It looks like the press is starting to take notice of the bear bloggers. I think the bailouts of the millionares on Wall St. are really starting to anger the average American.
Karl Denninger was on the Glenn Beck show last week. If the press starts to run with this Wall St. will really start taking some heat!:
Interesting isn't it?
Another bank bites the dust
This was a small one but I thought it was worth noting:
"FOR IMMEDIATE RELEASE
August 22, 2008
Media Contact:David Barrdbarr@fdic.gov
cell: 703-622-4790; office: 202-898-6992
The Columbian Bank and Trust Company, Topeka, Kansas, was closed today by the Kansas Bank Commissioner J. Thomas Thull, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Citizens Bank and Trust, Chillicothe, Missouri, to assume the insured deposits of The Columbian Bank and Trust Company.The nine branches of The Columbian Bank and Trust Company will reopen on Monday as branches of Citizens Bank and Trust. Depositors of the failed bank will automatically become depositors of Citizens Bank and Trust. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage.Over the weekend, customers of The Columbian Bank and Trust Company Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.As of June 30, 2008, The Columbian Bank and Trust Company had total assets of $752 million and total deposits of $622 million"
Saturday, August 23, 2008
Friday, August 22, 2008
Market Update
I thought it was time for a good ole fashion market update today. I have ranted enough this week on the economy:)
Today was an interesting day. The big move up is not really all that impressive given the light trading volume. None of the moves this week really show us any confirmation of a trend. I see no conviction behind this buying spree today.
Everyone seems very confused and unsure of where we are headed. Take oil for example. Yesterday, it did a moonshot up to around $120 a barrel. Today it Free falled back down $6 to around $114. This makes no fundamental sense. This is very emotional trading done on zero fundamentals.
The US dollar seems to be dictating where oil moves from day to day. The dollar showed some strength today after weakening yesterday.
One thing that I found that was interesting was the money flow chart today. It looks like the big boys are selling into the strength. The russell and xlf(financials) both saw strong money outflows. I actually bought a couple shorts today on this bounce. I picked up some (TWM) and (SRS) today. These are ETF's that short the Russell 2000(TWM) and commercial real estate(SRS).
I have been looking for a good entry point, and I believe that the bounce the last three days provided one. Please note these are very volatile and carry a lot of risk. Buyer beware.
Fannie/Freddie
It looks like the Fed is going to be forced to take action on the GSE's in the very near future. Freddie's stock is now in the 2's. Note the Moody's cut today:
"Aug. 22 (Bloomberg) -- Fannie Mae and Freddie Mac's $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody's Investors Service, which said the increased likelihood of ``direct support'' from the U.S. Treasury may devalue the securities.
The ratings were lowered five steps to Baa3 from A1, New York-based Moody's said today in a statement. Moody's kept its Aaa senior debt ratings on Fannie and Freddie stable and affirmed the subordinated debt because the Treasury will likely make sure the companies continue to make interest payments in any bailout.
Moody's joins a chorus of analysts and investors who say Fannie and Freddie's limited access to ``economically attractive'' capital will give Treasury Secretary Henry Paulson little choice but to bail out the beleaguered mortgage-finance companies."
My Take:
This is going to be your next market mover folks. The big players in the markets want answers here. The common stock is pretty much worthless, and Paulson has said he will back the GSE's. The big money is essentially saying "Ok Mr. Paulson, put your money where your mouth is!".
What the Treasury does here is going to be very interesting. Do they guarantee all of the $5 trillion in debt? Do they just guarantee all the loans going forward and issue warrants on the $5 trillion of debt in order to spread out the risk? Do they not guarantee any of the $5 trillion and totally screw Russia and China.
This is a very tough decision. In the long run it doesn't really matter because the economy is screwed no matter what the Fed does. It doesn't change the fundamentals of the economy. Its not going to stop housing from dropping further. In fact, if they decide to backstop all $5 trillion its going to kill the housing market.
The reason I say this is because the bond market will hate this decision and their appetite for debt will drop dramtatically. This will send treasury yields through the roof which in turn sends mortgage rates to the moon!
I am expecting a bounce no matter what the Fed decides because the "bubble boys" are going to try to pump the news IMO. This pump will be a great time to place some bets if you like to bet short. Once the market digests the reprocussions of bailing out Fannie/Freddie, I think we selloff badly.
Bottom Line:
We really didn't learn much this week. The markets were pretty flat and the volume was light. This won't last for long though folks. The big boys are getting back from vacation, and the GSE disaster needs to be resolved.
This should create plenty of fireworks in the near future. I think you are also going to see something done with Lehman shortly as well. They have writedowns that must be taken in the very near future. Fuld is scrambling around looking for a buyer because they need capital in order to take the losses. Lehman either finds the capital or goes belly up in my opinion. I have no idea how this plays out.
Buckle up everybody! Its going to get very interesting over the next few weeks. Happy Friday!
Today was an interesting day. The big move up is not really all that impressive given the light trading volume. None of the moves this week really show us any confirmation of a trend. I see no conviction behind this buying spree today.
