warning for months that the Fed could not"save" the financials.

This massive debt bubble is to big for them to blow back up. Fear is back in the financials again as these bonds plummet in value. Inflation and the economic reality that nothing can stop this bubble from bursting is again starting to be priced into the market.

Remember, the banks were hoping these bonds would bounce back so they could dump them. This is why they refuse to disclose how many billions they have in these pieces of junk.

These securitizations are starting to rot the lower they fall in value and the deeper they fall, the bigger the will be losses for all of the financials. This is why Lehman is dropping like a rock. They are up to their necks in this AAA CDO garbage.

If prices on these AAA debts do not stabilize, Lehman and many other regional banks are at risk of blowing up. I expect bank failures to begin very soon.

Whats scary is I see nothing stopping these bonds from droppingfurther in value because defaults continue to rise. Many of these bonds will end up almost worthless. Remember, this is supposed to be AAA premium debt that was sold as the safest debt over the world. UBS and others are feeling this oversees as well.

The bottom line is I expect to see a panic in the financials in the near future. Fear seems to be rising back to where it was when Bear Stearns went belly up. Interest rates are rising as a result of this mess, and this will put further pressure on the crisis because it will slow the housing market down even further forcing more defaults.

Like I have said before. The debt bubble can no longer be sustained and the crap is starting to hit the fan.

Make sure you look at your banks financial strength before you deposit money there. If you are in a bank like National City or Washington Mutual, find another bank!!

The way the financials are starting to look, buying a safe might be our best option!

Monday, June 9, 2008

The $99 Trillion dollar question

The Fed's Richard Fisher was interviewed on CNBC and took a little wind out of the bulls sails today.

He began with some tough inflation talk and then reiterated his concerns about our inability to be able to pay our current Social Security and Medicare debt obligations. The total costs of these programs are going to be $99 trillion dollars or $333,000 per person according to Mr. Fisher!

This is his famous speech from a few weeks ago that I highlighted here. There is also a link on the page that provides a copy of the whole speech.

Mr. Fisher basically reiterated on CNBC that the temptation for government to try and hyper inflate out of this debt will be there, but that there is no way in hell that the central bank will allow it. The Fed will force massive deflation before ever allowing this nightmare scenario to take place IMO.

This is how bad a shape are government is in financiallyfolks. Our government balance sheet looks worse than Bear Stearns!! Fisher demaded on CNBC that we MUST figure out how we are going to pay off this $$99 trillion debt obligation NOW, or we could find ourselves in deep trouble!!!!

My Take:

I applaud Mr. Fisher for going on CNBC and bringing this issue to light. The reason paying off this debt obligation never gets talked about is because no politician wants to be associated with the solution.

Why? Because its going to involve a lot of financial pain and sacrifice by every American, and that is political suicide for a politician. As we know, they are all about getting re-elected rather than doing whats best for this country.

Sometimes I wish we could just put an anonymous mailbox in the middle of Congress. This way, politicians could then drop their ideas for fixing our economic problems in a box and not be associated with it!

We then could finally have real debate about getting this country out of debt and start fixing the economy. If we don't deal with all of this now its going to be worse later. This includes fixing Wall St.!

Hopefully, Mr. Fisher can politically start making Congress face $99 trillion issue that he says "dwarfs the credit crisis".

The Inflation story no one is talking about: STEEL!

Good morning everyone!

There are a few things I want to get to this morning, but I wanted to start out with the inflationary pressures in steel that I have able to confirm by a couple sources from the steel industry.

I bring this up because steel is a very important commodity in the economy because, like oil, its a key raw material cost in many areas of our economy. Its a major cost in things like cars, building materials, hand tools, steel wire racks in your closets, farm equipment. You name it. Many say its one of those staples that you need to keep your eye on in order to gauge how the economy is going.

One source confirmed that steel prices on certain steel products have almost TRIPLED in about 6 months. Prices have risen from about .26 a pound up to 68 cents a pound in the past 6 months. I have also confirmed that there is another price increase that's been announced for July by the major mills.

This is on mainly round bar materials, but I have been told its pretty much being seen industry wide. The reason for this is because scrap, which is used in all steel products, has been the main force pushing prices up.

So why are prices soaring higher?

Like oil, scrap is being gobbled up by China and other emerging markets. Its a supply and demand issue. This has forced mills to add a "scrap surcharge" to all orders which can be as high as the cost of the steel itself.

The second reason for the price increases is pricing power. The steel mills simply cannot keep up with world demand so they are able to raise prices. Demand at US mills is so strong that they are rationing their customers in terms of how much steel they are allowed to buy each month.

This has left everyone scrambling to find steel. Exporters are calling anyone and everyone trying to find product because their international customers have unlimited demand.

The Fallout from Rising Prices

Inflation anyone? Imagine being an end user and your key material cost has tripled. Many end users will eat smaller increases because they will not want to risk losing the customer. When costs triple, they can no longer afford to "eat it" and must pass it on no matter how big the customer. From what I have learned, even Walmart and automotive are accepting these price increases.

One "end user" source confirmed to me that after dramatically raising his prices to Walmart, they then stopped buying for eight weeks playing hardball. The"end user" explained to me that he was ready to then walk away because he couldn't afford to manufacture at a loss.

Of course after shopping around, Walmart realized everyone was at the same new price. After this realization, they ended up accepting the whole price increase, and resumed buying including the 8 week inventory that they walked away from.

The bottom line:

This is going to be a major inflationary force in our economy and bears watching.. The big three automakers are already hanging on by a thread, and seeing costs triple for their biggest raw material cost is going to make it difficult to not raise prices on autos. If they don't pass it on its going to kill profits. This goes for anything else steel related.

My source explained to me that no one in the steel industry is happy with this development. Short term they will make a fortune, but everyone realizes their customers cannot survive such inflationary pressures for very long.

Manufacturers that have to absorb 250-300% price increases on a key raw material like steel will be in major trouble going forward. How do you pass such price increases on to such a weak consumer.

Go out and buy that car or hammer now before prices soar. If Walmart and the Big Three autos has accepted these price increase, you can be assured that some of it will be passed on to you.

I wouldn't want to be GM right now.

Must Reads:

More bad financial news:


"June 9 (Bloomberg) -- Lehman Brothers Holdings Inc. reported a $2.8 billion second-quarter loss, the company's first since going public in 1994, and raised $6 billion to help it survive the collapse of the mortgage market.
The fourth-largest U.S. securities firm fell as much as 12 percent in New York trading after selling common and preferred shares at a price 13 percent below the close on June 6."

Ratings scam may be over:

"June 9 (Bloomberg) -- The U.S. Securities and Exchange Commission may recommend this week that Moody's Investors Service, Standard & Poor's and Fitch Ratings be prohibited from advising investment banks on how to earn top rankings for asset- backed securities, according to people familiar with the matter. "

Meridith Whitney strikes again. Looks like the monolines will force more writedowns:

"June 9 (Bloomberg) -- Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney."

Sunday, June 8, 2008

Technicals Look Bearish

Did we hit a Double top? Technically things seem to look bearish according to Barron's.

Next week should be quite an interesting week. It looks like a retest of the lows is on the way.