http://finance.yahoo.com/q/it?s=YHOO Terry Semel between Aug and Oct 2007 sold nearly $100 M of YHO stock! must be nice to be insider......bag holder lemmings bought it...now look at it!
D
Wednesday, January 30, 2008
20 YEARS IN THE MAKING
http://prudentbear.com/index.php/CreditBubbleBulletinHome
Doug Noland's astutue credit bubble report, conclusion scroll down to above title at end of report.
Big Ben on the m0und this PM, big deal, I suspect when FED Out of way so will excuses for buying thism kt.
D
Doug Noland's astutue credit bubble report, conclusion scroll down to above title at end of report.
Big Ben on the m0und this PM, big deal, I suspect when FED Out of way so will excuses for buying thism kt.
D
Tuesday, January 29, 2008
BALTIC DRY INDEX SINKING LIKE TITANIC
BDI peaked about same time the stock market did. From WickpediaBaltic Dry Index
From Wikipedia, the free encyclopedia
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The Baltic Dry Index is an index covering dry bulk shipping rates and managed by the Baltic Exchange in London. According to Baltic Exchange, the index provides:
an assessment of the price of moving the major raw materials by sea. Taking in 40 shipping routes measured on a timecharter and voyage basis, the index covers supramax, panamax and capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.
The index is made up of an average of the Baltic Supramax, Panamax and Capesize indices. These indices are based on professional assessments made by a panel of international shipbroking companies.
Since the cost of shipping varies with the amount of cargo that is being shipped (supply and demand), and since dry bulk is usually goods that are precursors to production (like cement, coal, and iron ore), the index is also seen as a good economic indicator of future economic growth and production.
It is my own opinion that ALL we are seeing is a bear market bounce, until proven otherwise.
Fed tomorrow, WHO doesnt think they will pander to markets demand, they dictate nothing.
50 basis is what is being DEMANDED, IMHO anything less will be sold.
VLO and other refiners are bouncing, oversold restaurants have bounced like Darden, and Calif Pizza Kitchen, Home Builders and some banks catching bids along with commodities.
We are nearing resistance in the SPX of which the 1370 -1380 are should not be broken this time around.....I would reasess if it is.
Duratek
Saturday, January 26, 2008
SYSTEMIC FINANCIAL ARMAGEDON
NOLAND:
I’ll stick with the view that an unfolding breakdown in various trading models and hedging strategies is at risk of precipitating a crisis of confidence for the leveraged speculating community. I suspect hedge fund trading was much more responsible for chaotic global securities markets this week than a rogue French equities trader. There is, unfortunately, little prospect for markets to calm down anytime soon. There is no quick or easy fix to any of the myriad current problems – seized up securitization markets, sinking housing prices, faltering bond insurers, counterparty issues, a crisis in confidence for “Wall Street finance”, or acute economic vulnerability - to name only the most obvious. Again, they’ve been More than 20 Years in the Making.
Financial Economists Roundtable
Statement on Derivative Markets and Financial Risk
September 26, 1994 *****(YES 1994 !!!!!!!!!!!!)
This concern, no doubt, partly stems from the sheer size of derivatives markets in general and to the ballooning OTC derivatives market in particular. The General Accounting Office (GAO) reports that at year-end 1992 the notional value of outstanding futures, forward, options and swap contracts alone totalled more than $17 trillion, up from $7 trillion in 1989. Another reason for concern about derivatives is the seemingly impenetrable complexity of some of these instruments. This complexity has created an aura of mystery about derivatives markets, and has fostered a fear that a miscalculation by someone, or an undetected but vital flaw in the market or regulatory system, could trigger failures cascading into a financial market meltdown.
The GAO Report, the latest of these, contains thmost provocative policy recommendations.
The GAO Report recommends additional regulation of both derivatives dealers and end-users of derivatives. The study concludes that OTC derivatives could pose a systemic risk to financial markets if a major OTC dealer were to default on its counterparty (or contractual) obligations. It also finds that certain "unregulated" dealers, such as those affiliated with securities and insurance firms, have created a potentially dangerous "regulatory gap" that needs closing.
http://www.freemarketnews.com/Analysis/178/3889/2006-02-22.asp?nid=3889&wid=178
First, the triggering event or events cause sharp and sudden declines in one or more classes of asset prices. The decline in asset prices is sufficiently steep to raise questions about the creditworthiness of major counterparties or institutions such that the analytical distinction between market risk and credit risk blurs as market risk and credit risk feed on each other.