Everyone seems very confused and unsure of where we are headed. Take oil for example. Yesterday, it did a moonshot up to around $120 a barrel. Today it Free falled back down $6 to around $114. This makes no fundamental sense. This is very emotional trading done on zero fundamentals.
The US dollar seems to be dictating where oil moves from day to day. The dollar showed some strength today after weakening yesterday.
One thing that I found that was interesting was the money flow chart today. It looks like the big boys are selling into the strength. The russell and xlf(financials) both saw strong money outflows. I actually bought a couple shorts today on this bounce. I picked up some (TWM) and (SRS) today. These are ETF's that short the Russell 2000(TWM) and commercial real estate(SRS).
I have been looking for a good entry point, and I believe that the bounce the last three days provided one. Please note these are very volatile and carry a lot of risk. Buyer beware.
Fannie/Freddie
It looks like the Fed is going to be forced to take action on the GSE's in the very near future. Freddie's stock is now in the 2's. Note the Moody's cut today:
"Aug. 22 (Bloomberg) -- Fannie Mae and Freddie Mac's $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody's Investors Service, which said the increased likelihood of ``direct support'' from the U.S. Treasury may devalue the securities.
The ratings were lowered five steps to Baa3 from A1, New York-based Moody's said today in a statement. Moody's kept its Aaa senior debt ratings on Fannie and Freddie stable and affirmed the subordinated debt because the Treasury will likely make sure the companies continue to make interest payments in any bailout.
Moody's joins a chorus of analysts and investors who say Fannie and Freddie's limited access to ``economically attractive'' capital will give Treasury Secretary Henry Paulson little choice but to bail out the beleaguered mortgage-finance companies."
My Take:
This is going to be your next market mover folks. The big players in the markets want answers here. The common stock is pretty much worthless, and Paulson has said he will back the GSE's. The big money is essentially saying "Ok Mr. Paulson, put your money where your mouth is!".
What the Treasury does here is going to be very interesting. Do they guarantee all of the $5 trillion in debt? Do they just guarantee all the loans going forward and issue warrants on the $5 trillion of debt in order to spread out the risk? Do they not guarantee any of the $5 trillion and totally screw Russia and China.
This is a very tough decision. In the long run it doesn't really matter because the economy is screwed no matter what the Fed does. It doesn't change the fundamentals of the economy. Its not going to stop housing from dropping further. In fact, if they decide to backstop all $5 trillion its going to kill the housing market.
The reason I say this is because the bond market will hate this decision and their appetite for debt will drop dramtatically. This will send treasury yields through the roof which in turn sends mortgage rates to the moon!
I am expecting a bounce no matter what the Fed decides because the "bubble boys" are going to try to pump the news IMO. This pump will be a great time to place some bets if you like to bet short. Once the market digests the reprocussions of bailing out Fannie/Freddie, I think we selloff badly.
Bottom Line:
We really didn't learn much this week. The markets were pretty flat and the volume was light. This won't last for long though folks. The big boys are getting back from vacation, and the GSE disaster needs to be resolved.
This should create plenty of fireworks in the near future. I think you are also going to see something done with Lehman shortly as well. They have writedowns that must be taken in the very near future. Fuld is scrambling around looking for a buyer because they need capital in order to take the losses. Lehman either finds the capital or goes belly up in my opinion. I have no idea how this plays out.
Buckle up everybody! Its going to get very interesting over the next few weeks. Happy Friday!
Thursday, August 21, 2008
The Lost Decade of Investing
Good evening everyone!
I wanted to talk a little about long term investing tonight. The markets were quiet today except for oil's moonshot so I figured today would be a good night to take a look at long term investing in a bear market.
We all know how bad the economy is right now. Notice the comments that came out today from some of the worlds greatest money managers and economists. I have never heard the experts sound so gloomy!
I wanted to emphasize tonight how long these corrections can last. Many bear markets can last a decade or more. Take a look at the Nikkei below:
I wanted to talk a little about long term investing tonight. The markets were quiet today except for oil's moonshot so I figured today would be a good night to take a look at long term investing in a bear market.
We all know how bad the economy is right now. Notice the comments that came out today from some of the worlds greatest money managers and economists. I have never heard the experts sound so gloomy!
I wanted to emphasize tonight how long these corrections can last. Many bear markets can last a decade or more. Take a look at the Nikkei below:
As you can see, the Nikkei is now sitting at the same level that it was in 1986. This is what deflation can do to a market. Some Japanese still continue to rent because they were burned so badly after their famous deflationary collapse destroyed the value of their homes. Such destruction can leave an impression on you that can last a lifetime.
My grandfather still vividly remembers the Great Depression. He was just a kid then, but it is forever ingrained in his mind.
You think it can't happen here?
Think again folks, it already has. Take a look at the S&P below since 1999/2000. The S&P is actually down since 2000, and relatively flat since the late nineties. That's 10 years of investing! We have already had a lost decade.
