Saturday, July 19, 2008

Interest Rates are up as the 10 year rises

Good Afternoon!

In case you haven't noticed, interest rates are rising again! The poor housing market just can't catch a break. We are now up to 6.3% on a 30 year mortgage according to bankrate. Rates on average were at 6.13% last week.

I have been talking a lot about the 10 year treasury note recently. I focus on this because most mortgages rates are set based on the 10 year yield. Well guess what folks, the 10 year yield is shooting to the moon again after falling earlier in the week as money flew back into the stock market.

As I have explained before, the 1o year yield must rise when people move out of treasuries in order to make them more attractive to potential buyers. When this yield rises, so does mortgage rates.

Treasuries are considered a "safe haven" because its gauranteed by the government. As a result, when the market sucks, people run to treasuries which drops the yields on treasuries because there is a lot of demand.

When the market moved higher late last week, yields on treasuries rose because people moved out of the "safe haven" and back into stocks. This then forced up mortgage rates. However, there is another scenario as to why yields rose.

The "Black Cloud" continues to hover

The explanation that I gave above is how the pigmen would prefer to explain the rise in treasury yields. There is another scenario as to why the 10 year rose last week. Remember the "black cloud " of $5 trillion in Fannie/Freddie mortgage debt that I talked about this last week?

Well its still there guys! The government still doesn't know what to do with it. Freddie announced on Friday they plan to sell more shares in order to raise capital. This will result in more dilution of their stock. I am sure Freddie investor's are thrilled about that! Yeah right.

What could be happening here is the 10 year may be rising because treasury investors see that "black cloud" and have decided that they don't want to own as much of our debt in the form of treasuries.

Remember, the biggest treasury investors are countries like Russia, the middle eastern countries, China, and India.

As our debt bubble bursts, maybe they are beginning to worry that our government may decide to take over this $5 trillion dollar liability in order to stave off the inevitable collapse of this "bubble debt".

Now of course this $5 trillion dollars has value because houses are not worth nothing. However, this $5 trillion would double the debt load of the United States and the default rates on this "black cloud" continue to soar. Maybe China and other countries are beginning to think the "safe haven" of treasuries doesn't seem so safe anymore.

If the world decides to pull back on buying treasuries, interest rates on the 10 year would soar in order to make them more attractive to investors. Housing would then collapse. This would most likely be the pin that pops the debt bubble.

Here is the story from Bloomberg on the 10 year:

"July 19 (Bloomberg) -- Treasuries declined, pushing yields on 10-year notes up the most in a month, as concern diminished that credit-market losses will worsen reduced the haven appeal of government debt.

The yield on the benchmark note finished the week at 4.08 percent, the highest closing level since June 25. Bonds had initially rallied as stocks fell on concern that U.S. banking- system turmoil may be worsening after Treasury and Federal Reserve officials proposed a plan to shore up mortgage-lenders Fannie Mae and Freddie Mac.

Rising mortgage-bond rates may also have prompted investors to sell government debt as a hedge, said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, another primary dealer.

``The 10-year plus sector is reacting to the mortgage market,'' Ader said.

Yields on 30-year mortgage bonds guaranteed by Fannie Mae touched 6.17 percent, the highest since Aug. 16, 2007. Yesterday they were 2.06 percentage points more than yields on 10-year Treasuries, the biggest spread since March 11.

Treasuries also fell amid speculation the European Central Bank is considering another increase in its benchmark rate to combat continued inflation, after raising it on July 3 by a quarter-percentage point to 4.25 percent."

Final Take:

More time is needed to see if this rise on the 10 year is a trend. As you can see above, the ECB is talking about another rate increase. This will put more pressure on the Fed to raise rates. This also puts more pressure on the dollar.

If the Fed doesn't raise rates soon, the bond market will do it for them.

Bottom Line:

The $5 trillion "black cloud" eventually has to be dealt with. The bond market may take rates to the moon if it doesn't like what the Fed decides to with it.

The rise in the 10 year tells me the bond market is signaling that they have had enough of the games on Wall St.

Friday, July 18, 2008

Roubini: FDIC Will Be Drained to Zero

Hi Everyone

I had a very busy day so sorry for the delay. I am going to make it quick tonight. Roubini is out today with this frightening prediction. There is an audio version of this interview on the link:

" In an interview with RTT News, Nouriel Roubini, Professor of Economics and International Business at NYU's Stern School of Business and Chairman of RGE Monitor stresses that we are in the middle of a "severe recession that is deepening" and will cause "at least a couple hundred small banks," to go "belly up," a third of regional banks to be in "severe trouble" and "at least a couple" major national banks to become "insolvent."