Second, the combination of falling asset prices and the erosion of creditworthiness causes market participants to commence risk mitigation efforts such as position liquidations which - while perfectly reasonable at the micro level - add to macro pressures on asset prices wjich in turn trigger the initial evaporation of market liquidity for one or more classes of assets. The evaporation of asset liquidity aggravates both market and credit risk and begins to call into question balance sheet liquidity for some institutions. Investor position liquidations intensify these pressures.
Third, in these circumstances, once seemingly generous amounts of margin or collateral are rapidly called into question, thereby dramatically elevating credit concerns. The escalation of credit concerns further influences the defensive behavior of financial market participants, all of which acts to reinforce the cumulating the adverse market dynamics. Hence a financial crisis with systemic risks is at hand.
http://www.safehaven.com/article-4096.htm
In truth, while no one can say for certain when the day of reckoning will arrive, it seems a good bet that if some of those who are in a position to know are worried about the derivatives market and the associated systemic risks, you should be, too.
One of the difficulties people have with understanding this particular disaster-in-the making is its complexity and seeming irrelevance to their day-to-day lives. Unlike an earthquake or a car bomb, a derivatives-inspired financial meltdown won't to lead to leveled buildings or bloodshed, at least initially. Yet, the toxic fallout will likely be as painful, long-lasting, and difficult to overcome as any of the more widely discussed scenarios.
What makes the coming debacle even more difficult to comprehend is that it stems from a long chain of seemingly benign interactions and financial relationships. Indeed, despite the fact that the modern derivatives market has flourished because of big money, complex technology, and highly-paid talent, the culprit when it all goes wrong is likely to be simple: human emotions -- fear and greed -- run amok.
For most people, the term "derivative" has little meaning. In many cases, the mere mention of the word is enough to cause eyes to glaze over. That is partly because these financial instruments are somewhat ethereal. They are, in other words, largely created out of thin air. Practically speaking, they have no value in and of themselves.
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1303
According to Ramaswamy, it is unlikely that trouble related to a single company like Delphi will spill over to the broad markets, but he said it would be worrisome if a large number of companies ran into serious difficulties. And Rosen noted there is a lot of dry tinder on the forest floor -- a mushrooming issuance of low-rated, high-risk debt. "I will be shocked if we don't see a significant rise in default rates over the next 18 months," he said.
If that happens, it will be easier to determine whether credit derivatives are making the world a safer place -- or a more dangerous one.
OTC and exchange-traded
Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007)[1].
Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized Derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest[2] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade). According to BIS, the combined turnover in the world's derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs(tm) and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.
THERE IT IS
Duratek
I’ll stick with the view that an unfolding breakdown in various trading models and hedging strategies is at risk of precipitating a crisis of confidence for the leveraged speculating community. I suspect hedge fund trading was much more responsible for chaotic global securities markets this week than a rogue French equities trader. There is, unfortunately, little prospect for markets to calm down anytime soon. There is no quick or easy fix to any of the myriad current problems – seized up securitization markets, sinking housing prices, faltering bond insurers, counterparty issues, a crisis in confidence for “Wall Street finance”, or acute economic vulnerability - to name only the most obvious. Again, they’ve been More than 20 Years in the Making.
Financial Economists Roundtable
Statement on Derivative Markets and Financial Risk
September 26, 1994 *****(YES 1994 !!!!!!!!!!!!)
This concern, no doubt, partly stems from the sheer size of derivatives markets in general and to the ballooning OTC derivatives market in particular. The General Accounting Office (GAO) reports that at year-end 1992 the notional value of outstanding futures, forward, options and swap contracts alone totalled more than $17 trillion, up from $7 trillion in 1989. Another reason for concern about derivatives is the seemingly impenetrable complexity of some of these instruments. This complexity has created an aura of mystery about derivatives markets, and has fostered a fear that a miscalculation by someone, or an undetected but vital flaw in the market or regulatory system, could trigger failures cascading into a financial market meltdown.
The GAO Report, the latest of these, contains thmost provocative policy recommendations.