Take a minute and think of all the ups and downs that you had in your investments over the last 10 years. Think of the sleepless nights during the tech crash.
The great bull market that started in 2003 did nothing but get us back to even!
I think its time that we all ask ourselves if all of the risk and wasted emotions is actually really worth it. Why risk your nest egg in a rigged market that has averaged zero growth over the last decade? Many lost their fortunes in the tech bubble during this period. The ones that were brave enough to stay fully vested have only gotten back to even.
I do not consider the US stock market to be a safe place for investing anymore. Its turned into the wild wild west. No rules, no accountability, and no returns on your money! I will put my money elsewhere until the regulators bring some discipline back to the markets.
These dangers must be considered when you are strategically setting up your portfolio. The mess we are in now is going to take years and years to fix. This the worst situation I have ever seen in my lifetime. The amount of fraud and risk that been taken in the market has reached unprecedented levels in my view. This can only end one way: Badly.
I would not be surprised if we lost another decade. Make sure that you find an investment advisor that you can trust and knows what the hell they are doing. Any financial planner thats just throwing you 100% into equities needs to be questioned and avoided IMO.
This will be a big issue as this market corrects. Its going to take a long time for the "bubble boys" to realize that the days of big returns of the stock market are over for a long period of time while we fix this mess.
We have basically had an unprecedented 26 year period of relative prosperity. The 1987 crash, the housing mess in the early nineties, and the tech bubble were basically just little speed bumps that we hit along the way.
The pigmen want to you believe that this is just another little speed bump that will be fixed by the end of next year. What they don't realize is this time we just ran into a pothole that's 10 feet deep!
The hangovers from such prosperity often last as long as the party. You must consider this as you build your portfolio.
The savings habits of this country also must change as we hit a long period of slow to negative growth. We need to start buuilding up liquidity(cash) before we can begin the recovery process. The days of getting rich trading debt are over.
Start saving!
As you can see below, we are pathetic in this department versus other countries:
America needs to take a reality check! There is no more equity available to pull out of our houses. The HELOC days are over. Rates are rising and borrowing is becoming very expensive.
We need to get back to saving money because this financial crisis is going to force the unemployment rate to rise dramatically. Many jobs will be lost as we deleverage our whole economy. Expect job losses in most sectors of the economy as the consumer pulls back. Remember thec onsumer is 70% of the economy!
Also, ask yourself this question:
Do I have enough money in my savings account to live for a period of time if I lost my job? If your answer is no then its time to get started!
Bottom Line:
Bear markets can last as long as bull markets. I can find only two periods of time in recent history that compare to what we are going through now. The first is the Great Depression where there was a debt party similar to what we are seeing today. The second is Japan's deflationary collapse after their housing bubble burst.
No one knows for sure how bad this economic collapse is going to be. The one thing I am fairly certain of is its going to take a long time to clean up.
Remember, history always repeats itself.
Wednesday, August 20, 2008
Fannie/Freddie Shares Plunge on Bailout Rumors
Just a quick note tonight guys and gals:
I have a busy evening. The GSE plot thickens! Fannie and Freddie each plunged over 20% for the day and are down over 40% for the week on further speculation of a bailout.
Here is the news from Bloomberg:
"Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac tumbled in New York trading to the lowest levels since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.
Fannie, based in Washington, slumped 27 percent and McLean, Virginia-based Freddie dropped 22 percent, extending its losses to 90 percent for the year.
``Using taxpayer money to bail them out looks like it's becoming reality now,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``That's going to leave the shareholders holding worthless paper.''
Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Freddie paid its highest yields over U.S. Treasuries on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.
Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout."
My Take:
The shareholders in these two GSE's are about to get "zeroed" via a bailout. What I found interesting about today's news was the reaction to it by the stock market. Stocks were up! The financials actually rallied today!
This tells me that many pigmen are in "the know" on how this all plays out, and its really not news to them. This makes me very angry.
Once again, the average Joe shareholders like you and I are left in the dark.
I am really starting to ask myself: Jeff, are you sure you want to continue to invest in the stock market?
Watching the manipulation, lies, and corruption day after day really makes me wonder whether or not I am a fool for even attempting to play with these convicts.
Some days, just feel like the average investor is the biggest sucker on the planet. I am sure after getting tipped off and making their money on the news, the pompous ultra rich sit there and laugh at the little guy as his/her account gets shredded.
When rates eventually rise dramatically(trust me they will) and savings accounts start paying 7%, I may just take my chips and go home.
Why would anyone want to play a game where the rules of the game are set up to beat you. I have no desire to be dropped into a pit of lions and you don't realize you are the raw piece of beef.
Do any of you feel like joining a game of poker where everyone knows your hand and before the betting begins?
Cramer even complained about this today. I wouldn't be surprised to see the trading volumes continue to drop in the markets as this corruption continues to worsen. Everyone I know is scared to death of the markets right now. I DON'T BLAME THEM!
