Archive for March, 2008

Bear rallies

Monday, March 31st, 2008

Full story here. Don’t go for the “long haul” because it’s more like a keel haul at this point. Use ShadowTraders to get in, get money, get out.

“Every slump is punctuated by exuberant bursts of optimism, known to traders as “bear market rallies”. Japan had four false dawns during its long slide into the abyss. Each lifted Tokyo’s Nikkei index by an average of 53pc. Such bounces can be intoxicating.

…There have been nine bear rallies since 1970. The average length is four months. The surge misleads investors into believing that sunlit uplands lie ahead. Then the sucker punch hits.

“The Federal Reserve’s actions have averted financial Armageddon, but they cannot avert an earnings recession. We don’t expect a new bull market until early 2009,” he said.

Morgan Stanley says earnings will fall 16pc this year as debt leverage kicks into reverse.

Investor psychology is “asymmetric”. The market discounts trouble in advance. Share prices start falling a year before earnings peak. In a downturn investors keep selling until earnings hit bottom.

Nordic-style nationalization of banks?

Monday, March 31st, 2008

Full story here. Still wanna keep your 401(k) stuffed with bank stocks? Trade with ShadowTraders in the futures market.

“…The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers. [ed. No kidding!]

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.

…While the responses varied in each Nordic country, there a was major effort to avoid the sort of “moral hazard” that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks – Christiania Bank and Fokus – were seized by force majeure.

“We were determined not to get caught in the game we’ve seen with Bear Stearns where shareholders make money out of the rescue,” said one Norwegian adviser.

“The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.

…Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

“Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank’s dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan,” he said. [ed. Double no kidding!!!!]

Wow, a nationalization of such assets could be the stuff of “accidental overdoses”, random “car accidents” and “heart attacks”. These guys won’t give up their stuff voluntarily.

Fannie & Freddie wade deeper into the subprime pool

Thursday, March 27th, 2008

Full story here. Still feeling good about that mutual fund that’s holding all that Fannie Mae paper? Forget it. Use ShadowTraders to make your money fast and safely.

“…As long-time readers are all too familiar, I have been a persistent critic of government-sponsored enterprises, or GSEs – notably mortgage finance agencies Fannie Mae and Freddie Mac. These behemoths of historic credit excess – instigators of the mortgage finance and housing bubbles – liquidity backstops for the ballooning leveraged speculating community – and instrumental agents for an unparalleled misallocation of financial and economic resources – are proving themselves the Freddie Krueger of systemic distortions and policy failures…

I found OFHEO director James Lockhart’s interview late Wednesday afternoon on CNBC also worthy of documentation:
Bartiromo: And just the idea that they are a bid in the marketplace to buy those securities obviously was really celebrated in terms of investors and the idea that now there is a buyer there. How long do you expect this process to take? And how long do you think it will take to actually get this moving – liquidity back into the market and a feeling of stability?

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

It would be an outright crime if thinly capitalized Fannie and Freddie were allowed to increase their Books of Business (mortgages retained on their balance sheets and MBS guaranteed in the marketplace) by $2 trillion this year – “if the market needs that money”.

I was shocked when Mr Lockhart imparted that they were now in a position to accomplish such a feat. It is certainly a terrible idea to put Fannie and Freddie guarantees on millions of new mortgages created from restructuring loans of troubled borrowers. This would amount to nothing less than a despicable transfer of massive prospective credit losses directly to the American taxpayer (current owners of this paper should not be bailed out)…”

So the actual dorks who got us into trouble will get a dummy to stand in for them when it’s time to get hauled up for the firing squad. If this were a true nationalization, one wouldn’t need to use the corpse of a rapacious lender with a quasi-government guarantee to be the dummy, with the US taxpayer now really being the one to take a hit, as well as 2 more generations of taxpayers yet unborn. Nor would you really need the Fed to create money out of thin air and bill us interest for it, since the US Treasury would do it (and had done so for 150 years before bankers decided they should be able to print our money and charge us for it). Such an exciting little planet we have here…

The Gods’ Next Big Laugh

Tuesday, March 25th, 2008

Article found here. Get going with ShadowTraders and really get in the last laugh.

“Hear that noise?