Roubini says there is "no doubt" that the FDIC's reserve will be "drained 100-percent" and stresses that there is "nothing that can be done" to prevent this financial crisis and recession.In addition, Roubini predicts that Lehman Brothers "won't be able to survive" as an independent broker dealer.

To listen to the complete interview, visit:"

Quick Take:

Roubini hasn't missed since this credit crunch began. He was a year ahead of everyone in terms of predicting this meltdown. I take him very seriously. The last I saw, the FDIC had about $20 billion in the bank. Any type of slight bank run will wipe this out in a heartbeat.

Now, the government will of course backstop it to a point. Remember, if we print our way out of this we end up in the hyperinflationary scenario. I don't see it happening. The government is not that stupid. As a result, there will be a point at which the bailouts stop.

This is when you will see debt bubble burst. The June selloff was a prelude of things to come. The real fireworks start later this summer or early fall IMO.

Deflation and a shrinking money supply is the only sensible way out of this mess. If a bank run hits, I am starting to consider turning my mattress into my bank.

Here is another warning from a very influental economist

This is from world renowned economist Martin D. Weiss Ph.D. Here is the link. I will post this whole piece because I think its excellent:

"Dead cat bounce! Beware of bear market trap ...
by Martin D. Weiss, Ph.D. 07-18-08

Bernanke and Paulson's smoke, mirrors and hot air are temporarily buoying markets, luring gullible investors back into stocks! Meanwhile,

Merrill Lynch just disclosed it was creamed by $40 billion in investment write-downs in the second quarter — $69 billion so far this year.

Citigroup has revealed a $2.5 billion loss — and a decline in total assets of a staggering $99 billion so far this year. Plus,

The U.S. Dollar Index is now within one penny of a new all-time low and a new plunge.
I think this could be one of the most dangerous times imaginable for you — and for anyone else who owns vulnerable stocks or equity funds.

With the mortgage crisis and credit catastrophe still deepening ... with the economy still teetering on the edge of a cliff ... with the U.S. dollar hovering near its all-time lows and poised for even greater losses ahead ...

Yes, Washington's efforts to rescue Fannie, Freddie and other lenders have lured some investors back into stocks. But mark my words: It will be a move those investors could regret for the rest of their investing lives.

Every indicator we examine is virtually screaming that this is nothing more than a bear market trap — a dead cat bounce — and that the worst of this crisis is still ahead of us.
My recommendation: If you haven't done so already, use these rallies as your chance — perhaps one of your last chances — to do three things:

First, reduce your risk. That means taking advantage of the bounce in financial stocks to clear out. And that also means shedding stocks in most other sectors as well.

Second, build your cash, stashing most of it in U.S. Treasury bills or a Treasury-only money fund, with an allocation to the world's strongest foreign currencies.

Third, with funds you can afford to risk, turn this crisis into some of the major profit opportunities we cover in our newsletters."

Final Take:

This bounce is providing everyone stuck in financials a nice opportunity to exit stage left. you might not get another chance to get out. The Fed has painted a pretty picture which is temporarily propping up stocks. This bounce isn't going to last very long.

I will take a smart economist's opinion over a pigmen's opinion any day of the week.

Please protect yourself!

Thursday, July 17, 2008

Merrill Reports a Huge Loss/ Google Misses Big

Well I talked about a one day rally last week. Will this be the two day rally?

We will see how the market digests these earnings tomorrow. The Merrill number was shocking. $9.7 billion dollar loss! Analysts were expecting a $5 billion dollar loss for the quarter. Here are Merrill's numbers.

"July 17 (Bloomberg) -- Merrill Lynch & Co., the third- biggest U.S. securities firm, reported a fourth straight quarterly loss that was wider than analysts estimated as the firm compounded its credit-market writedowns.

The second-quarter net loss of $4.65 billion, or $4.97 a share, compared with earnings of $2.14 billion, or $2.24, a year earlier, Merrill said in a statement. Analysts' estimates ranged from a loss of 93 cents to a loss of $4.21 a share, according to a survey by Bloomberg.

Chief Executive Officer John Thain is selling assets and cut about 4,200 jobs in the first half of the year to stem record losses and a 43 percent drop in Merrill's share price during the past 12 months. The New York-based company announced $9.7 billion of writedowns today; analysts at Citigroup Inc., Oppenheimer & Co. and Wachovia Corp. had predicted the company would book charges of at least $5 billion.

Merrill's loss was ``inexplicably larger than what people expected,'' Michael Holland, chairman of Holland & Co., which oversees more than $4 billion, said in a Bloomberg TV interview. Thain, 53, is ``going to have an explanation. How people perceive the explanation, how they perceive his vision of where we're going, is key to how the stock performs.''

