Posts Tagged ‘Banks’
Risk of Default at Large Financials
Thursday, November 6th, 2008
It appears that CDS rates at the largest US financials has fallen. Morgan Stanley and Goldman Sachs have the highest CDS prices while Wells Fargo and HSBC now have CDS prices below 100. These prices are indications of the cost to insure $10,000 of bond debt for 5 years.
These prices were much higher a few weeks ago, before TARP kicked in.
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Tags: Banks, Brokers, CDS, Credit Market
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Commodities Snapshot
Wednesday, November 5th, 2008
A snapshot view of commodities reveals that they have all experienced some mild recovery at the end of the month of October, as liqudation pressure caused by the deleveraging of hedge fund and bank balance sheets which wreaked havoc on markets during the month subsided. Its been little more than a week since TARP began deploying funds in a meaningful way. Also, another factor seems to have been the destabilization that was caused by the covering of short positions in Dollar/Yen carry trades that forced further liquidation in equity and commodity markets making October 2008 the worst month in 21 years. These conditions have been profoundly deflationary.
The following chart shows how as a result of high commodity prices the daily cost of living rose incrementally to a high of an additional cost per capita of $4.77. While the turmoil in commodity market has been terrible for investors, the turn has been beneficial to comsumers, who are now enjoying a $2.58 dividend off the resultant cheaper cost of living.
In the above chart we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers wallets this year. (Bespoke)
Volatility in commodities is sure to continue and their prices have still a long way to go before the upper limit of the current downtrend line is broken. Under present circumstances, if you consider the economic growth numbers for the US economy continue to show up in the negative GDP growth and the credit market volatility continues to reign on the markets’ parade, commodity prices could face more downward pressure.
Charts: Bespoke Investment Group
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Tags: Banks, Carry Trade, Chart, Commodities, Credit, Credit Market, Economy, energy, GDP Growth, Gold, Markets, Natural Gas, Silver
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Deleveraging Forces Liquidation
Friday, October 31st, 2008
“When investors are in trouble, they sell what they can, not what they would like to.”
The current issue of The Economist features an excellent article about the forced selling that has been the key feature of this bear market, caused by the violent trading days that have come in the wake of the deleveraging of many banks and hedge funds as they need to get their balance sheets in order.
Here are some excerpts:
… the speed of market movements suggests another factor has been even more important. When investors are in trouble, they sell what they can, not what they would like to. It looks as if they have been dumping a whole range of assets.
Emerging stockmarkets, for example, have lost more than half their value this year, while emerging-government bonds were yielding more than eight percentage points above Treasury bonds, at least until a rally on October 28th. Leveraged loans (debts to finance management buy-outs) are trading at just 70 cents on the dollar.
… Who is being forced to sell? One obvious answer is banks that have ended up owning far more risky assets than they would like. Barclays Capital put $970 million of leveraged loans up for sale in October; in the face of disappointing offers, it ended up selling just 30% of the lot. Other banks have been winding down their trading, a big source of revenue earlier this decade, in an attempt to reduce risk.
Another group of sellers is the hedge funds. After a disappointing performance this year, many are facing calls for redemptions from clients and are having to sell assets to raise cash. But their problems also stem from their use of leverage, or borrowed money.
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Tags: Banks, Commodities, Dollar, Markets, Trading, Value
Posted in Markets | 1 Comment »
Better To Be Late, Amid Credit Crises: Thomas Barrack, Jr.
Thursday, October 30th, 2008
Thomas J. Barrack Jr., billionaire and Founder of Colony Capital, which controls $39-billion in real estate assets, in his recent newsletter, “Is the world going to an [Extinction Level Event?” provides his assessment of the state of the markets, and shares the following:
Why the Banks Have Most Likely Not Hit Bottom
• Corporate earnings from most sectors will be weak and capex programs will be slashed.
• Hedge funds will continue to be tortured by redemptions and their interplay with banks was
incestuous.
• The effect of hedge funds pulling out of the market will chill many sources of corporate
finance - Redemptions are massive.
• Counterparty risk in the CDS market will remain a bit of a mystery.
> CDS was equally as bad at the plate as equity and debt players
> The governments infusion of equity collapsed the CDS spreads
• CDS payments and failures at levels that are unfathomable - watch Lehman reconciliations on
Tuesday, Oct. 21st.
• The housing market will remain anemic.
• Insurance companies, automakers, airlines and shippers are all in trouble.
• State and municipalities are also Fed borrowers.
• Corporate refinancings at $150 billion a quarter with no one to refinance.