The GAO Report recommends additional regulation of both derivatives dealers and end-users of derivatives. The study concludes that OTC derivatives could pose a systemic risk to financial markets if a major OTC dealer were to default on its counterparty (or contractual) obligations. It also finds that certain "unregulated" dealers, such as those affiliated with securities and insurance firms, have created a potentially dangerous "regulatory gap" that needs closing.
http://www.freemarketnews.com/Analysis/178/3889/2006-02-22.asp?nid=3889&wid=178
First, the triggering event or events cause sharp and sudden declines in one or more classes of asset prices. The decline in asset prices is sufficiently steep to raise questions about the creditworthiness of major counterparties or institutions such that the analytical distinction between market risk and credit risk blurs as market risk and credit risk feed on each other.
Second, the combination of falling asset prices and the erosion of creditworthiness causes market participants to commence risk mitigation efforts such as position liquidations which - while perfectly reasonable at the micro level - add to macro pressures on asset prices wjich in turn trigger the initial evaporation of market liquidity for one or more classes of assets. The evaporation of asset liquidity aggravates both market and credit risk and begins to call into question balance sheet liquidity for some institutions. Investor position liquidations intensify these pressures.
Third, in these circumstances, once seemingly generous amounts of margin or collateral are rapidly called into question, thereby dramatically elevating credit concerns. The escalation of credit concerns further influences the defensive behavior of financial market participants, all of which acts to reinforce the cumulating the adverse market dynamics. Hence a financial crisis with systemic risks is at hand.
http://www.safehaven.com/article-4096.htm
In truth, while no one can say for certain when the day of reckoning will arrive, it seems a good bet that if some of those who are in a position to know are worried about the derivatives market and the associated systemic risks, you should be, too.
One of the difficulties people have with understanding this particular disaster-in-the making is its complexity and seeming irrelevance to their day-to-day lives. Unlike an earthquake or a car bomb, a derivatives-inspired financial meltdown won't to lead to leveled buildings or bloodshed, at least initially. Yet, the toxic fallout will likely be as painful, long-lasting, and difficult to overcome as any of the more widely discussed scenarios.
What makes the coming debacle even more difficult to comprehend is that it stems from a long chain of seemingly benign interactions and financial relationships. Indeed, despite the fact that the modern derivatives market has flourished because of big money, complex technology, and highly-paid talent, the culprit when it all goes wrong is likely to be simple: human emotions -- fear and greed -- run amok.
For most people, the term "derivative" has little meaning. In many cases, the mere mention of the word is enough to cause eyes to glaze over. That is partly because these financial instruments are somewhat ethereal. They are, in other words, largely created out of thin air. Practically speaking, they have no value in and of themselves.
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1303
According to Ramaswamy, it is unlikely that trouble related to a single company like Delphi will spill over to the broad markets, but he said it would be worrisome if a large number of companies ran into serious difficulties. And Rosen noted there is a lot of dry tinder on the forest floor -- a mushrooming issuance of low-rated, high-risk debt. "I will be shocked if we don't see a significant rise in default rates over the next 18 months," he said.
If that happens, it will be easier to determine whether credit derivatives are making the world a safer place -- or a more dangerous one.
OTC and exchange-traded
Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:
Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2007)[1].
Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized Derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest[2] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade). According to BIS, the combined turnover in the world's derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs(tm) and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.
THERE IT IS
Duratek
Friday, January 25, 2008
GOODBYE BULL MKT
http://market-ticker.denninger.net/2008/01/goodbye-bull-market.html super video! well done Denninger
DON'T BE DUPED!!!! OPEN YOUR EYES, WE are being FUCKED WITH! And SOLD OUT!
D
DON'T BE DUPED!!!! OPEN YOUR EYES, WE are being FUCKED WITH! And SOLD OUT!
D
Wednesday, January 23, 2008
CRAMER UNDRESSED AS CARNIVAL BARKER!!!!!
http://www.youtube.com/watch?v=SGkrNJ19DSU MUST SEE! LMAO!!!! Thank you RIck Santelli. WHAT IDIOT LEMMING FOLLOWS THIS JERK? OE CNBC
Duratek
Duratek
Monday, January 21, 2008
"IT'S THE END OF THE WORLD AS WE KNOW IT"
Foreign markets crashing and burning this MLK day, Tuesday will be awful on the US exchanges, maybe even crash like.