Thain also broke off talks with Silverstein Properties Inc. about relocating the investment bank's headquarters to a skyscraper under construction at the World Trade Center site in downtown Manhattan. Discussions between Merrill, Silverstein and the Port Authority of New York and New Jersey, which owns the site, ``ended over economic terms,'' Port spokesman Steve Coleman said today in a statement. "

My Take:

I guess buying that shiny new headquarters in the new World Trade Center doesn't sound like such a good idea when you are balance sheet is bleeding red.

Man, the analysts must be fuming over getting burned like this. The street expects $5 billion in losses and Merrill then responds by puking up $10 billion. All I can say is wow. Merrill's credibility just went out the window.

This is why the Fed won't raise interest rates folks. These banks are walking zombies!

Who knows how many more skeletons are in Merrill's closet.

Now this being said, I still would not trade any financials short at this time. These stocks are way down from their highs. Everyone is now trying to figure out what these pigs are worth given the credit mess they are in. When you combine this uncertainty with the SEC meddling on the short side, it makes the financials untouchable from a trading standpoint.

If you long or short financials here you are gambling not investing. Now I can here the spin already on CNBC. Bubblevision is already calling this the "kitching sink" quarter for Merrill. Yeah right, I have heard that like 50 times. Merrill must own a lot of kitchen sinks!


And now lets move on to our next after hours disaster. Here are the Google numbers:

"July 17 (Bloomberg) -- Google Inc., owner of the most popular Internet search engine, posted a second-quarter profit that trailed analysts' estimates, sending the shares down as much as 12 percent.

Net income rose to $1.25 billion, or $3.92 a share, from $925 million, or $2.93, a year earlier, the company said today in a statement. Excluding costs such as stock-based compensation, profit amounted to $4.63, trailing the $4.73 average of estimates compiled by Bloomberg.

Chief Executive Officer Eric Schmidt said international growth and higher Web traffic helped the company in ``a more challenging economic environment.'' Clicks on advertisements climbed 19 percent, decelerating from growth of 47 percent in the year-earlier period."

My Take:

I am sorry Google! Please don't take my ads away! I am just reporting the news:) USA Today also reported a massive drop in advertising revenue. I believe it was somewhere around a 30% drop. This shouldn't be a surprise as the economy slows.


Microsoft reported soft earnings as well today.

"July 17 (Bloomberg) -- Microsoft Corp., the world's biggest software maker, posted fourth-quarter profit that trailed analyst estimates and gave a disappointing forecast after a sluggish U.S. economy crimped sales, sending the shares down 4.8 percent."

Final Take:

None of this should be a surprise today. On the plus side, IBM did report a strong quarter. It will be interesting to see how the market reacts to the mainly bearish earnings today. Financials will be especially interesting to watch.

Many are calling for a summer bear market rally of 5-10% followed by a retest of the lows in the fall. Remember, October is a common time for crashes. I personally don't see how we make it that long.

The debt bubble still appears to be blowing up even though the market is rallying. Wachovia was raided today by investigators:

"SAN FRANCISCO (MarketWatch) -- A team of state securities regulators showed up at the St. Louis headquarters of Wachovia Securities Thursday seeking documents and interviews about the firm's auction-rate securities operations, The Wall Street Journal reported in its online edition, citing Missouri authorities."

IndyMac is also being investigated by regulators according to AP.

In my eyes the Titanic is on the verge of sinking. The rally today reminded me of the quartet on the Titanic that kept playing music as the ship started to sink.

Could stocks go higher short term? Sure. Is this the bottom? Noooooooooo, not in my opinion. A lot of this rally was based on oil pulling back, and decent earnings from JP Morgan and Wells Fargo.

Note to the pigmen: Receding oil prices are not bullish. Why? Because it means we are witnessing demand destruction from the consumer that has just hit the canvass. Its obvious the consumer is tapped! People will not be buying new plasma TV's if oil drops .20 a gallon.

What the longs need to understand is that the damage to the consumer has been done. They keep thinking housing will stabilize and come back. How? People are in debt up to their eyeballs! This will not change with $100 oil. It won't change with $80 oil!

The consumer will be back after housing drops to affordable levels, and the debts are either payed off or defaulted on.

The only way this happens is via a long severe consumer led recession. Lets hope its not worse. I will consider myself lucky if we only have to suffer through a recession in order to work our way out of this.

So the bulls rallied the last two days on three things:

1. Lower oil. This should be considered bearish as I juust described.
2. JP Morgan's beat. I hardly consider things to be bullish when your earnings dropped 50% versus a year ago. As for
3. Wells Fargo. You know what? Nice quarter Wells! You can't expect every pigmen to be stupid!

Lets be realistic here. These three events should have never resulted in a 500 point rally. This is what happens when the market is full of shorts and severely oversold. Can you say short covering?