• Massive margin calls on the titans of America which will cause collapse in the corporate
equities they own.
• Forced liquidations.
• LBO restructurings and covenant violations.
• No DIP financing for bankruptcies, only liquidations.Long-term Consequences
The good news is that all we care about at the moment is SURVIVAL. We need to fight every day to monitor and steward the best deals we can find — the ones we own. However, eventually we will need to examine the long-term effects of our triage.
• Huge inflationary pressures. Inevitable higher interest rates and taxes.
• Massive national debt and budget deficits.
• Are we deferring the pain like Japan did?
• $11.3 trillion national debt is really $55 trillion due to OBL (off balance-sheet liabilities).
• Implications of investment losses for pension funds and endowments?Bottom Line
The game is afoot and not over. Don’t panic and don’t be euphoric. The discoveries will be constant and unsettling. Fortunately, the world powers have committed to win it. Now we all have to figure out what exactly that means. Based upon our past experience at implementing bank takeovers and “distressed asset” management and dispositions, we suggest that we all buckle our seatbelts for a longer ride with lots of ups and downs before we arrive to safety.
From Bloomberg, October 10, 2008:
“For once, it will be better to be late rather than early,” Barrack said in a four-page letter to investors on Oct. 8, a copy of which was obtained by Bloomberg News. “There is no bottom because no one believes the messenger.’
“As all markets come to the realization that we are now in a worldwide systemic recession — not just a credit crunch — things may get worse,” the Los Angeles-based Barrack, 61, wrote in the letter, titled “In God We Trust — But Not Counterparties.”
“The massive restructurings, refinancings and re-pricings that will now take place, cascading from the financial world to the industrial world, will be legend. The complexities, repercussions and consequences to all parties are indeterminate.”
From Donald Trump’s Blog, the Donald quotes his good friend’s (Thomas Barrack Jr.) newsletter:
Why Can’t Anybody Find the Bottom?
It all boils down to trust! The mantra of the country is “In God We Trust–but not counterparties.” No buyer trusts any seller, banker, insurer or intermediary. No investor trusts any depository, insurer, broker-dealer or advisor. No Main Street citizen trusts Wall Street, and neither Main Street or Wall Street trusts the government. No counterparty in any transaction has confidence in the other. Values at every level have been artificially adjusted and when the air comes out of the “speculative hope certificates” everyone is pointing fingers at each other for fault and retribution.
The Worst is in Front of Us
Counterparties are renegotiating, borrowers are violating covenants, banks are finding any excuse not to fund existing commitments, insurers are negating liability, and renegotiations of responsibility and liability are being conducted at every level of the capital structure across the spectrum of companies.
There is no bottom because no one believes the messenger. With trillions of dollars of re-pricing occurring in these markets there is no hurry to catch the falling knife. There will be ample time once that last “dead cat bounce” has bounced and the government launches a coherent and consistent program. For once it will be better to be late rather than early.
Bottom Line: This is Not the Bottom.
Thomas J. Barrack Jr., “Is the World Going To ELE?”, October 14, 2008
Source: NakedShorts.com, Colony Capital
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Tags: Banks, CDS, Credit, Dollar, energy, Fed, Housing Market, inflation, interest rates, Japan, Markets, Real Estate, Recession, spreads, Value
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The Age of Prosperity is Over: Arthur Laffer
Thursday, October 30th, 2008
Arthur Laffer, the Reagan-era economist, famous for defining Supply-Side economics and developing what is now referred to as the Laffer Curve, has written an Op-Ed piece in the Wall Street Journal (October 27, 2008).
The Age of Prosperity is Over, October 27, 2008. This is a must read.
Seymour Schulich provides a foreword to this article:
“This piece from an American friend gives a clear picture of where the U.S. is heading and the price to be paid for allowing unregulated hedge funds and derivative activity.
The next commodity boom will set new price records. It is galling to see the u.s. dollar sell at a huge premium. I think our Canadian dollar is the best buy in the world today.”
Best Regards, Seymour Schulich
Here are some excerpts:
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.
Regarding past Presidents and central bankers:
The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.
Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.
Hat Tip: John Budden, BeEarly.com
The Age of Prosperity is Over, Wall Street Journal, October 27, 2008.
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Tags: Alan Greenspan, Banks, Dollar, Economics, Economy, Markets, Mortgage, REW, Value
Posted in Credit Markets, Markets | No Comments »
Resurgent Yen a Global Destabilizer
Wednesday, October 29th, 2008
Once again, volatility favouring the Japanese Yen is having a pronounced effect on what happens in the stock market. There is a well documented history of the relationship that exists between global stock markets and the Yen. There appears to be a well-defined negative correlation between the yen and equity markets. When the yen surges, markets fall, and vice versa.
