Shadowtraders Blog

Can consumers really believe that the price of oil is based upon supply and demand? This week, Thursday, we saw the price of oil jump from $111/barrel up to $121/barrel. Then Friday came and the price dove back down to $114. Surely supply and demand had no bearing on the price.

This week we saw more banks/brokerages fall to the auction rate securities debacle. Goldman Sachs had announced that it would not buy back the illiquid paper. On Thusday we saw Goldman announce a $1billion buyback. But the real announcment came from Merrill Lynch. Merrill is now required to pay, get this, $125 million in fines for its involvement in auction rate securities. What is really amusing is that Merrill said that it would not admit any fault. Get real. No one pays $125million is fines assessed from the SEC unless they have done something major. The biggest problem Merrill now faces is ... how to keep its customers who had all their funds tied up.

On Thursday we heard that Lehman Brothers was trying to sell 50% of its brokerage to the Koreans and the deal fell through. On Friday we heard that Lehman Brothers was simply going to be bought out entirely. How will CEO Richard Fuld keep his job now. And for that matter should he? In one year Lehman Brothers stock has gone from $70 / share to $15. Now that's what you call "Shareholder value".

But lets talk about the real crisis that is already here. According to economist Hyun Song Shin, who has been studying the credit crisis turmoil since its beginning last year, the subprime debacle has already cost banks and brokerages $500 billion. Here's the problem now. The credit crisis is no longer limited to subprime mortgages. It has spread throughout the entire economy, from credit card defaults, small business loan defaults, prime real estate defaults, construction margin defaults, etc.

In an interview on Saturday, Shin said that "We'll see as much as the subprime losses again on the other side, at the very least." That means another $500 billion. Now the International Monetary Fund is projecting a total of $946 billion loss by banks and brokerages.

"We are probably half way [through the financial turmoil], "Shin said. "The first stage is done -- we're at the second stage. ... The real issue is how much is how much the prime mortgage portfolio is going to be affected. That is going to depend on how far house prices will fall."

With the Fed meeting in Jackson Hole for their annual retreat, this had to be one of the major topics of concern. Even Ben Bernanke's calming words on Friday, about how inflation was taming, won't be able to hid the gloom and doom report of Shin.

And this week we all but saw that Fannie May and Freddie Mac will need to be bailed out in some way. The real question is how. There are billions of dollars invested in Fannie and Freddie bonds. If these companies are taken over by the Feds, it all but guarantees a loss for these bond holders. Many pension funds have invested in these bonds.

Lastly, if we haven't had enough "good" news, this weekend we saw another bank failure, bringing the total to 9. This failure will cost the FDIC $60million. Columbian Bank and Trust, with assets of $752 million will now be Citizens Bank and Trust of Chillicothe Mo.

For us as traders, what can we look forward to next week? Existing and new home sales, consumer confidence, personal income and spending and GDP. Can you say "Oy Vey?"

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