Bottom Line:

Stay on the sidelines. The risk of a bounce is high and the news flow is negative. We also have that giant "black cloud" of $5 trillion of Fannie/Freddie debt that needs to be dealt with. The market could swing either way here. There will be better entry points in the future.

If this bear market rally continues, it will create a nice shorting opportunity as the bad news flow keeps hitting the wires.

I will be shorting this rally when it looks tired. That is if if the SEC still allows this type of "wild" behaviour.

Wednesday, July 16, 2008

Do You Trust The Stock Market? I Don't!

No news tonight. Just a commentary.

Wow what a bounce. Its amazing how the stock market can throw a huge party while Rome burns.

I wanted to talk a little bit about the insanity that we are watching in the stock markets, and how the regulators are responding to it.

I must say I have never seen such a level of incompetence. About a month ago, the regulators decided to go after the longs by trying to regulate oil speculators that were long oil. This week the SEC decided to go after the shorts by attempting to stop all naked shorting on Fannie and Freddie as well as the investment banks.

First of all let me say that this is insane. What kind of message do you send with this type of policy? Are they mad at the longs or the shorts? At least be consistent when you are trying to regulate the markets. I keep asking myself this question: Do we even have a capitalistic stock market when people are not allowed to go long or short?

Here's an idea. Lets stop all investors from going long or short. This way no one will lose anything and we can sit here and enjoy fantasyland! The regulators need to wake the hell up. Longs and shorts set the prices in the stock market. This is how free markets work!

Without both sides of the trade, how do you set a price on anything. Is oil worth $20 or $200? If traders can't set a price, who in the hell knows?

When you interfere with how the markets work, you hurt investor confidence. This is the last thing the market needs right now. How can anyone take a position long or short if the regulators keep changing the rules?

I have absolutely zero confidence in the stock market right now. I am mainly frozen in cash because of the insanity that I watch on a daily basis on Wall St. The market is quickly becoming one giant manipulated piece of garbage. If they aren't careful, investors will take there money and put it elswhere.

As it stands right now, I may never be fully invested in the stock market ever again. You know why? Because I don't trust it. There is too much instability. I compare it to the wild wild west! I mean take a look at whats going on: Regulators are going hog wild as they meddle in the markets, traders are driving companies into the ground, Rumors are spread on a daily basis that manipulate prices(even on CNBC).

If Warren Buffet had bought every company that he had been rumored to have been interested in he would be in bankruptcy!

Value investing has been thrown out the window. The S&P is up 2.7% over the last 10 years as we go in and out of bubbles. If I had thrown my money into fixed income in 1999, I would have killed the stock market in terms of performance. I could have gotten 5% just in CD's which would have almost doubled what the pigmen returned in the last decade.

Who in the hell wants to invest in a stock market that rises and drops 50% with almost zero return in the long run? Not me! Fixed income is looking better and better in my eyes.

In order to restore confidence on Wall St., the regulators need to stay out of how the market works and focus on the crooks that are manipulating it.

If a bunch of trading desks got together and shorted Bear Stearns out of business then throw the book at them if the evidence is there. Send them to prison!

Here is some more advice after you get done throwing these crooks in jail. Why don't you force the banks to open up their books and realize their losses? This would go a long ways towards restoring confidence.

We all need to understand that this debt bubble needs to unwind and there is no way to stop it. I cringe as I watch all of these bailouts that are flying through Congress. You might as well just take that money and start a bondfire in front of the Washington Monument. I have a favor to ask of you after you throw this money away. Can you please raise my taxes 20% and force me to pay for it?

The founding fatheres of this country would roll over in their grave if they saw what was going on today on Wall St. and in DC.

The regulators should focus more on restoring confidence and making sure this debt unwind is done in an ordely fashion.

If they continue to pick on the longs and the shorts, they might find themselves with no market left to regulate.

Consusumer Prices Rise 1.1%: Second Highest Jump in 26Years

Good Morning

Well this morning is all about inflation,inflation, and more inflation! Stocks are mixed. The DOW is up about 100 points on Wells Fargo relatively strong earnings and dividend increase. The DOW has again been fluctuating violently so far this morning.

One of the problems we have right now is because sentiment is so bad, everyone continues to "sell the rally", especially in financial stocks. During the bull market the mentality was always "buy on the dips".

We are oversold, so a bit of a bounce on the Wells Fargo news may send stocks higher today.

OK, lets get to the inflation nightmare that was reported this morning. Consumer prices were up 1.1%. This was the second highest surge in inflation in 26 years!

Here are the numbers from the AP:


Consumer prices jump 1.1 percent in June

Wednesday July 16, 9:52 am ET

By Martin Crutsinger, AP Economics Writer

Consumer prices surge in June at 2nd fastest pace in 26 years, reflecting soaring energy costs
WASHINGTON (AP) -- Consumer prices shot up in June at the second fastest pace in 26 years with two-thirds of the surge blamed on soaring energy prices.