We have covered this topic on several occasions during this year:
- The Carry Trade and Markets? What is the relationship?,
- Resurgent Yen is Scary News,
- Why the selloff in commodities and emerging markets?,
- More Carry-Trade commentary
- More volatility coming and more ETF options
- Yen’s Strength [has been] profoundly negative for global markets
From the Economic Times, The Group of Seven issued warnings on Monday the yen’s wild swings are threatening financial stability, fanning speculation central banks may intervene to halt a rally in the currency driven by a Japanese exodus from emerging markets.
The yen was the only currency mentioned in a brief G7 statement as it rallied to 13-year high against the dollar, not only threatening Japanese exports as the world’s second-largest economy tumbles toward recession amid the worst global financial crisis in 80 years, but leading to a destabilization of currency related transactions that need to be unwound.
As a matter of background building, we provide below a summary of milestones in the yen’s history:
1871 - The yen became Japan’s currency as part of the Meiji Restoration, which marked the start of Japan’s modernization and opening to the rest of the world. Japan adopted the gold standard.
1949 - After World War Two the dollar’s fixed rate is set at 360 yen via the Bretton Woods system, partly to help stabilize prices in the Japanese economy.
1959 - The dollar/yen exchange rate is liberalized and the margin of fluctuation is set at 0.5 percent on either side of its dollar parity.
1963 - The margin of fluctuation is widened to 0.75 percent. 1971 - United States abandons gold standard, bringing an end to the Bretton Woods system of fixed exchange rates and forcing a realignment of world currencies.
December 1971 - Under the Smithsonian Agreement, the dollar/yen exchange rate is set at 308 yen and is allowed to fluctuate in a wider band between 301.07 yen and 314.93 yen.
1973 - Japanese monetary authorities decide to let the yen float freely against the dollar, and the yen appreciates as far as 263 to the dollar.
1978 - The yen pushes through 200 to the dollar for the first time, strengthening as far as 177.
1980 to 1985 - The yen’s appreciation halts and partially reverses despite Japan’s big trade surpluses. Higher interest rates in the United States prompt Japanese investors to put money in dollar assets.
1985 - The Group of Five industrial nations, the predecessor to the G7, sign the Plaza Accord in which they agree the dollar is overvalued and to weaken it. The yen climbs from its pre-accord level of around 240 to 211 in October and 200 in November, a 20 percent rise in just a few months.
1986 - The U.S. currency falls further to around 190 yen in January, 167 yen in April and 153 yen in August.
1987 - In February, six of the G7 nations sign the Louvre Accord, which aims to stabilize currencies and halt the dollar’s broad decline. The dollar still falls from near 153 to 137 in April and 120.80 by the end of the year.
1988 - On January 4, the dollar falls to a post-war low of 120.45 yen in Tokyo trade, a level that holds as the low for more than five years. The Bank of Japan intervenes to buy dollars and sell yen that day on behalf of the Ministry of Finance.
August 17, 1993 - The dollar declines to a new post-war low of 100.40 yen in Tokyo.
June 21, 1994 - The dollar falls through the key 100 yen level and touches a record postwar low of 99.85 yen in New York trade before finishing at 100.30 yen.
April 19, 1995 - The dollar hits a record post-war low at 79.75 yen after U.S.-Japanese trade frictions spark heavy selling. By the end of the year it is near 103.40.
June 17, 1998 - As the dollar shoots above 144 yen, U.S. authorities join the Bank of Japan to buy yen, spending $833 million. By August the dollar rises to near 148 yen, partly due to yen carry trades in which investors borrow yen funds at Japan’s near zero interest rates to buy higher-yielding currencies.
1998 - After the global financial market strains from the near collapse of hedge fund Long-Term Capital Management, carry trades are unwound quickly. In one week alone in October, the dollar tumbles from near 136 yen to a low around 111.50 yen.
1999 - The yen strengthens further despite repeated intervention, reaching 102 in November.
2001 - Following the Sept 11 attacks, Bank of Japan intervenes to sell yen for dollars.
2003 - The MOF begins massive intervention to halt the yen’s rise against the dollar, partly to shield Japanese exporters as the economy remains stuck in its post-bubble slump and deflation. The MOF spends 20.4 trillion yen ($200 billion) over the year, nearly all of it to buy dollars and sell yen.