Those who insure against losses (AMBAC) are bankrupt themselves....leaving maybe $1 Trillion up in the air.The financial system is seizing up and there is nothing the FED (reason for problem)or Bush can do, and you dont want to be LONG here or standing in the way.....you just want to survive and protect what you got!!!
http://economicrot.blogspot.com/2007/12/kondratieff-winter.html Great blog for Kondratief background
http://www.itulip.com/forums/archive/index.php?t-85.html talk on derivitives
http://www.cross-currents.net/charts.htm great unwinding
http://www.contraryinvestor.com/mo.htm JAN ISSUE
Duratek
Those who insure against losses (AMBAC) are bankrupt themselves....leaving maybe $1 Trillion up in the air.The financial system is seizing up and there is nothing the FED (reason for problem)or Bush can do, and you dont want to be LONG here or standing in the way.....you just want to survive and protect what you got!!!
http://economicrot.blogspot.com/2007/12/kondratieff-winter.html Great blog for Kondratief background
http://www.itulip.com/forums/archive/index.php?t-85.html talk on derivitives
http://www.cross-currents.net/charts.htm great unwinding
http://www.contraryinvestor.com/mo.htm JAN ISSUE
Duratek
Thursday, January 17, 2008
THE COMING BEARISH STORM
@@@CLICK CHART TO ENLARGEIt's different this time folks IMHO, I think its telling this is the worst start to a year in HISTORY of the stock market.
I am in 100% CASH, and I'll wait til the smoke clears. BEN BOMBED
I was warning in DECEMBER and long before that, I only pray someone was listening
> http://www.cnbc.com/id/22706231/site/14081545 Cramers rant
D
Tuesday, January 15, 2008
LOOK IN THE MIRROR, IS THAT FUR YOU SEE?
click to enlarge*
This thing is snowballing, rally it might, it has tried, We are in BEAR territory my friends
D
Monday, January 14, 2008
TIME TO BUY? TIME TO HIDE?
http://www.cnbc.com/id/15840232?video=623459009&play=1 must see video Peter Thiel CNBC interview
http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm I do not like this index is falling signs of world economy slowing?
Mortgage Crisis to Corporate Debt Crisis:
http://prudentbear.com/index.php/CreditBubbleBulletinHome
The financial system fell under intense stress Wednesday. The epicenter of the crisis was in the “Credit default swap,” or CDS market, and “contagion” fears were building quite a head of steam. The pricing for Countrywide Financial default protection (5-yr CDS) surged a huge 469 basis points to a record 1,610 bps (it would cost $16,100 annually for 5-yrs to insure $100,000 of Countrywide debt against default). For perspective, Countrywide default protection was priced at a mere 30 bps one year ago and didn’t even trade above 600 during the subprime crisis this past summer and autumn. Rescap CDS surged an astounding 1,360 bps Wednesday to 3,746. This was up from the year earlier 95 bps. MBIA CDS increased 85bps to 849 (year ago 87) and Ambac 89 bps to 841 (year ago 70bps). Washington Mutual CDS increased 61 bps to 611 (year ago 54bps). Many indices of corporate debt spreads rose to their widest levels in years.
In the old Greenspan days, Wednesday’s circumstance would have most-likely beckoned a “surprise” inter-meeting Fed rate cut. There were rumors for as much. And while chairman Bernanke did not ease rates, Thursday morning he provided the markets the next best thing: “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.” Bernanke didn’t plan on rambling down the Greenspan path. Actually, I believe he and other members of the FOMC would have preferred to avoid it – resist responding directly to Wall Street pleas for aggressive Federal Reserve accommodation. “Let the chips fall…”, as they say. But the Fed now knows what many on Wall Street have understood since this summer: The U.S. Credit system and economy are extraordinarily fragile and the Fed simply will not risk sitting back and watching an implosion without resorting to extreme measures. If nothing else, inter-meeting “surprise” rates cuts are back on the table. Wall Street must be quite relieved to know this mechanism is available in the event market selling pressure turns unwieldy.
This week brought back memories of the 2002 Debt Crisis. Weighed down by the telecom debt collapse, Enron, and other frauds, intensifying Corporate Debt problems late in the year were at risk of smothering the consumer sector. The nexus at the time was the auto finance subsidiaries and Household International. Consumer finance Corporate Debt spreads were widening significantly, and Household, in particular, was facing a liquidity crisis in early November. The failure of a major financial institution at that juncture would have created a major systemic issue.