That’s the sound of the gods laughing They’re laughing at Northern Rock, Bear Stearns, and all the angels, archangels, seraphim and cherubim of the whole financial industry. The geniuses thought they had put an ankle bracelet on uncertainty. They believed that with their new tools they could model risk, quantify it, and control it. Now, they’re going broke… and the gods are tumbling off their chairs.

But listen up, because the biggest laughs are still ahead.

Alan Greenspan, the world’s best-known civil servant since Pontius Pilate, wrote in the Financial Times this week. In the interest of saving readers’ time, we reduce his half-page circumlocution on today’s financial crisis to 4 simple words: it wasn’t his fault. An unexpected and unpredictable force had taken over in the financial markets, he explained… a kind of ‘dark matter’ that caused everyone to act a little funny. According to Mr. Greenspan the source of the proximate problem is the home building industry. For some reason, (he decided not to mention what), it overbuilt. The crisis will end, he continued, “when home prices stabilize and with them the value of equity in homes supporting troubled mortgage securities.”

…Today, America’s central bank applies a “rule based monetary policy” – supposedly founded on the ’scientific’ discoveries of Irving Fisher and his heirs. What’s the rule? Balance out inflation against unemployment. When inflation threatens, raise rates. When the economy is menaced by unemployment, cut them. And always, like a dishonest butcher, make sure your thumb lingers on the inflation side.

Professor Fisher lived long enough to see the gods laughing at him. Just days before the stock market crash of ‘29 he wrote, “stock prices have reached what look like a permanently high plateau.” Then, when the crash came he said that the “market was only shaking out the lunatic fringe,” and claimed that prices would soon go much higher. A few months later, Fisher had lost his fortune and his reputation, but still told investors that recovery was just around the corner…”

Govt benefit programs in trouble

Tuesday, March 25th, 2008

Full story here. Trade with ShadowTraders now, because there isn’t “Kansas retirement” anymore, Dorothy.

“…Trustees for the government’s two biggest benefit programs warned Tuesday that Social Security and Medicare are facing “enormous challenges” with the threat to Medicare’s solvency far more severe.

The trustees, issuing a once-a-year analysis of the government’s two biggest benefit programs, said the resources in the Social Security trust fund will be depleted by 2041. The reserves in the Medicare trust fund that pays hospital benefits were projected to be wiped out by 2019.

Both those dates were the same as in last year’s report. But the trustees warned that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes. For Medicare, that threshhold is projected to be reached this year and for Social Security it is projected to occur in 2017…”

Apart from the actual scary part of running deficit spending on Medicare starting this year, there is the more ominous future where, in a hyperinflation or recession-crashed economy, there is more unemployment, ergo less payroll deductions for these social services, more dollars needing to be spent for less service, not to mention a rise in the ‘under the table’ employment to dodge possible increases in suppressive taxation. Think people are happier and healthier whilst unemployed? Nope. (Go long on Ripple and Night Train). So we can anticipate a slight rise in demand, while getting a big drop in inflows. Of course, we’re not even dealing with the fact that the social security fund was raided of cash starting in the 70’s. It was replaced with Treasury bills as IOUs. Lord help ‘em if there were a default on our gov’t debts, because then there wouldn’t even be a facade of coverage. The emperor has no clothes and the sharpie marker we used to cover him up is washing off…

Fed’s rescue halted a derivatives Chernobyl

Monday, March 24th, 2008

Full story here. Don’t wait for “Helicopter Ben” to circle your house. Trade with ShadowTraders, make your money and keep it.

“…Fed chairman Ben Bernanke has moved with breathtaking speed to contain the crisis. Last Sunday night, he resorted to the “nuclear option”, invoking a Depression-era clause – Article 13 (3) of the Federal Reserve Act – to be used in “unusual and exigent circumstances”.

The emergency vote by five governors allows the Fed to shoulder $30bn of direct credit risk from the Bear Stearns carcass. By taking this course, the Fed has crossed the Rubicon of central banking.

To understand why it has torn up the rule book, take a look at the latest Security and Exchange Commission filing by Bear Stearns. It contains a short table listing the broker’s holding of derivatives contracts as of November 30 2007.