2004 - The MOF spends 14.8 trillion yen ($145 billion) intervening in the first quarter of the year, including 1.67 trillion yen buying dollars on January 9 alone. But the MOF ceases intervention in March and has never since resumed.
2005 - The yen reaches a high of 101.67 yen in January but then starts to fall, hitting 121.40 in December. Yen carry trades and Japanese investors shifting funds into foreign assets drive the slide.
June 2007 - The dollar hits a 4-1/2-year high of 124.14 yen. July 2007 - The yen’s broad depreciation takes it to a 22-year low on a real effective exchange rate basis. Since January 2005 the yen has lost 25 percent of its value on a REER basis.
August 2007 - Strains in financial markets from the U.S. subprime mortgage crisis spark an unwind of yen carry trades.
The dollar falls from near 120 yen to 111.60 yen. The high-yielding Australian and New Zealand dollars tumble nearly 10 percent.
March 13, 2008 - The yen hits an 12-year high of 99.77.
October 24, 2008 - Yen hits 13-year high of 90.87 versus the dollar, while setting an all-time high against the Australian dollar of 55.11, with the Aussie losing almost a third of its value in just a month on a massive unwind of carry trades.
October 27, 2008 - The yen’s surge to 13-year highs prompts the G7 to issue statement to single out the yen in warning on currency market volatility.
The yen has surged nearly 20 percent so far in October on a trade weighted basis, more than twice as big as any month going back to 1970, including the carry trade collapse in October 1998 and the Plaza Accord to weaken the dollar in 1985.
(Sources: Reuters, Bank of Japan, Bank of England)
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Tags: Australia, Banks, Carry Trade, Commodities, Correlation, Currency, Dollar, Economy, Emerging Markets, ETF, Gold, interest rates, Japan, Markets, Mortgage, Recession, SMI, Value
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China’s Bold Economic Policy Moves
Wednesday, October 29th, 2008
CLSA Asia-Pacific Markets, a division of Credit Lyonnais/Credit Agricole, are one of the best groups of analysts providing background on China.
Included here are excerpts from a report by CLSA’s macro strategist Andy Rothman regarding China’s recent decision to stimulate its housing sector.
Beijing is cutting mortgage rates to as low as 5.23 percent, reducing required down payments to buy a home from 30 percent to 20 percent for first-time buyers, comparatively still far above what most Americans have put up to purchase a house, and also lowering some taxes and fees.
CLSA views the government’s action as a move to get people to invest their wealth in real estate, which will serve to shrink an overbuilt housing inventory and help keep the broader economy from slowing down further.
“Beijing had succeeded in cooling off price growth, taking it from 25 percent year over year last fall to about zero year over year today. And, having achieved the objective of avoiding a bubble, the last thing the Communist Party wanted to do was crash the property market.
“(This week’s) policy changes will have two effects:
“First, they make home-buying more affordable, with a combination of lower interest rates, lower down payments and lower transaction fees.
“But the second effect is most important, as affordability has never been the big problem in China. (The) measures represent the government reversing its anti-property stance adopted one year ago. Back then, Beijing said, in effect, ‘we will do our best to depress prices and discourage home-buying.’ Consumers responded rationally by delaying purchases.
“Now, the government is saying, (my words), ‘we encourage home-buying and you should anticipate that property prices will start rising again.’
“With affordability good, household debt almost non-existent, and banks ready to lend (they are all controlled by the Party), homebuyers will return to the market in response to Beijing’s message.
“(The) move can be considered part of an overall effort to give a light stimulus to the economy, but in my view is primarily focused on the real estate sector. These changes also illustrate that the Party is capable of taking proactive steps to deal with a changing economic environment.”
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Tags: Asia, Banks, China, Credit, Economy, Focus, interest rates, Markets, Mortgage, Real Estate
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Commodity Snapshot
Sunday, October 26th, 2008
Judging by the way that commodities prices have literally been “drawn and quartered” since July, its obvious that the market has been forced into liquidation by the massive unwinding or rather de-levering caused by the near failure in the credit market, and the assumption of debt by governments and central banks around the world.
Gold, notably, has traded lower during this anomalous selling-spree, even though it has long been regarded to be the real asset choice of those wanting to protect against financial risk. Perhaps its simply either that gold is highly liquid at a time of great need and is being sold off, or there has been a substantial amount of central bank intervention by way of shorting gold in the futures market. Either way, given the sheer amount of money supply growth, by contrast, gold is very cheap. Which brings us to platinum. Take a look at these charts:
Platinum, which is 30X rarer than gold closed at $793, only $83 premium to the price of gold. At peak earlier this year, platinum traded at a $1,300 premium to gold.