Bottom Line:
Something big is being stirred up to bail out Fannie and Freddie. I would be very nervous if you are a shareholder in these companies . The price action this week says it all. The equity holders are pretty much screwed, and its time for the government to step in.
The lack of reaction in the markets to the news tells you that many already have the Feds playbook. This makes me want to go to cash because I don't know what the Treasury is putting together to bail these suckers out.
Cash sounds like the right place to be until this all plays out. In the end it really doesn't matter because the economy is toast. This is just one more example of how bad this mess really is.
Stocks corrections never go straight down folks! Interventions like the one being brewed up as we speak can provide temporary relief to stocks. You need to set up your portfolio so that it can withstand this volatility. Its time for the sidelines IMO.
Use this sticksave as another indicator of how bad this economy really is. Mortgage applications hit a 6 year low today. The housing market is evaporating faster than Fannie and Freddie. Applications hit 6 year lows during peak selling season folks! There is no appetite for housing and we have 11 months worth of inventory!
Anyone that thinks this ends well needs go see the Wizard of Oz and ask him for a brain.
I have a busy evening. The GSE plot thickens! Fannie and Freddie each plunged over 20% for the day and are down over 40% for the week on further speculation of a bailout.
Here is the news from Bloomberg:
"Aug. 20 (Bloomberg) -- Fannie Mae and Freddie Mac tumbled in New York trading to the lowest levels since at least 1990 as speculation increased that the U.S. Treasury will bail out the mortgage-finance companies, wiping out shareholders.
Fannie, based in Washington, slumped 27 percent and McLean, Virginia-based Freddie dropped 22 percent, extending its losses to 90 percent for the year.
``Using taxpayer money to bail them out looks like it's becoming reality now,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $5 billion in San Antonio. ``That's going to leave the shareholders holding worthless paper.''
Rising borrowing costs and evidence that demand for their debt was waning last month led Treasury Secretary Henry Paulson to seek the authority to pump unlimited amounts of capital in Fannie and Freddie in an emergency. Freddie paid its highest yields over U.S. Treasuries on record in a debt sale yesterday amid concern that credit losses are depleting the capital of the beleaguered mortgage-finance companies.
Fannie and Freddie have $223 billion of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout."
My Take:
The shareholders in these two GSE's are about to get "zeroed" via a bailout. What I found interesting about today's news was the reaction to it by the stock market. Stocks were up! The financials actually rallied today!
This tells me that many pigmen are in "the know" on how this all plays out, and its really not news to them. This makes me very angry.
Once again, the average Joe shareholders like you and I are left in the dark.
I am really starting to ask myself: Jeff, are you sure you want to continue to invest in the stock market?
Watching the manipulation, lies, and corruption day after day really makes me wonder whether or not I am a fool for even attempting to play with these convicts.
Some days, just feel like the average investor is the biggest sucker on the planet. I am sure after getting tipped off and making their money on the news, the pompous ultra rich sit there and laugh at the little guy as his/her account gets shredded.
When rates eventually rise dramatically(trust me they will) and savings accounts start paying 7%, I may just take my chips and go home.
Why would anyone want to play a game where the rules of the game are set up to beat you. I have no desire to be dropped into a pit of lions and you don't realize you are the raw piece of beef.
Do any of you feel like joining a game of poker where everyone knows your hand and before the betting begins?
Cramer even complained about this today. I wouldn't be surprised to see the trading volumes continue to drop in the markets as this corruption continues to worsen. Everyone I know is scared to death of the markets right now. I DON'T BLAME THEM!
Bottom Line:
Something big is being stirred up to bail out Fannie and Freddie. I would be very nervous if you are a shareholder in these companies . The price action this week says it all. The equity holders are pretty much screwed, and its time for the government to step in.
The lack of reaction in the markets to the news tells you that many already have the Feds playbook. This makes me want to go to cash because I don't know what the Treasury is putting together to bail these suckers out.
Cash sounds like the right place to be until this all plays out. In the end it really doesn't matter because the economy is toast. This is just one more example of how bad this mess really is.
Stocks corrections never go straight down folks! Interventions like the one being brewed up as we speak can provide temporary relief to stocks. You need to set up your portfolio so that it can withstand this volatility. Its time for the sidelines IMO.
Use this sticksave as another indicator of how bad this economy really is. Mortgage applications hit a 6 year low today. The housing market is evaporating faster than Fannie and Freddie. Applications hit 6 year lows during peak selling season folks! There is no appetite for housing and we have 11 months worth of inventory!
Anyone that thinks this ends well needs go see the Wizard of Oz and ask him for a brain.
Tuesday, August 19, 2008
Deflation has Arrived
Good evening!
Interesting start to the week don't you think? There is much to talk about today. The sell off this week is not a surprise to me. I tried to warn everyone that the bounce was about done on Friday. I must admit its been on light volume so this must also be taken into consideration in terms of being a confirmation that we are abut sell off big time.
I am amazed at the power of denial that I am witnessing by the bulls.