Well, on November 14 HSBC agreed to buy (bailout) Household International. A week later, FOMC governor Bernanke gave his now (in)famous “Deflation: Making sure ‘it’ doesn't happen here” speech. With rates at 1.0% (until June 2004!), the Fed was now publicly discussing “electronic printing presses,” “helicopters” and other “unconventional measures.” Wall Street was trumpeting “deflation” risk. Sure enough, the crisis was soon resolved and Wall Street was emboldened to perpetuate history’s greatest Credit inflation and Mortgage fiasco.
The tables have been turned these days, with the Mortgage Crisis now evolving into a full-fledged Corporate Debt Crisis. The key nexus this time around has been Wall Street “structured finance,” especially as it relates to the major Mortgage lenders (certainly including Countrywide, Rescap/GMAC, and Washington Mutual) and the “financial guarantors (in particular, MBIA and Ambac). The unfolding Mortgage implosion has destroyed the value of innumerable “structured products;” has annihilated legions of mortgage companies; has impaired scores of major lenders; has severely battered general market confidence; and this week was in the process of taking down a few huge mortgage companies. Institutions with enormous liabilities to the “money,” “repo,” securitization, and derivative markets – not to mention large borrowings from the FHLB system - were in serious jeopardy. The risk of a domino implosion in the Credit default market and the “financial guarantor” industry had become a very real possibility. System Risk Intermediation was in peril.
The Fed responded with what the market has interpreted as a promise of aggressive rate cuts, while Bank of America has apparently for now resolved the Countrywide debt issue. Citigroup’s stock rallied on rumors of a major new investment from Prince Alwaleed and others. Washington Mutual’s stock price rallied sharply on rumors of merger talks with JPMorgan. Countrywide’s stock surged as CDS prices collapsed, a dynamic sure to have caused considerable grief to those shorting the stock to hedge against default protection written.
Curiously, the general market took little comfort from developments. A case can be made that the rally in CDS and financial stocks was destabilizing for much of the leveraged speculating community (including “market neutral” and “quants”) keen to short financial stocks against (now sinking) technology shares. Overall, the market was hammered, while MBIA and Ambac CDS prices barely budged from record levels. Friday's market was one of those that surely caused havoc for numerous sophisticated trading strategies. And it is worth noting that an index of Junk bond spreads to Treasuries actually widened an additional 4 basis points to 603 bps, rising this week above 600 for the first time since – not coincidently - the 2002 Debt Crisis.
But the general environment is nothing like 2002, and I don’t expect Fed words and actions – in concert with financial bailouts - to have similar effects. For one, 13% household mortgage debt growth in 2002 provided powerful financial and economic stimulus that will not be forthcoming in 2008. With consumer Credit relatively stable, 2002’s Corporate Debt Crisis was not a serious systemic issue. Moreover, “Wall Street finance” was in an aggressive expansionary mode and the global banking community was developing quite a hankering to participate in the U.S. Credit Bubble. The economy was emerging from a shallow recession.
The world is a much different place today. The Mortgage Finance Bubble is a bust, Wall Street finance is imploding, and foreign financial institutions are keen to cut and run from the business of providing U.S. Credit. Countrywide’s mortgage problems will be absorbed – along with so many other risks – by our own highly vulnerable domestic banking system. Worse yet, the economy is quickly succumbing to recessionary forces. With a high degree of confidence we can proclaim that the Mortgage Crisis has now evolved into a Corporate Debt Crisis – and this crisis will not be resolved anytime soon – by rates, by helicopters, or by bailouts.
Unlike 2002, today’s Credit crisis is systemic. Consumer and financial sector fragilities – the heart of our Credit system - are now impaired to the point of imperiling the capacity of the Credit system to finance business spending and intermediate corporate lending risk. To be sure, prospects for a faltering U.S. consumer sector, massive financial sector Credit losses, and an imminent economic downturn have quite negative ramifications for business lending and valuations. In particular, unfolding dislocation in the CDS and Credit “insurance” markets will severely restrict Credit Availability for small, medium and large firms – especially those less than top-tier borrowers.
I’ll go further and suggest that a severe tightening of Financial Conditions has abruptly made many business borrowing plans unviable; many a balance sheet and debt load untenable; and vast numbers of business strategies - crafted in altogether different financial and economic times - much less viable. Some companies will make the necessary adjustments and many will not. The unfolding backdrop definitely makes a lot of stock buyback plans imprudent and growth strategies highly risky. The aggressive risk-taking business manager – having previously capitalized on the protracted boom - will now be at a similar handicap to that which afflicted the zealous home buyer and lender.