Oil is continuing to get cheaper. OPEC held an emergency meeting, agreeing to cut production by 1.5 -million barrels. News of this had no effect on oil prices, not even an intermediate effect; it closed on Friday at $64.15. Which begs the question: Is OPEC really a cartel? They seemed content to sit back and watch gleefully as the price shot up to 147, but have been unable to do anything to stop its slide to current levels, not even a substantial cut in production. Or so it seems.
Is the imminent food crisis over? Are fears of oil shortages overwrought?
Right now, it looks like nobody cares. They just want their money out, and at any price.
As Warren Buffett has put it so eloquently in his recent NYTimes Op-Ed piece, Buy American. I am, “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Charts: Bespoke Investment Group
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Tags: Banks, Chart, Commodities, Credit, Credit Market, Dollar, EFU, energy, Gold, Oil Prices, Platinum, Silver
Posted in Agriculture, China, Commodities, Credit Markets, Crude Oil, Economy, Emerging Markets, Gold, Markets, Oil & Gas, energy, inflation | No Comments »
Governments Keep Making Mistakes: Jim Rogers
Wednesday, October 22nd, 2008
Jim Rogers, CEO, Rogers Holdings, appeared on CNBC’s European Squawk Box this morning with Geoff Cutmore, to discuss the progress of markets and his outlook.
click image for video
Rogers stated that the economy is in for high inflation given the size and nature of the central bank interventions and injections in to the financial system, and pre-ambles this saying,
“The world is unfolding. The American government keeps making mistake after mistake after mistake. Other governments do too. Unfortunately this is going to be a mess,” Jim Rogers, CEO of Rogers Holdings said Wednesday.
“Bernanke, and Paulson and the guy at the NY Fed, Tim G-r-eithner [or whatever his name is: slips Rogers] have been wrong every week for the last two years. Why do you think they know what they’re doing?”
He has covered most of his “shorts,” and wishes that he had not yet covered them, as their has been more downside.
He is long short-term US government bonds and short and shorting long term government bonds as he believes that we are heading for inflation. He has been buying agricultural commodities, though he admits that his timing is bad, as they are down.
“I bought some more agriculture earlier this week and it promptly went down. The fundamentals for commodities and agriculture have not changed,” says Rogers. “What’s happening in the world right now means that there will be less supply of everything coming out of this, and nobody can get a loan for a new zinc mine or a loan to increase their crop production.”
Rogers adds that
“What’s happening now is that we are in a period of forced liquidation; we’ve had 8 or 10 of these in the last 100-150 years; 1929 in the US, 1974 in the UK…We’ve had these before. The things that come out on the other side have always been the things that are unimpaired. The US financial system is impaired. The investment banking system is impaired.”
“But, commodities and agriculture are totally unimpaired by all of this. If history’s any guide, the things to buy will be the things that are doing fine; water treatment in Asia [for example], agriculture’s gonna do fine; that’s what you should buy.” Rogers adds, “However, my timing’s not very good.”
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke should resign for keeping alive “zombie banks” that should be allowed to fail, he said.
The Japanese government refused to let financial institutions fail in the 1990s, Rogers said.
“It’s 18 years later and their stock market is 75 or 80 percent below what it was 18 years ago,” he added.
Rogers also said that interest-rate cuts are coming.
“I know we are going to get aggressive rate cuts everywhere, that’s why I’m long short-term government bonds in the U.S., but shorting long-term government bonds because it’s not going to help, it’s going to add to inflation.”