The Labor Department reported that consumer prices jumped 1.1 percent last month, much worse than had been expected. Energy prices rocketed upward by 6.6 percent, reflecting big gains for gasoline, home heating oil and natural gas.

The big rise in prices cut deeply into consumers' earning power with average weekly wages, after adjusting for inflation, dropping by 0.9 percent in June, the biggest monthly decline since 1984.
The 1.1 percent June price increase was the second largest monthly advance in the past 26 years, surpassed only by a 1.3 percent gain in September 2005 from a jolt to energy costs after Hurricane Katrina.

Over the past 12 months, consumer inflation is up by 5 percent, the largest year-over-year gain since a similar 5 percent rise in May 1991.

Food prices also showed a big increase in June, rising by 0.7 percent, more than double the 0.3 percent increase of May. Vegetable prices shot up by 6.1 percent, the biggest increase in nearly three years

Core inflation, which excludes energy and food, showed rising pressures too with an increase of 0.3 percent in June, up from a 0.2 percent gain in May and the biggest one-month rise since January.

This increase reflected a 4.5 percent jump in airline ticket prices, the biggest one-month rise for airline fares since March 2000."

Final Take:

The market may be up a bit today as Wells brought some relief to a badly beaten up sector. This will be temporary of course. I don't have enough fingers to count the number of financial rallies that ended up in flames this year.

This inflation number is bad guys. Bloomberg is reporting that wages decreased .9% when adjusted for inflation in June. This is an annual pace of almost 10%.

Soaring prices combined with dropping wages equals an economic catastrophe. The Fed can't raise rates short term, but as these hot inflation numbers continue to pour out each month, they will be forced to raise rates.

Bottom Line:

Rising rates are a must in order to stabilize the economy. There is no other choice, and if inflation continues to rise at this amazing rate it may happen sooner than we think.

Bernanke testifies again today and I will be interested to see how he reacts to this hot inflation number. We also have the Fed Minutes this afternoon.

Both of these events could cause fireworks. I will hop on tonight after we hear the latest babble from the Fed.

Hold on tight folks! We could have another wild ride today.

Tuesday, July 15, 2008

Looking for A Safe Place For Cash?/Bernanke

I wanted to take some time during this banking crisis to talk about where to put cash that allows you to sleep well at night. I have been getting this question a lot and I think its an important one. Here is a checklist of places to hide

1. Keep it the bank as long as its under $100,000. If you are using an online bank call and make sure that its FDIC insured. Call your bank and confirm it if it helps you sleep well.

2. Buy Treasuries! Buying them through Treasury Direct is one of the easier ways to do it. Here is the link to their site. Treasuries are guaranteed by the US government.

3. Buy ticker symbol (SHY) if you are looking for a safe bet that has a little higher return. The yield here is around 3%. This is an ETF that holds almost 100% treasuries.

4. Keep a little cash at home. The pigmen can't take it from you if its in your hands! I only advise doing this because as this banking crisis worsens, the banks may be shut down for a period of time. This happened during The Great Depression. You don't want to be stuck without cash if the ATM'S are shut down for a period of time.

Bernanke Changes His Tune

Well we heard a lot from him today didn't we? He looked very nervous to me as he sat there answering questions. I thought his change on the outlook for the economy is significant and positive. Here is a nice highlight from Bloomberg on today's testimony:

"Bernanke Abandons Assessment of Lessening Growth Risk (Update3)

July 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke abandoned his June assessment that the threat of an economic downturn had diminished, telling lawmakers that growth and inflation risks are increasing.

There are ``significant downside risks to the outlook for growth,'' and ``upside risks to the inflation outlook have intensified,'' Bernanke said in semiannual testimony on the economy to the Senate Banking Committee in Washington.

Bernanke's shift reflects renewed turmoil in markets that forced the Treasury and Fed to mount a rescue of Fannie Mae and Freddie Mac this week. He said that stabilizing financial markets remains ``a top priority,''

In new forecasts, Fed officials raised their projections for economic growth and inflation for this year, while reiterating their outlook for faster growth in 2009.

Fed governors and district bank presidents now see the economy expanding 1 percent to 1.6 percent this year, up from 0.3 percent to 1.2 percent in their April outlook. Consumer prices will rise 3.8 percent to 4.2 percent this year compared with a projected range of 3.1 percent to 3.4 percent in April. The economy should expand at a 2 percent to 2.8 percent rate in 2009, identical to the April forecasts.

``The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power,'' Bernanke said.

American households foresee average annual inflation of 3.4 percent over the next five years, the highest expectation since 1995, according to the Reuters/University of Michigan survey.
`Temporarily Higher'
``Inflation seems likely to move temporarily higher in the near term,'' Bernanke said.