Bear Stearns had total positions of $13.4 trillion. This is greater than the US national income, or equal to a quarter of world GDP – at least in “notional” terms. The contracts were described as “swaps”, “swaptions”, “caps”, “collars” and “floors”. This heady edifice of new-fangled instruments was built on an asset base of $80bn at best.

On the other side of these contracts are banks, brokers, and hedge funds, linked in destiny by a nexus of interlocking claims. This is counterparty spaghetti. To make matters worse, Lehman Brothers, UBS, and Citigroup were all wobbling on the back foot as the hurricane hit.

“Twenty years ago the Fed would have let Bear Stearns go bust,” said Willem Sels, a credit specialist at Dresdner Kleinwort. “Now it is too interlinked to fail.”…”

 You know, if I went around trying to sell my house to more than one party, it’d be called fraud. And we already have a regulatory mechanism in place called a title company to make sure that ownership can be verified and transfered properly. This is why I can’t make $4 million from my humble home. Not so with these dear banks. The regulatory party was eliminated (too many messy questions), and thru the miracle of structured investment vehicles they sold the same crap over and over. Oh, and they could sell it to grandad’s retirement fund because they had the ratings agencies in their pocket too. Oh, for the chance to grease someone at the credit bureau who’ll swear on a stack of balance sheets that my FICO score is 850 and my “stated income” is around $3 million. Just to finish this scenario, the feds find me doing this, but since I’m doing it with all of my friends (some of whom happen to be the fed guys bosses) I won’t be allowed to fail and the feds will trade my SIV certificates for $4 million. Such a deal!

Wall St insolvent?

Sunday, March 23rd, 2008

Full story here. Get yourself ahead NOW with ShadowTraders.

“…The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday’s decision to become a lender of last resort for the biggest Wall Street dealers.â? (â??Bernanke May Run Low on Ammunition for Loans, Ratesâ?, Bloomberg)

The troubles in the credit markets and real estate are bigger than the Fed or the PPT; and they know it. The next step is massive government intervention; rate freezes, bailouts and fiscal stimulus. Big government is back; Reaganism has gone full-circle. That doesn’t mean that the PPT cannot have an important psychological affect in soothing jittery markets and stalling a system-wide collapse. It just means, that markets will eventually correct regardless of what anyone does. The sharp downturn in the financial markets is the result of unsustainable credit expansion that can’t be fixed by the parlor tricks of the PPT. The rate at which financial institutions are deleveraging and destroying capital will inevitably trigger an economic crisis equal to the Great Depression. What is needed is strong leadership and a re-commitment to transparency, rather than the â??business as usualâ? deception of the public that keeps the balls in the air for another day or two.

â??Sucker ralliesâ?, like yesterday’s (March 17th) 400 point surge on Wall Street just obfuscate the systemic problems that need to be addressed before investor confidence is restored. Blogger Rick Ackerman summed it up succinctly in last night’s entry: â??These psychotic, 400-point rallies in the Dow do not augur renewed confidence. They are being driven almost entirely by short-covering, and even the otherwise clueless news anchors are starting to dismiss them as meaningless. One of these days, moments after the last surviving bear’s short position has been liquidated, stocks are going to fall so steeply that even the Plunge Protection Team will call for back-up. Then, the financial collapse that so many have been expecting will unfold in just a few days, with enough power to leave the global economy in ruins for a generation.â? (Rik’s Piks Rick Ackerman)

Whether Ackerman’s dire predictions materialize or not, there’s no denying that the situation is getting worse by the day. In just the last week, two major financial institutions, Carlyle Capital and Bear Stearns, have either gone under or been bailed out wiping out tens of billions in market capitalization. These flameouts increase the rate of the deflation adding to the already-prodigious losses from housing foreclosures, delinquent credit card debt, defaulting car loans, and the accelerating deleveraging in the hedge fund industry. Fortress America has sprung a leak, and capital is escaping in a torrent…”