It seems like the "bubble boys" need a reality slap of horrible data before they "get it" and sell. The stock market is filled with permabulls after the great run the market has had. This bullishness sentiment is fogging their ability to make smart fundamental decisions in a market that's about to be hit with a deflationary death spiral.
Many of these clowns will lose their fortunes just like they did during the tech wreck. The banks were punsihed today.
Lehman was a big story. I am going to put them back on the endangered species list(after losing a few bucks). The fact that they didn't sell their mortgage assets tells me that they can't afford to do it because their balance sheet is too damaged. The silence from Lehman today was deafening. The price action today tells me they are in trouble.
Deflation
So lets discuss deflation again today. The Telegraph had a disturbing article on the major contraction of the money supply(M3) in July. The graph below shows how sharply the M3 supply shrunk in July.
From the article:
"The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.advertisement
Household income is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s."
My Take:
This is another warning shot to the inflationists out there. The government is not trying to print out of this nightmare! In fact, they are doing the exact opposite. They are reducing the money supply. The drop off in July was the biggest 1 month drop in history!
I was happy to see this chart because going the hyper-inflationary route is much more painful, and usually ends up with governments being overthrown because no one can afford to live.
We seem to be taking the more prudent route out of this mess: Massive deflation similar to Japan. Guys, the writing is on the wall in terms of how the government plans to get out of this mess. They will shrink the money supply which will cause a massive deleveraging of the financial system which in turn causes massive deflation.
Deflation shrinks the value of all assets because there is less money in the system. Banks have forced to be more prudent with their lending because of losses and must deleverage and shore up their balance sheets in order to be viable companies that can make money in the future.
The only way they can do this is by letting deflation hit and allowing houses to become affordable again. When this happens, the ones that survive will be healed and they will have more demand for loans than they know what to do with.
Of course Wall St. hates deflation because it kills their earnings power. Deleveraging is not profitable! When Japan went through massive deflation their stock market went from 38,000 down to about 13,000 where is stands today twenty years later. I don't expect a 60% drop in equities, but we definitely have a ways to go on the downside.
Deflation has already started folks. I have discussed examples of deflation that I am already seeing here in the US.
Expect a lower standard of living in the US as we lick our wounds over the next several years. The good news is if your income holds up, living will become much more affordable and your standard of living may go up!
Other News
Fed president calls for Freddie/Fannie nationalization.
Aug. 19 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker called for ``demonstrably'' privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.
``I would prefer to see them credibly and demonstrably privatized,'' Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan's view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.
Treasury Secretary Henry Paulson by contrast has tried to keep Fannie Mae and Freddie Mac in their current form as government-sponsored companies owned by shareholders. Lacker's remarks come as a slide in the firms' stocks and increase in their borrowing costs spur speculation the Treasury will intervene."
Inflation Soars to a 27 year high
"Aug. 19 (Bloomberg) -- Prices paid to U.S. producers rose twice as much as economists had forecast in July, reflecting the jump in energy and commodity costs that has since started to wane.
The 1.2 percent increase in the producer price index followed a 1.8 percent increase the prior month, the Labor Department said today in Washington. Costs were up the most in 27 years from a year before. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June."
Final Take:
The inflation number may force the Fed to raise rates down the road if falling energy prices don't do the trick.
Remember, price inflation can happen in a deflationary environment. Many people don't understand that these are two different phenomenons. In fact, price inflation actually feeds deflation because people have less disposable income to buy assets like gold and houses because they are paying higher prices via inflation on goods like food and other necessities that are needed in order to live.
I would be nervous if I was an inflationary "gold bug" right now. The one way I do see gold rising is investors might take it higher based on fear when the equity market starts to fall further.
There is only one way the markets go as the money supply drops folks! Down, down, down. Please stay diversified and don't allow your portfolio to go down the deflationary drain!
Interesting start to the week don't you think? There is much to talk about today. The sell off this week is not a surprise to me. I tried to warn everyone that the bounce was about done on Friday. I must admit its been on light volume so this must also be taken into consideration in terms of being a confirmation that we are abut sell off big time.
I am amazed at the power of denial that I am witnessing by the bulls.
It seems like the "bubble boys" need a reality slap of horrible data before they "get it" and sell. The stock market is filled with permabulls after the great run the market has had. This bullishness sentiment is fogging their ability to make smart fundamental decisions in a market that's about to be hit with a deflationary death spiral.
Many of these clowns will lose their fortunes just like they did during the tech wreck. The banks were punsihed today.
Lehman was a big story. I am going to put them back on the endangered species list(after losing a few bucks). The fact that they didn't sell their mortgage assets tells me that they can't afford to do it because their balance sheet is too damaged. The silence from Lehman today was deafening. The price action today tells me they are in trouble.
Deflation
So lets discuss deflation again today. The Telegraph had a disturbing article on the major contraction of the money supply(M3) in July. The graph below shows how sharply the M3 supply shrunk in July.