Traders see a 59 percent chance of an increase to 2.25 percent or higher by the end of the year, based on futures prices. "

Final Take:

Ben did a big U turn on inflation risk today. I guess it took $145 oil and a consumer spending dropping like a rock in June for him to realize that inflation is stopping the economy dead in its tracks. This is a significant change in policy and a positive one in my view.

This pretty much guarantees that we will be seeing higher interest rates coming out of the Fed if the recession doesn't push prices down far enough. Without a strong dollar, I don't see how prices recede to a level that the Fed is comfortable with. As a result, expect future hikes from the Fed.

The days of easy money are gone boys and girls! Interest rates will be a headwind for years to come versus the tailwind its been since the mid nineties. This will dramatically reduce the ability for financial firms to make profits. Higher rates will also dramatically lower the value of all assets. Gee, do you think this might hurt housing?

Bottom Line

Be careful out there. The market is really rough right now and highly unpredictable as the Fed scrambles to save the financial markets. Today has been a perfect example of this. We have zigged and zagged all day long today due to rumors, sticksaves, and fear.

If you dabble in the market, keep your position's (long or short) small.

Cash is the place to be until this Freddie/Fannie disaster gets straightened out.

Monday, July 14, 2008

Banking Crisis Hits Wall St.

Good Evening!

What a day folks. Well we now have a full blown banking crisis on Wall St. Regional banks like WAMU were destroyed. Some were down 35%. Here are some of the casualties:

"Washington Mutual Inc. posted the steepest retreat ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that regional banks are short of capital. The companies said they've seen no unusual depositor activity. Fannie Mae and Freddie Mac erased an earlier rally fueled by Treasury Secretary Henry Paulson's plan to help rescue the largest U.S. mortgage lenders.

Washington Mutual retreated $1.72, or 35 percent, to $3.23. The biggest U.S. savings and loan is seeing ``business as usual'' with no unusual depositor activity, spokesman Derek Aney said in an interview. National City, Ohio's biggest bank, tumbled 65 cents, or 15 percent, to $3.77 even after saying there was ``no unusual depositor or creditor activity.''
Lehman Brothers Holdings Inc. in a report today predicted a rise in loan-loss provisions at Washington Mutual for balance- sheet losses that may total $26 billion this year.
`Substantial Credit Losses'
Zions Bancorporation, the Salt Lake City-based lender with operations in 10 Western U.S. states, fell 23 percent to $19.73. First Horizon National Corp., Tennessee's biggest bank, slumped 25 percent to $5.04.

Goldman Sachs analysts recommended investors sell Zions and predicted dividend cuts may be in store for Zions, SunTrust Banks Inc., Comerica Inc. and Bank of America Corp.

``Substantial credit losses are going to have to be absorbed,'' said Henry Herrmann, chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages about $65 billion. ``We're right on the cusp of earnings season, and more and more of this is going to be manifest.''

M&T Bank Corp., the lender whose second-largest shareholder is billionaire investor Warren Buffett's Berkshire Hathaway Inc., plunged 16 percent to $58.82, its biggest drop since 2000. Second-quarter profit at the Buffalo, New York-based bank tumbled 25 percent on losses tied to mortgages.

Wachovia Corp., the fourth-largest U.S. bank, fell 15 percent to $9.84, a 17-year low, after being cut to ``neutral'' from ``buy'' at UBS AG, which predicted a dividend reduction to 1 cent and the sale of $5 billion of common shares."

My Take:

PLEASE READ THIS! If you have not paid much attention to your bank finaces recently then go get your statements right now! Make sure you have no more than $100,000 in any bank. You need to take action tomorrow. If you have $300,000 you need to put it in 3 different banks if you are going to keep it all in your name.

The FDIC will only insure any one individual account for $100,000. You will lose the rest if your bank fails. A run on the bank is highly possible right now.

Please take this very seriously. IndyMac was your warning shot across the bow that the **** is hitting the fan. I will explain why this is happening in my final take.

Investors flock to Treasuries

Investors flew into treasuries today as the IndyMac and Fannie/Freddie news renewed fears of a banking collapse. Here is the data from Bloomberg:

"July 14 (Bloomberg) -- Treasuries gained, pushing two-year note yields down the most in more than two weeks, as stocks fell on concern that U.S. banking-system losses may be worsening.
Predictions of wider losses overshadowed the Treasury Department's support of Freddie Mac and Fannie Mae. Washington Mutual Inc. posted its biggest drop ever and National City Corp. tumbled to a 24-year low after last week's collapse of IndyMac Bancorp Inc. spurred speculation that more regional banks may be short of capital.