Source: CNBC
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Tags: Agricultural commodities, Agriculture, Asia, Banks, Bernanke, Commodities, Economy, EFU, Euro, Fed, Federal Reserve, inflation, Japan, Jim Rogers, Markets, Paulson, UK, Video, Water
Posted in Commodities, Markets | No Comments »
Cramer: Dow 8300, Oil $50, Obama
Wednesday, October 8th, 2008
From Jim Cramer in New York magazine:
What will New York look like a year from now? The answer: bad and probably worse, and perhaps downright catastrophic. Three degrees of awful. The first step was passing the bank-bailout legislation. Now that it’s done—and if it didn’t get done we would have been looking at a guaranteed economic collapse—the critical issue will be presidential leadership. And while any president will be an improvement over the current one, there is a growing belief on Wall Street that Barack Obama has the capacity to lead us out of this wilderness while John McCain does not. I’ll go a step further: Obama is a recession. McCain is a depression…
At this time next year, I could see the Dow as low as 8,300. That’s more than 40 percent off its October 2007 high of 14,164. On Main Street, that means a further slowdown in consumer spending, as buyers feel poorer, and another hit for 401(k) and college savings accounts. For Wall Street, it means more bank closures and mergers and still more layoffs. The two remaining independent commercial banks–née–investment banks, Goldman Sachs (GS) and Morgan Stanley (MS), will have to fight mightily to remain independent. The bet here is that Goldman makes it but Morgan Stanley succumbs to one of the four emerging megabanks — Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Wells Fargo (WFC)…
In terms of investing between now and next fall, I’d buy the stocks of only companies you can’t not use—Kellogg’s (K), General Mills (GIS), Kraft (KFT), P&G (PG). You can’t trust anything to do with financial paper — there’s still too much uncertainty (if a bailout bill does pass, at what price will the toxic bonds be marked?). And commodities have been bid up too high — demand soared as investors sought shelter from stocks — to buy for some time. Oil’s going to $50 on weaker demand; when it gets there, we can revisit the oil stocks.
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Tags: Banks, Citigroup, Commodities, energy, Gold, oil stocks, Recession
Posted in Markets | No Comments »
Interest Rates Cut by 0.50% Around World
Wednesday, October 8th, 2008
Key Central Banks around the globe have announced a concerted cutting of interest rates, by 0.50%, this morning, in an historic moment of cooperation, to stem the tide of the global credit market’s woes.
The US Federal Reserve, the European Central Bank, the Bank of England, and the central banks of Canada, Sweden, and the United Arab Emirates have all cut key lending rates by 50 bps or 0.5 percent.
The Bank of England also announced that it would partially nationalize the country’s banking system by investing $90-billion in some of its banks.
In China, the People’s Bank has cut its key rate by a commensurate 27 basis points, and the Bank of Japan whose key rate is only 0.5% did not cut, but is lending “strong support” to the other central banks’ moves.
In identical statements, the Fed, ECB, and Bank of England, explained that inflationary concerns have moderated, and the worsening financial crisis had “augmented the downside risks to growth.”
Trichet, the ECB’s Chair, very modestly stated that “inflation is moderating.” Critics have argued that the ECB has been too slow and looking in the rear view mirror too long, to do anything meaningful for the European economy, and at the expense of the financial stability of European businesses. Others argued that while the move is very welcome, it may be too little, too late.
Euro and Sterling both gained on the announcement, while the price of gold fell.
Equity markets in Europe rebounded from intraday lows on the hope that this monetary action would help banks and consumer stocks.
Pre-Opening trading in index futures indicate a strong opening for US markets following the announcements.
Key Rates (post-cut)
- US - 1.50%
- Canada - 2.50%
- ECB - 3.75%
- UK - 4.5%
- Sweden - 4.25%
- China - 6.93%
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Tags: Banks, Canada, China, Credit, Credit Market, ECB, Economy, Euro, Fed, Federal Reserve, Gold, inflation, interest rates, Japan, Markets, Sweden, Trading, UK
Posted in Markets | 1 Comment »
European Credit Crisis Deepens Global Selloff
Tuesday, October 7th, 2008
Ongoing credit market turmoil and a rapidly deteriorating economic outlook have hit global equities very hard.
Ongoing credit crunch worries and evidence of resultant effects on the global economy are diminishing the remnants of confidence among investors. Investors are fleeing all risk assets indiscriminately, moving into safe havens such as cash and government securities. Widening concerns of global bank failures continue (regardless of last week’s approval of the U.S. TARP program, now anti-climactic), bringing about runs on banks in several countries and preventing financial institutions from lending to one another.
Germany and Denmark announced guarantees on all private deposits following Ireland’s first-mover decision last week. Looks like we’ll have to wait for Europe to come to some unified solution such as a concerted bailout, and some nationalization of the banking sector in some of the larger markets.
Source: BCA Research, October 7, 2008
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Tags: Banks, Credit, Credit Crisis, Credit Market, Economy, energy, Euro, Germany, Markets
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Is the Market Bottom in Yet?
Tuesday, October 7th, 2008
Jeff deGraaf, Head of Technical Analysis at ISI, who appeared on CNBC’s On The Money today, suggests that we are merely in the 5th inning of this bear market, or about 250 days into a typical 600-day bear market downturn. Usually, the first part of the bear market consists of the unwind from the previous boom cycle. He suggests that we still have yet to see the second part of the downturn.
click image to watch video
deGraaf made the point that if you’re a long-term position oriented investor, this is probably [only]the 5th inning of the bear market. If you’re a short term tactical investor, there’s been enough things washed out that you could get 150-200 “handle” rally.