For those searching for explanations behind the stock market’s dismal start to the New Year, I suggest contemplating the many serious ramifications of the Mortgage Crisis having now evolved into an Incurable Corporate Debt Crisis. This week, the Bursting Credit Bubble passed another significant inflection point – one perhaps subtle but with major economic consequences.
http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm I do not like this index is falling signs of world economy slowing?
Mortgage Crisis to Corporate Debt Crisis:
http://prudentbear.com/index.php/CreditBubbleBulletinHome
The financial system fell under intense stress Wednesday. The epicenter of the crisis was in the “Credit default swap,” or CDS market, and “contagion” fears were building quite a head of steam. The pricing for Countrywide Financial default protection (5-yr CDS) surged a huge 469 basis points to a record 1,610 bps (it would cost $16,100 annually for 5-yrs to insure $100,000 of Countrywide debt against default). For perspective, Countrywide default protection was priced at a mere 30 bps one year ago and didn’t even trade above 600 during the subprime crisis this past summer and autumn. Rescap CDS surged an astounding 1,360 bps Wednesday to 3,746. This was up from the year earlier 95 bps. MBIA CDS increased 85bps to 849 (year ago 87) and Ambac 89 bps to 841 (year ago 70bps). Washington Mutual CDS increased 61 bps to 611 (year ago 54bps). Many indices of corporate debt spreads rose to their widest levels in years.
In the old Greenspan days, Wednesday’s circumstance would have most-likely beckoned a “surprise” inter-meeting Fed rate cut. There were rumors for as much. And while chairman Bernanke did not ease rates, Thursday morning he provided the markets the next best thing: “We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.” Bernanke didn’t plan on rambling down the Greenspan path. Actually, I believe he and other members of the FOMC would have preferred to avoid it – resist responding directly to Wall Street pleas for aggressive Federal Reserve accommodation. “Let the chips fall…”, as they say. But the Fed now knows what many on Wall Street have understood since this summer: The U.S. Credit system and economy are extraordinarily fragile and the Fed simply will not risk sitting back and watching an implosion without resorting to extreme measures. If nothing else, inter-meeting “surprise” rates cuts are back on the table. Wall Street must be quite relieved to know this mechanism is available in the event market selling pressure turns unwieldy.
This week brought back memories of the 2002 Debt Crisis. Weighed down by the telecom debt collapse, Enron, and other frauds, intensifying Corporate Debt problems late in the year were at risk of smothering the consumer sector. The nexus at the time was the auto finance subsidiaries and Household International. Consumer finance Corporate Debt spreads were widening significantly, and Household, in particular, was facing a liquidity crisis in early November. The failure of a major financial institution at that juncture would have created a major systemic issue.
Well, on November 14 HSBC agreed to buy (bailout) Household International. A week later, FOMC governor Bernanke gave his now (in)famous “Deflation: Making sure ‘it’ doesn't happen here” speech. With rates at 1.0% (until June 2004!), the Fed was now publicly discussing “electronic printing presses,” “helicopters” and other “unconventional measures.” Wall Street was trumpeting “deflation” risk. Sure enough, the crisis was soon resolved and Wall Street was emboldened to perpetuate history’s greatest Credit inflation and Mortgage fiasco.
The tables have been turned these days, with the Mortgage Crisis now evolving into a full-fledged Corporate Debt Crisis. The key nexus this time around has been Wall Street “structured finance,” especially as it relates to the major Mortgage lenders (certainly including Countrywide, Rescap/GMAC, and Washington Mutual) and the “financial guarantors (in particular, MBIA and Ambac). The unfolding Mortgage implosion has destroyed the value of innumerable “structured products;” has annihilated legions of mortgage companies; has impaired scores of major lenders; has severely battered general market confidence; and this week was in the process of taking down a few huge mortgage companies. Institutions with enormous liabilities to the “money,” “repo,” securitization, and derivative markets – not to mention large borrowings from the FHLB system - were in serious jeopardy. The risk of a domino implosion in the Credit default market and the “financial guarantor” industry had become a very real possibility. System Risk Intermediation was in peril.
