Sunday, November 25, 2007

Silly market analogy of the month.

The mechanics of gravity are "slightly" different from market movements...whether plotted on the traditional euclidian X and Y axes, or compiled into different statistical packages. My target for this year was 1320 for the S&P, and I thought this was pessimistic...and the proliferation of "the end is nigh" analogies such as the below makes me think that we may be in for a rally.

SAN FRANCISCO (MarketWatch) -- "Perched on the edge of a cliff."
That's how one economist describes the U.S. economy as the markets get ready for a busy week of data, including numbers about the already damaged U.S. housing market, orders for durable goods and personal income and spending.
"What we're looking for is confirmation that indeed the U.S. economy is slowing sharply in the fourth quarter," says Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ. Zentner said that within a month, it could be apparent whether the economy is slipping into a recession or not.
"The U.S. economy is really perched on the edge of a cliff right now," says Zentner...

Tuesday, November 20, 2007

Now the dollar does matter...

One could add a nice politically minded narrative that includes Ron Paul's recent lambasting of Bernanke, but the truth is the dollar matters to the Fed, and it is now disclosing more of its hand. By deeming the rate cut a "close call", it has finally begun to take steps in ameliorating inflation expectations, which has ticked up considerably since its actions starting September 18. It is still in between the Scylla of inflation and Charybdis of housing-led recession...and it knows that the financial economy (an admittedly loosely defined term) has always followed the real economy and the engine of housing.

By Brian Blackstone
WASHINGTON (Dow Jones)--Though last month's decision by the U.S. Federal
Reserve to lower official interest rates was a "close call," officials were
worried enough about the chances of a severe housing-induced downturn to act,
according to the minutes of that meeting released Tuesday.
The minutes dwelled extensively on the economy's vulnerabilities, suggesting
that while officials adopted a neutral view of economic and inflation risks
last month, they probably see the potential downside from weak growth as the
bigger worry.
Reflecting the jittery balancing act officials face, they also seemed more
worried about the dollar than in previous meetings, calling its recent
"significant" decline an inflation risk.
"Many members noted that this policy decision was a close call," the Fed said
in the minutes of the Oct. 30-31 Federal Open Market Committee meeting. Minutes
are usually released with a three-week lag, but October's were moved up one day
so as not to conflict with the early market close Wednesday ahead of

Monday, November 19, 2007

A banking problem.

As I have said repeatedly, a financial crisis is immiminent in China. Central planning (unless of the U.S. Fed variety I say with a little sarcasm) cannot work as a doctrine. Investors and institutions with shiny new deposits in Yuan will have to deal with risk a magnitude greater than "sovereign risk".
However, I must admit that this problem is as old as international investment, and with the present era of fiat money and its ability to create and destroy money at an unprecedented rate, I think we will find that global capital flight will be exacerbated. "Its different this time" should read to any investor as "I have 6 months to find buyers of my securities inventory at favorable prices before a crash".

The below illustrates some of what I said above - do you really want deposits with Chinese banks and their centralized monetary system?

China Freezes Lending to Curb Investing Frenzy
November 19, 2007;PageA1

SHANGHAI -- Chinese authorities are slamming the brakes on bank lending, in
their latest attempt to curb the runaway investment threatening to overheat
what is soon to be the world's third-largest economy.
In recent weeks, regulators have quietly ordered China's commercial banks to
freeze lending through the end of the year, according to bankers in several
cities. The bankers say that to comply, they are canceling loans and credit
lines with businesses and individuals.
A China Banking Regulatory Commission official here confirmed that local and
Chinese subsidiaries of foreign banks have been asked to ensure that loans
at the end of the year don't exceed the total outstanding on Oct. 31.

Sunday, November 04, 2007

C to disclose more write-offs...

I don't want this to become a news blog, but the number of write-downs from major houses is something that can't be ignored. I know very few people (myself decidedly NOT included) who know how to "properly" value a security backed by cash waterfalls originating from mortgages. It's interesting to note that the banks taking the largest write offs had these things in their own inventory, and not in the inventory of their in-house hedge funds...

By David Enrich and Robin Sidel

NEW YORK (Dow Jones)--Citigroup Inc. (C) is poised to announce billions
of dollars in further writedowns on mortgage-related securities,
according to people familiar with the matter.

The announcement is expected to come as early as Monday morning, in
advance of Citigroup submitting its quarterly report to regulators, the
people said.

The size of the additional writedowns was still under discussion Sunday
by Citigroup directors, but people estimated they could be $7 billion to
$8 billion. That would come on top of about $2.2 billion in
mortgage-related writedowns and trading losses that Citigroup reported
last month as part of its third-quarter earnings.

Friday, November 02, 2007

Hey Stan, its on Tuesday???

Two of the largest banks lose their CEOs within a week. With the interdependence of the banks, more will likely follow.

NEW YORK (Reuters) - Citigroup Inc (C.N) Chief Executive Charles Prince plans to resign this
weekend, the Wall Street Journal said, as the widening subprime mortgage crisis deals a final blow
to a reign long under attack.

The largest U.S. bank by assets plans to hold an emergency board meeting on Sunday, at which Prince
will step down, the newspaper said on Friday, citing people familiar with the situation.

Its hard to lose $8 Billion and not get sued...

Headline risk is something that is difficult to quantify! I appears that Merrill was attempting to smooth earnings and/or create a buffer zone for mortgage-related losses. They moved these losses off balance sheet via repo (repurchase) transactions with some hedge funds, thus avoiding dreaded "mark to market" losses.

Deals With Hedge Funds
May Be Helping Merrill
Delay Mortgage Losses
November 2, 2007; Page A1

Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said.

The transactions are among the issues likely to be examined by the Securities and Exchange Commission. The SEC is looking into how the Wall Street firm has been valuing, or "marking," its mortgage securities and how it has disclosed its positions to investors, a person familiar with the probe said. Regulators are scrutinizing whether Merrill knew its mortgage-related problem was bigger than what it indicated to investors throughout the summer...

Thursday, November 01, 2007

Its hard to lose 2 Billion and not get sued...

Bear Stearns may face forensic review of its "High-Grade Enhanced Leverage funds". They will have even more problems if it is found that their proprietary desk was dumping unprofitable positions on the two funds. This is going from bad to worst for Bear, and it seems the media wants to have all the chiefs of the investment banks involved in the credit crisis to fall on their swords.

INVESTMENT BANKING Investors want Bear funds probe

(From The Daily Telegraph (LONDON), provided by LexisNexis)
Publication: The Daily Telegraph (LONDON)

James Quinn Wall Street Correspondent

BEAR Stearns chairman and chief executive Jimmy Cayne is to come under yet more pressure after investors in the bank's two collapsed hedge funds joined together to lobby for forensic probes in to their demise.

Institutional and private investors accounting for more than 25pc of holdings in each of the two funds have combined in order to attempt to vote off Bear Stearns as controlling party from each of the two High-Grade Enhanced Leverage funds