The burning question that remains to be answered is, “How much like other bear market patterns in the last 40 years is this one?”
Here are the charts deGraaf discussed:
At this stage, 57% of S&P 500 stocks have now made 52-week lows.
Based on the 1973-1974 bear market deGraaf points out where we are in terms of the timeline.
Then, he makes a comparison to the 2001-2002 bear market, again pointing out where we are in terms of that one.
“What you need from our standpoint to tactically be a bull is for the market to send you a message that it wants to go up,” said deGraaf.
Here are some things to look for:
- Market Breadth
- [Between] 5 to 1 and 3 to 1 advance/decline ratios
- Preferably, with the market doing it on its own volition,
- Without government intervention, and
- Not contrived by government policy.
Following deGraaf’s comments, John Najarian pointed out that the CBOE VIX (Volatility Index) is signalling a great likelihood of a great number of 35 point plus days (down 60 pts. today) on the S&P 500 and more 500+ point days in the Dow, to the upside (or downside). Currently the VIX index has reached an all time highs in the mid 50% range.
The relative strength of the US dollar is promising too, but getting to a stronger dollar on the basis of the weakening Euro in the midst of the vaporization of some large European banks, like Fortis, will be painful, to say the least, as resultant losses are forcing more liquidations in equity markets during the last few wildly volatile trading sessions.
Is the bottom in yet? Not likely, and not for some time yet.
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Tags: Banks, Chart, Dollar, Euro, Markets, S&P 500, S&P500, Technical Analysis, Trading, US Dollar, Video
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InTrade: Bailout Vote Prediction
Friday, October 3rd, 2008
Below is InTrade’s prediction chart showing the odds that Congress will pass into law the government bailout on or before October 31, 2008. As of the posting of this story the odds are roughly 91% in favour of passage. The question remains, in what form?
US Congress to approve a government bailout of banks on/before 31 Oct 2008
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Tags: Banks, Chart
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Bailout Failure: Voters Rescued
Tuesday, September 30th, 2008
Perhaps the biggest problem with the credit market debacle is that Main Street doesn’t get it. Literally. Try explaining the credit market to the average guy.
The “TARP bailout” is being billed as a Main Street rescue, by Henry Paulson, et al. If you look at the situation realistically, Wall Street has already fallen. If you were Rip Van Winkle and you fell asleep for a year, while the US government tried to bailout Wall Street, you’d be wondering, what happened to all the banks that disappeared, or were bought up as of September 26, 2008. What was the point?
Add to this now Wachovia (now Citigroup), and the $700-billion TARP bill itself, as of September 29, 2008.
While Congress was voting against the credit market bailout yesterday, the market panicked and gave up $1.3-trillion.
Ironically, the folks who make the laws in America are not Wall Streeters, and are having the same difficulty as Main Streeters in understanding how the credit market works. How can you expect US Congressmen to vote on something they do not understand?
What is a credit default swap? Alt-A Securities? The Discount Window?
The failure appears to be an inability to “sell” Main Street on this bailout deal. The average guy doesn’t get “Wall Street,” and is wondering why they are going to get stuck with the bills that this bailout will generate.
What happens when you can’t refinance your mortgage, when you can’t withdraw cash from an ATM, when your employer can’t pay your salary, or the buyer of your home can’t secure financing, or your business is unable to extend credit to customers, or get credit from suppliers?
Wall Street, Ben Bernanke, and Henry Paulson are going to have to a better job to get an agreement on a “rescue package” to lawmakers, that the lawmakers can understand and pass on. Main Street still doesn’t get why it has to pay for the mistakes of others, and they don’t get yet how close the credit system is to imploding.
For now it appears that Congress has rescued voters. From what, though?
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Tags: Banks, Bernanke, Citigroup, Credit, Credit Market, Mortgage, Paulson
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Is There a Bull Market Somewhere?
Wednesday, September 24th, 2008
Not likely, according to PIMCO’s Bill Gross. In his most recent Investment Outlook, Gross, reasons and opposes (for now) the idea that in the very different worlds of Louis Rukeyser, Jim Cramer, and Jim Grant, “There’s always a bull market somewhere!”