From the article:
"The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.advertisement
Household income is now 131pc of disposable income, compared with 93pc at the top the dotcom bubble, 79pc in the property boom of the late-1980s, and 62pc at the end of the 1970s."
My Take:
This is another warning shot to the inflationists out there. The government is not trying to print out of this nightmare! In fact, they are doing the exact opposite. They are reducing the money supply. The drop off in July was the biggest 1 month drop in history!
I was happy to see this chart because going the hyper-inflationary route is much more painful, and usually ends up with governments being overthrown because no one can afford to live.
We seem to be taking the more prudent route out of this mess: Massive deflation similar to Japan. Guys, the writing is on the wall in terms of how the government plans to get out of this mess. They will shrink the money supply which will cause a massive deleveraging of the financial system which in turn causes massive deflation.
Deflation shrinks the value of all assets because there is less money in the system. Banks have forced to be more prudent with their lending because of losses and must deleverage and shore up their balance sheets in order to be viable companies that can make money in the future.
The only way they can do this is by letting deflation hit and allowing houses to become affordable again. When this happens, the ones that survive will be healed and they will have more demand for loans than they know what to do with.
Of course Wall St. hates deflation because it kills their earnings power. Deleveraging is not profitable! When Japan went through massive deflation their stock market went from 38,000 down to about 13,000 where is stands today twenty years later. I don't expect a 60% drop in equities, but we definitely have a ways to go on the downside.
Deflation has already started folks. I have discussed examples of deflation that I am already seeing here in the US.
Expect a lower standard of living in the US as we lick our wounds over the next several years. The good news is if your income holds up, living will become much more affordable and your standard of living may go up!
Other News
Fed president calls for Freddie/Fannie nationalization.
Aug. 19 (Bloomberg) -- Richmond Federal Reserve Bank President Jeffrey Lacker called for ``demonstrably'' privatizing Fannie Mae and Freddie Mac, becoming the first Fed official to publicly clash with the Bush administration's strategy of keeping them as federally backed firms.
``I would prefer to see them credibly and demonstrably privatized,'' Lacker said today in an interview with Bloomberg Television. He agreed with former Fed Chairman Alan Greenspan's view that the two largest U.S. mortgage finance firms ought to be nationalized, then split up and sold off.
Treasury Secretary Henry Paulson by contrast has tried to keep Fannie Mae and Freddie Mac in their current form as government-sponsored companies owned by shareholders. Lacker's remarks come as a slide in the firms' stocks and increase in their borrowing costs spur speculation the Treasury will intervene."
Inflation Soars to a 27 year high
"Aug. 19 (Bloomberg) -- Prices paid to U.S. producers rose twice as much as economists had forecast in July, reflecting the jump in energy and commodity costs that has since started to wane.
The 1.2 percent increase in the producer price index followed a 1.8 percent increase the prior month, the Labor Department said today in Washington. Costs were up the most in 27 years from a year before. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June."
Final Take:
The inflation number may force the Fed to raise rates down the road if falling energy prices don't do the trick.
Remember, price inflation can happen in a deflationary environment. Many people don't understand that these are two different phenomenons. In fact, price inflation actually feeds deflation because people have less disposable income to buy assets like gold and houses because they are paying higher prices via inflation on goods like food and other necessities that are needed in order to live.
I would be nervous if I was an inflationary "gold bug" right now. The one way I do see gold rising is investors might take it higher based on fear when the equity market starts to fall further.
There is only one way the markets go as the money supply drops folks! Down, down, down. Please stay diversified and don't allow your portfolio to go down the deflationary drain!
Monday, August 18, 2008
R.I.P. Fannie/Freddie?
Its not official, but it looks like the endgame is near for the two GSE's.
I have been writing about these companies at great lengths over the past few months. This was the main reason the stock market took a giant dump today.
The move down was triggered by a Barron's article on the GSE disaster that essentially said the equity holders of these companies are toast and the companies will be nationalized. Here was the headline from Barron's. Unfortunately I don't have a link:
"The Endgame Nears For Fannie and Freddie
By JONATHAN R. LAING
The almost inevitable government recapitalization of Fannie Mae and Freddie Mac will likely wipe out investors—and management.IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"
My take:
The market did not like hearing this news. Folks, if the GSE's go down, getting a loan will be almost impossible. Interest rates will go through the roof because there simply is no capital out there that is available for lending. You can find it but its going to cost you.
IMO, Fannie/Freddie are either going to go out of business, or be forced by the bond market to be nationalized which will result in a drastic change of their lending standards. They will be forced to de-leverage significantly because it will be the taxpayer that foots the bill for their losses. Either way, the days of bubble lending are gone.
Why?
Because this would dramatically reduce the money thats available for lending. Rates would then go through the roof because capital has become so expensive to lend for banks.
I would not be surprised to see double digit mortgage rates by the end of the year if the two agencies blow up or are forced to dramatically reduce their lending. Its a virtual guarantee that one of these two things are going to happen.