The Fed responded with what the market has interpreted as a promise of aggressive rate cuts, while Bank of America has apparently for now resolved the Countrywide debt issue. Citigroup’s stock rallied on rumors of a major new investment from Prince Alwaleed and others. Washington Mutual’s stock price rallied sharply on rumors of merger talks with JPMorgan. Countrywide’s stock surged as CDS prices collapsed, a dynamic sure to have caused considerable grief to those shorting the stock to hedge against default protection written.
Curiously, the general market took little comfort from developments. A case can be made that the rally in CDS and financial stocks was destabilizing for much of the leveraged speculating community (including “market neutral” and “quants”) keen to short financial stocks against (now sinking) technology shares. Overall, the market was hammered, while MBIA and Ambac CDS prices barely budged from record levels. Friday's market was one of those that surely caused havoc for numerous sophisticated trading strategies. And it is worth noting that an index of Junk bond spreads to Treasuries actually widened an additional 4 basis points to 603 bps, rising this week above 600 for the first time since – not coincidently - the 2002 Debt Crisis.
But the general environment is nothing like 2002, and I don’t expect Fed words and actions – in concert with financial bailouts - to have similar effects. For one, 13% household mortgage debt growth in 2002 provided powerful financial and economic stimulus that will not be forthcoming in 2008. With consumer Credit relatively stable, 2002’s Corporate Debt Crisis was not a serious systemic issue. Moreover, “Wall Street finance” was in an aggressive expansionary mode and the global banking community was developing quite a hankering to participate in the U.S. Credit Bubble. The economy was emerging from a shallow recession.
The world is a much different place today. The Mortgage Finance Bubble is a bust, Wall Street finance is imploding, and foreign financial institutions are keen to cut and run from the business of providing U.S. Credit. Countrywide’s mortgage problems will be absorbed – along with so many other risks – by our own highly vulnerable domestic banking system. Worse yet, the economy is quickly succumbing to recessionary forces. With a high degree of confidence we can proclaim that the Mortgage Crisis has now evolved into a Corporate Debt Crisis – and this crisis will not be resolved anytime soon – by rates, by helicopters, or by bailouts.
Unlike 2002, today’s Credit crisis is systemic. Consumer and financial sector fragilities – the heart of our Credit system - are now impaired to the point of imperiling the capacity of the Credit system to finance business spending and intermediate corporate lending risk. To be sure, prospects for a faltering U.S. consumer sector, massive financial sector Credit losses, and an imminent economic downturn have quite negative ramifications for business lending and valuations. In particular, unfolding dislocation in the CDS and Credit “insurance” markets will severely restrict Credit Availability for small, medium and large firms – especially those less than top-tier borrowers.
I’ll go further and suggest that a severe tightening of Financial Conditions has abruptly made many business borrowing plans unviable; many a balance sheet and debt load untenable; and vast numbers of business strategies - crafted in altogether different financial and economic times - much less viable. Some companies will make the necessary adjustments and many will not. The unfolding backdrop definitely makes a lot of stock buyback plans imprudent and growth strategies highly risky. The aggressive risk-taking business manager – having previously capitalized on the protracted boom - will now be at a similar handicap to that which afflicted the zealous home buyer and lender.
For those searching for explanations behind the stock market’s dismal start to the New Year, I suggest contemplating the many serious ramifications of the Mortgage Crisis having now evolved into an Incurable Corporate Debt Crisis. This week, the Bursting Credit Bubble passed another significant inflection point – one perhaps subtle but with major economic consequences.
Tuesday, January 08, 2008
BROKEBACK MARKET
CLICK CHART TO ENLARGECountrywide (CFC 5.57, -2.07) is preparing to file bankruptcy as soon as this week, according to Bloomberg.com.
Meanwhile, bond insurers got hit after reports indicated Morgan Stanley cut its bond insurers profit outlook. MBIA (MBI 13.46, -4.16) and Ambac (ABK 19.59, -3.89) shed 22% and 17% respectively.
I heard last 1/2 hour (was out of office after 1:30) consumer credit report was out...instead of $8B they put on $15B on credit cards.....sinking...
Just read my back posts to any new reader, you will see why I was worth reading.....and when I said what I said.
We are teetering at the precipice, and oversold hasnt brought the snap back rally expected...I think the market is saying more danger ahead, all laundry not aired, and it appears a BEAR MKT IS UPON US.
Duratek
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