Market Commentary for the Week of March 24 – 28

Sunday, March 23rd, 2008

Last week was our first upweek in a long time. Tuesday’s 420 point rise was followed by a 270 point drop and then a 260 point rise. The key was that the Market held above its 52 week low of 11870. That may have been a magic turning point.
The other major change this last week was that even though the financial institutions were reporting less than half the revenue as 2007, at least they were reporting positive numbers and beating expectations. That may be the bottom for the financial stocks.
But that is not the end of the recession. This last week, PPI came in a 3% (excluding energy and food) increase, showing a significant rise in inflation. Core PPI (which does not include food and energy) came in at 5% instead of the 2% expected. And leading indicators (which include new orders, jobless claims, money supply, stock prices) on Friday were -.3%.
Another indication that the recession is not over was the New York Empire State Index which measures manufacturing in the NY area. This came in at -22%, while the Market expected -7%.
One very important indicator that is often overlooked is Net Foreign Purchases, that measures how much money is coming into the country from foreign sources. That came in at $62 billion, when last year it was well over $100 billion.
So what will next week bring for the Market? The next report up is the Existing Home Sales report on Monday. The Market has already discounted the number of sales from previous months. And given that this report is basically useless because it is plus or minus 30%, the Market will not put a lot of attention on that report. Judging by the Building Permits report from last week that failed to meet even the lowered expectations, we cannot expect the housing market to have recovered from last week. Wednesday is the other home sales report, this time the new homes. Again, with a shrunken building permits number, this should not be good. But will the Market ignore that number and be positive anyway?
That all depends upon the Durable Orders report that comes out at 8:30am. Last month, Durable Orders was -5%. This month the Market is expecting the orders to be positive. If they are, the Market could hold and continue to climb.
The biggest question is Tuesday. What will consumer confidence be? If it is again a low number, how will the Market react? Will the Market ignore the bad number and continue to climb? It all depends entirely on how low the number is.
Wednesday, the Market will see the impact of the housing and job markets on the GDP number. This next week will show just how deep the recession is.

The last important point to look at is inflation. Last week the Feds once again dropped the interest rates while inflation is running out of control. What will this mean going forward? We’ll see the Feds raise interest rates just as fast as they reduced them. As soon as the Market shows signs of recovery, watch the Feds quickly raise the interest rates.

Goldman, Lehman outlooks cut to ‘negative’

Friday, March 21st, 2008

Article here. Just by ShadowTrading, you’re miles ahead of the folks who said “I’ll trust this big investment bank”.

Please note that this warning came on a market holiday–no surprises there. The current scene has rendered itself into a strange financial kabuki, with the players putting on their best masks and singing and dancing the parts they are supposed to.

“Goldman Sachs Group Inc’s and Lehman Brothers Holdings Inc’s credit rating outlooks were cut on Friday by Standard & Poor’s, which said volatile markets could result in lower profit and revenue.

S&P revised its outlook to “negative” from “stable” on Goldman’s “AA-minus” and Lehman’s “A-plus” long-term credit ratings, suggesting a possible downgrade in one to two years.

The ratings are S&P’s fourth- and fifth-highest investment grades, respectively. Lower credit ratings can result in higher borrowing costs.

Goldman is the largest Wall Street investment bank by market value, and Lehman is the fourth-largest. Goldman did not immediately return calls seeking comment. Lehman spokeswoman Kerrie Cohen declined to comment…”

Paulson is —-ing incompetent!

Friday, March 21st, 2008

Not my words. The full article is here. Wow, we’re really getting some mileage on the Year of the Rat already. The rats on Wall St are running for the exits.

 ”…Within the space of a week, the Federal Reserve announced the emission of $400 billion in cash to bail out the bankrupt U.S. banking system, and Treasury Secretary Henry Paulson released a report by the President’s Working Group on Financial Markets (PWG) which maintained that the system was fundamentally sound, except for a few excesses which need to be curbed. These actions, taken together, reflect a case of axiomatic blindness so profound it boggles the mind. The bankers and their regulators are acting on impulse, not intellect, and their impulse is to try to save themselves and their power at all costs. It is stupidity on a world-historic, civilization-killing scale.

“Paulson is f**king incompetent!” exclaimed Lyndon LaRouche in response to the PWG report. “They all are. It must be said directly: They are f**king incompetent.”

Strong words indeed, and entirely warranted, because what Paulson and Fed chairman “Helicopter” Ben Bernanke are doing, is attempting to have the Federal government bail out the U.S. banking system by transferring the losses to the government and, ultimately to the American people. Among the many problems with that approach is that the banks’ losses are so large, that creating enough dollars to plug the hole would destroy the value of the already plunging dollar through hyperinflation…”