``There's a significant amount of grave concern about the banking sector,'' said T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York, the investment-banking arm of Canada's biggest lender. ``Now what we're having is solvency concerns.''

The yield on two-year note fell 15 basis points, or 0.15 percentage point, the most since June 26, to 2.46 percent at 4:07 p.m. in New York, according to BGCantor Market Data. The price of the 2.875 percent security due in June 2010 rose 9/32, or $2.81 per $1,000 face amount, to 100 25/32.

The benchmark 10-year note's yield declined 10 basis points, the most since June 6, to 3.86 percent. It earlier touched 4.02 percent, the highest since July 2."

My Take:

I warned everyone this morning to watch the 10 year. This tells you where the smart money is going. If a full fledged bailout was in the cards for Fannie/Freddie, then the 10 year yield would have risen dramatically and sold treasuries fearing the consequences of such drastic actions.

Today's price action gave you a pretty clear indication as to what the Fed is thinking. Yields dramatically dropped as investors flew into treasuries. This tells you the smart money does not fear a nationalized bailout as of right now.

If the street thought that Bernanke was dumb enough to try and do this, treasuries would have gone the other way and yields would have risen to attract investors who were fleeing from treasuries.

The Fed played its first hand based on how the bond market reacted today IMO. Intertpretation: Expect GSE intervention by the Fed but to a point. A takeover is possible down the road, but not until Fannie/Freddie's debt load is much smaller.

This makes treasuries a safe haven once again. However, You need to watch this because Ben could panic as this crisis deepens and decide to change his mind.

I think at this point, its a pretty safe bet that he isn't planning on taking over these $5 trillion bloated pigs at this point.

This is why Fannie and Freddie continued to sell off. These stocks will be zero's before the Fed even entertains nationalization.

So why the selloff?

There were a couple of realizations today by investors. The first one being that Fannie and Freddie MUST survive and its going to be very expensive. As a result, investors realized the rest of the financials are now screwed because the Fed needs to throw the rest of their ammunition at this GSE problem.

This led to realization number two. The banks now have no way to raise capital because the Fed is tied up with Fannie/Freddie, and they cannot raise money through private capital because they burned them so bad.

As a result, the financials are on their own with no way of raising money. Investor's reacted to this reality today by RUNNING to the exits today on all banking stocks especially the regionals.

Today reminded me of George Costanza on "Seinfeld" jumping over children in a total panic during a fire drill at a school as he ran to the fire exit looking to get out at any cost(love that episode).

There were many George Costanza's on Wall St. today that owned financials that decided to follow the same strategy!

Bottom Line:

This is a very serious crisis and the Fed is about out of bullets. As a result, the only option on Wall St. right now is to sell stocks and hide in cash and treasuries.

I am in awe at how fast we are blowing up. Stay tuned and get your finances in order!

The Government to the Rescue!/ Market Rally Already Fading

Well the playbook was executed today. Paulson threw his support behind Fannie and Freddie which gave the market enough confidence to buy the $3 billion in Freddie paper this morning.

Whats interesting here is the market doesn't seem all of that enthusiastic about the news. Stocks as expected were up 130 points on the DOW at the open but have since settled down to about +85 points.

Here was the Paulson pump this morning regarding Fannie and Freddie:

"July 14 (Bloomberg) -- Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank. Fannie and Freddie shares surged in Frankfurt trading.

The steps would bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies. That reflects a need for the government to bail out an economy that's been rocked by the worst housing recession in 25 years, the credit crisis, and soaring energy costs.

``They appear to be crossing the Rubicon,'' Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar's invasion of Rome to set up a dictatorship."

Quick Take:

With such drastic action, one might have assumed a much more enthusiastic bounce this morning. Gee you think investors might realize that the announcement of the government potentially taking on an additional $5 trillion dollars in debt isn't a good thing? Duh!

By the way we are now +42 on the DOW. Will we see red by the time I finish this post? Quite possible!

Jim Rogers speaks out against the Fed's actions

Its always interesting to hear Jim Rogers opinions when we have major policy announcements. He calls this move by the Fed an "unmitigated disaster". Gee Jim, tell us how you really feel!

Here are Jim's comments on Bloomberg this morning:

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. The chairman of Rogers Holdings, who in 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go.''

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt,'' Rogers, 65, said from Singapore.

Rogers said he had not covered his so-called short positions in Fannie Mae. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said. He advised buying agricultural commodities because the bull market in raw materials has ``a long way to go.''

Final Take:

We are now only +31 on the DOW and I am close to finishing this post. Red is still a possibility!

Seriously, watch the bond market today, specifically the 10 year. If the bond market doesn't buy this move by the Fed, yields will rise and stocks are going to fall. The dollar has been all over the place today. Oil is up slightly.