The bond market sent a message today to the GSE's:
Reuters reported that demand for Freddie's most recent debt auction was anemic:
"NEW YORK (Reuters) - Freddie Mac's latest debt sale drew anemic demand on Monday, a day after Barron's reported an increasing likelihood the U.S. Treasury may essentially take over Freddie and rival Fannie Mae.
The weekly financial newspaper said such a move could wipe out existing holders of the largest U.S. home funding companies' common stock, with preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt also suffering losses.
Bonds issued by the two 'agencies' sharply underperformed Treasuries, and their shares slid by more than 9 percent on the New York Stock Exchange.
Merrill Lynch also weighed in on Freddie Mac on Monday, saying it will likely raise fresh capital in the third quarter, comprised of at least 50 percent common stock. Merrill also cut its price target on the company
."Lukewarm was my overall characterization," Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates, said in an email of Freddie Mac's $4 billion debt sale Monday."
Another report on the Fannie/Freddie debt
This is from Dow Jones
"NEW YORK (Dow Jones)--The cost of protection on the less-secure subordinated debt of Fannie Mae (FNM) and Freddie Mac (FRE) rose significantly Monday as fears reignite that the U.S. Treasury Department will recapitalize the two companies, leaving existing shareholders, and potentially holders of this debt, with nothing.
Holders of the mortgage giants' subordinated debt are also concerned they could be left empty-handed in such a move, according to Margaret Kerins, managing director at RBS Greenwich Capital.
As a result, credit default swaps on subordinated Fannie and Freddie debt Monday afternoon were seen at 330 basis points, or $330,000 to insure $10 million of debt for five years, Kerins said. This is 50 basis points, or $50,000, wider than Friday's closing level, and higher than levels around 303 basis points, or $303,000, seen earlier Monday, according to data from broker Phoenix Partners Group in New York.
The current levels are dramatically wider than levels seen in the middle of July when investors first became concerned about an increasing chance of default in the subordinated debt. On July 10, the cost of protection was at 241 basis points, or $241,000, according to administrator Markit."
Final Take:
Now although the news looks grim for the two GSE's, there is still a lot that needs to play out here. China owns a ton of this mortgage debt and the US badly needs China to continue to be an investor here.
What surprises me is it seems like the traders in the bond markets seem to be trading as if the US government is not going to pull the trigger and nationalize the $5 trillion in debt that the the two GSE have so irresponsibly run up.
I personally believe that in the end, the government will step up to the plate and nationalize these two companies and then draw a line in the sand.
As I described above, the only lending that will be done going forward will be 20% down. The loan will also be no more than about 36% of your income. You better have a great credit score as well.
The reaction to this event in the housing market will be violent as housing prices will free fall to levels at which buyers can qualify with the new lending standards that will be seen in the mortgage market.
The reaction to this on Wall St. will be horrifying. Massive losses will need to be taken by the banking system, housing will capitulate, and the consumer will reign in spending after losing such massive amounts of money in lost housing "equity".
The sad reality is this what needs to be done in order to save the financial system. Without buyers in the debt markets for Fannie/Freddie paper, the game is over. The US government will not let this happen IMO.
Bottom Line:
If the government decides to backstop the two GSE's then you can expect the US to lock up this $5 trillion and throw away the key. You might as well put a fence around this debt because it will no longer be growing. It will be guaranteed by the US because the we need the investors that own it like China to continue to buy debt.
We cannot afford to piss these people off and allow $5 trillion in debt to fall drastically in value. China would run for the hills and put their money elsewhere. The poor demand in todays debt auction says it all. China is not stupid and will reign in the purchasing of this debt until this is worked out.
The days of bubble borrowing are over folks!
Here is what I predict will happen.
The $5 trillion ponzi debt machine will be shut down immediately. The next step will be to throw this debt into a closet and guarantee it so we keep our big investors whole. Sadly, our tax dollars will be what guarantees this debt, and we will be the ones paying for the losses as a lot of this debt gets defaulted on.
This is the only solution that I see. I say this because if the government doesn't backstop this debt, it looks like the bond market has zero desire to continue buying it. The US simply can't afford to let this happen so they will bend over and take the hit.
A new housing market will be born after this occurs. Lending will be tight, expensive, and done only with customers that have money to put down with excellent credit scores.
The reprocussions of this are huge, and equities will end up paying the ultimate price. Lets hope this is enough to get us out of this mess.
I have been writing about these companies at great lengths over the past few months. This was the main reason the stock market took a giant dump today.
The move down was triggered by a Barron's article on the GSE disaster that essentially said the equity holders of these companies are toast and the companies will be nationalized. Here was the headline from Barron's. Unfortunately I don't have a link:
"The Endgame Nears For Fannie and Freddie
By JONATHAN R. LAING
The almost inevitable government recapitalization of Fannie Mae and Freddie Mac will likely wipe out investors—and management.IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"
My take:
The market did not like hearing this news. Folks, if the GSE's go down, getting a loan will be almost impossible. Interest rates will go through the roof because there simply is no capital out there that is available for lending. You can find it but its going to cost you.