While he does agree that there are always stocks, bonds, and currencies that can be found to be going up, while markets are going down, Gross cautions:
So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but NOT NOW, because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
- Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
- Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
- The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
Essentially, Gross’ thesis is that as the GSEs, banks, investment banks and global hedge funds delever their balance sheets, they also lower the prices of all securities that can be arbitraged within the marketplace.
The 10% year over year decline in prices has not been witnessed since the great depression, and that is a red flag.
a 10% aggregate asset price decline does more than make us all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
This rare event of systematic debt liquidation is the central issue in both the US and globally. If central bankers are unable to take effective measures, the campfire could turn into a forest fire, and a mild asset bear market could turn into a destructive financial tsunami. Gross points out that even they and their SWF and central bank counterparts who have been doing their part to stem the tide, and in some cases bought into debt issues too early, only to see those issues now priced “underwater,” are now reluctant to make additional commitments.
Paulson and Bernanke have consulted PIMCO regularly throughout the credit market debacle, and have apparently acted on some of that advice as well as that of others like Pershing Square’s Bill Ackman, who floated a Frannie bailout plan prior to the Fed’s that was eerily similar.
Paul McCulley stated in late July, that the only thing that was viable given the delevering of the market that was well underway, was for government to lever up its balance sheet, much the way it is proposing to this week, with the $700-billion TARP plan.
common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions.
Gross concludes:
Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
(note: these ideas were published well before the Fed/Treasury realized the need for a far reaching solution)
Is there a bull market somewhere?
There is, but those assets are “rare as diamonds, as opposed to grains of sand,” according to Bill Gross.
Investment Outlook, Bill Gross, September 2008
Source: PIMCO
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Tags: Banks, Bernanke, Bill Gross, Chart, Credit, Credit Market, Economy, Fed, Grain, GSE, liquidity, Markets, Paul McCulley, Paulson, PIMCO, Recession, spreads, Thesis, UK, Water
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Credit Crisis Observations
Tuesday, September 23rd, 2008
Niels Jensen and Jan Wilhelmsen of Absolute Return Partners (www.arpllp.com) produced an informative analysis of the credit crisis and provide the following observations. Here is our summary:
Loans and Mortgages are getting much harder to come by on average, globally.
This has bold and negative implications for property prices everywhere.
Observation # 1
It all began with housing and it will end with housing.
The current overhang caused by the tightness of credit (mortgages) will take years not months to unwind and housing prices will not begin to rise again until this occurs.
Observation# 2
Don’t trust central banks to always do the right thing.
Evidence suggests that while their intent seems to be genuine, central banks around the world have not been very effective at taming inflation. For example, simply raising interest rates in the underlevered economies of the BRIC countries has been futile, since most consumers and companies do not employ credit to the extent that those of us in the west do.
In the case of the BRIC countries, it appears the problem does not consist of sustaining growth, but rather containing growth. China, for instance, has a record of under-reporting both real and nominal GDP growth, and may have only recently more accurately stated inflation owing to the fact that they could not hide from skyrocketing oil and food prices.
Observation # 3
Policy mistakes are likely to be repeated.
The US is currently at risk of making the same policy making mistakes Japan made 10-15 years ago. US residential property prices have risen more during 2000-2006 boom than did the Japanese during the late 80s boom.
Japan too, though more rapidly, reduced the cost of money dramatically to fend off its crisis.
Japan bailed out many of its institutions and used taxpayers money to fund the activity of fixing the ‘unfixable,’ and this could have profound implications for the US GDP growth in years to come.
Observation # 4
The golden era of investment banks is over.
The biggest independent investment banks have just become banks. The US investment banking business is becoming more like Canada’s where the business is dominated by the large schedule “A” chartered banks and America’s “free” market just became a little more socialist. How ironic…The folding of GS and MS into banks also has valuation considerations for the venerated firms as their revenues and earnings are sure to decline under the auspices of Fed regulation. Further de-levering also has negative implications for the market as it entails more liquidation. Hopefully this will be done in an orderly fashion now that the conversion is underway.
Observation # 5
The final shoe hasn’t dropped yet.
There is more to come. For instance, the financial system has yet to deal with $1-trillion in Alt-A securities and further degradation of the CDS market and counter-party risks.
Absolute Return Partners states that the commodity bull is just the final leg of the liquidity super-cycle: take a look the Economist’s VAR-VAR-Voom chart.
Observation # 6
Leverage is ‘dead’ but capital is not.
Global savings rates now exceed 20%, except in the US, and while this is a positive for global stability, the question remains about whether investors are willing to invest money where it is most needed, the shore up the world’s banks. Failing that, property prices will ne