A bond market dislocation is very possible here folks. This means the bond market takes rates higher as investors could potentially stop buying treasuries if they fear they are no longer a pure "safe haven".

The reason why investors may lose this confidence in treasuries is because the Fed basically just opened the door to taking on an additional $5 trillion in debt. Investors see this as a huge risk! If China and the Middle East stop buying our debt, interest rates are going to soar.

Bottom Line:

This bounce is not a surprise. The problem now is the Fed's balance sheet is rapidly shrinking. This move to shore up Freddie and Fannie means there is less money available to save the financials. With private buyers now sitting on the sidelines after being burned, the banks are going to find it almost impossible to raise capital.

As a result, the banks are going to start dropping like flies very shortly IMO. One quick fact on the IndyMac Failure that came out on CNBC this morning. The Fed has a "Watch List" of 90 banks that they feel are in deep trouble and may fail. IndyMac was not on that list of 90 banks!!

This surely doen't bode well for the health of the banking system when banks that aren't even on the hit list are going under.

This may be the last major Fed bounce because they are running out of cash and options. Enjoy it while it lasts.

The way things are deteriorating, this bounce won't last long. +2.8 on the DOW now. Well at least the bounce lasted until the end of my post! We'll see if it makes it to the close.

Stay tuned. Today could be a wild day!

Sunday, July 13, 2008

Fannie and Freddie Update! Judgement Day Tomorrow

Hello everybody!

I hope everyone had a nice weekend. I got away for some R&R this weekend and it was great.

OK guys and gals, tomorrow is a big day!

Fannie and Freddie's fate may be decided tomorrow. Let me explain. Take a look at this from Bloomberg:

"July 13 (Bloomberg) -- Fannie Mae and Freddie Mac are in talks with Treasury, Federal Reserve and White House officials to come up with funding plans should the beleaguered mortgage companies require financing, according to people with knowledge of the discussions.

Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow. Officials are negotiating plans for a possible funding backstop mechanism in case the McLean, Virginia-based company can't find enough investors for the debt, said the people, who declined to be identified because the negotiations haven't been announced."

Quick take:

So this is the deal folks. There is a $3 billion dollar sale of short term Freddie Mac notes tomorrow morning by the investment banks. Many in the Fed and on Wall St. are worried that there will be very little demand for this paper after what happened last week.

I talked to a Wall St. buddy over the weekend. Supposedly, if the $3 billion doesn't sell, the Treasury will know it in the morning and will step in and make an announcement on legislation to back Fannie and Freddie.

Now what this legislation looks like is anyones guess. This could destroy the markets tomorrow or it could cause a huge bounce. It all depends on what Paulson has to say.

New Developments Tonight!

Paulson came out with an announcement tonight after emergency meetings with the big wigs over the weekend. It looks like they are already setting the groundwork. Here is the link to tonights news:

"Paulson Seeks Authority to Shore Up Fannie, Freddie (Update1)
By Brendan Murray and Dawn Kopecki

July 13 (Bloomberg) -- Treasury Secretary Henry Paulson sought authority from Congress to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, aiming to stem the collapse of confidence in the largest sources of U.S. mortgage financing.

Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity ``if needed'' in the firms, and to increase their lines of credit with the department from $2.25 billion each. The Federal Reserve authorized the companies to borrow directly from the New York Fed, in a step that could provide funding before the bill is passed.

Today's announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the firms that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown."

Final Take:

It sure doesn't sound like they are too confident about that Freddie sale tomorrow! Paulson isalready laying down the groundwork for some type of bailout and the sale hasn't even been attempted!

Tomorrow is a big day for Fannie, Freddie, and the markets. Its all going to come down to the details of what the Fed plans to do. They could wipe out the equity holders if they try to nationalize it. They could allow them to use the discount window. Keep in mind, Congress has to approve the legislation. The Fed cannot act on its own.

There is also word out tonight that when they make the announcement on Freddie and Fannie, they may also tell the markets this is it in terms of bailouts. No link here but here is some of the story:

"NEW YORK (AP) - The U.S. government is signaling it won't throw a lifeline to struggling financial companies - except for mortgage linchpins Fannie Mae (FNM) and Freddie Mac (FRE) - marking a shift to a new and potentially more volatile phase of the credit crisis.

Such an approach could mean beaten-down investment banks like Lehman Brothers Holdings Inc. (LEH) and regional banks must now fend for themselves as they try to recover from billions of dollars in mortgage-related losses. That is bound to unnerve Wall Street, already anxious as it awaits financial companies' earnings reports that are expected to be down a stunning 69 percent from a year ago when all the numbers are in."

The markets are going too move big tomorrow folks. I can't tell you which way but I do know one thing. If the Fed tells the banks they are on their own you could see a big red day tomorrow.

Its going to be a wild ride. Fasten your seatbelts!