IMO, Fannie/Freddie are either going to go out of business, or be forced by the bond market to be nationalized which will result in a drastic change of their lending standards. They will be forced to de-leverage significantly because it will be the taxpayer that foots the bill for their losses. Either way, the days of bubble lending are gone.
Why?
Because this would dramatically reduce the money thats available for lending. Rates would then go through the roof because capital has become so expensive to lend for banks.
I would not be surprised to see double digit mortgage rates by the end of the year if the two agencies blow up or are forced to dramatically reduce their lending. Its a virtual guarantee that one of these two things are going to happen.
The bond market sent a message today to the GSE's:
Reuters reported that demand for Freddie's most recent debt auction was anemic:
"NEW YORK (Reuters) - Freddie Mac's latest debt sale drew anemic demand on Monday, a day after Barron's reported an increasing likelihood the U.S. Treasury may essentially take over Freddie and rival Fannie Mae.
The weekly financial newspaper said such a move could wipe out existing holders of the largest U.S. home funding companies' common stock, with preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt also suffering losses.
Bonds issued by the two 'agencies' sharply underperformed Treasuries, and their shares slid by more than 9 percent on the New York Stock Exchange.
Merrill Lynch also weighed in on Freddie Mac on Monday, saying it will likely raise fresh capital in the third quarter, comprised of at least 50 percent common stock. Merrill also cut its price target on the company
."Lukewarm was my overall characterization," Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates, said in an email of Freddie Mac's $4 billion debt sale Monday."
Another report on the Fannie/Freddie debt
This is from Dow Jones
"NEW YORK (Dow Jones)--The cost of protection on the less-secure subordinated debt of Fannie Mae (FNM) and Freddie Mac (FRE) rose significantly Monday as fears reignite that the U.S. Treasury Department will recapitalize the two companies, leaving existing shareholders, and potentially holders of this debt, with nothing.
Holders of the mortgage giants' subordinated debt are also concerned they could be left empty-handed in such a move, according to Margaret Kerins, managing director at RBS Greenwich Capital.
As a result, credit default swaps on subordinated Fannie and Freddie debt Monday afternoon were seen at 330 basis points, or $330,000 to insure $10 million of debt for five years, Kerins said. This is 50 basis points, or $50,000, wider than Friday's closing level, and higher than levels around 303 basis points, or $303,000, seen earlier Monday, according to data from broker Phoenix Partners Group in New York.
The current levels are dramatically wider than levels seen in the middle of July when investors first became concerned about an increasing chance of default in the subordinated debt. On July 10, the cost of protection was at 241 basis points, or $241,000, according to administrator Markit."
Final Take:
Now although the news looks grim for the two GSE's, there is still a lot that needs to play out here. China owns a ton of this mortgage debt and the US badly needs China to continue to be an investor here.
What surprises me is it seems like the traders in the bond markets seem to be trading as if the US government is not going to pull the trigger and nationalize the $5 trillion in debt that the the two GSE have so irresponsibly run up.
I personally believe that in the end, the government will step up to the plate and nationalize these two companies and then draw a line in the sand.
As I described above, the only lending that will be done going forward will be 20% down. The loan will also be no more than about 36% of your income. You better have a great credit score as well.
The reaction to this event in the housing market will be violent as housing prices will free fall to levels at which buyers can qualify with the new lending standards that will be seen in the mortgage market.
The reaction to this on Wall St. will be horrifying. Massive losses will need to be taken by the banking system, housing will capitulate, and the consumer will reign in spending after losing such massive amounts of money in lost housing "equity".
The sad reality is this what needs to be done in order to save the financial system. Without buyers in the debt markets for Fannie/Freddie paper, the game is over. The US government will not let this happen IMO.
Bottom Line:
If the government decides to backstop the two GSE's then you can expect the US to lock up this $5 trillion and throw away the key. You might as well put a fence around this debt because it will no longer be growing. It will be guaranteed by the US because the we need the investors that own it like China to continue to buy debt.
We cannot afford to piss these people off and allow $5 trillion in debt to fall drastically in value. China would run for the hills and put their money elsewhere. The poor demand in todays debt auction says it all. China is not stupid and will reign in the purchasing of this debt until this is worked out.
The days of bubble borrowing are over folks!
Here is what I predict will happen.
The $5 trillion ponzi debt machine will be shut down immediately. The next step will be to throw this debt into a closet and guarantee it so we keep our big investors whole. Sadly, our tax dollars will be what guarantees this debt, and we will be the ones paying for the losses as a lot of this debt gets defaulted on.
This is the only solution that I see. I say this because if the government doesn't backstop this debt, it looks like the bond market has zero desire to continue buying it. The US simply can't afford to let this happen so they will bend over and take the hit.
A new housing market will be born after this occurs. Lending will be tight, expensive, and done only with customers that have money to put down with excellent credit scores.
The reprocussions of this are huge, and equities will end up paying the ultimate price. Lets hope this is enough to get us out of this mess.
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