Economic Reports 08/09/07

Summary: Initial claims increasing as continuing unemployment worsens. Same store sales show John Q pulling back further.

We keep Nattering that the whooshing and sucking sound being heard in the market is the multiplier effect, working in reverse...

and that the re-rate or revaluation of the toxic RMBS holdings currently on the books will ultimately bring this whole global house of cards down.

Said "marking to market" will not only devalue the debt, but also downgrade ratings, forcing a "margin call" on the reserve levels at many global banks.

Despite all the rhetoric, happy "daze" spin and posturing, this malaise which is already infecting the financial, banking & economic system...

will spread to the government GSE's FNMA & FHLMC, foreign governments, insurance companies and pension funds (public & private).

And yes, this credit crunch tsunami is headed straight for the consumer and there is absolutely NOTHING the central bankers or anyone can do to stop it.

By year's end, the Nattering One would not be surprised to see a trifecta...

At least one major: lender, brokerage house and bank will freeze & seize customer assets, collapse and board up its doors.

We still maintain that by October 31st, the Fed will be forced to lower rates.

Storylines from Bloomberg with a large sprinkling of Nattering love...

Blame it on the Locusts.... Same Store Sales showed 61% of retailers missed expectations that had already been lowered, with 39% exceeding forecasts.

Funny thing is the excuse du jour was sales being hurt by a delayed back-to-school shopping season and high gas prices that cut consumers' trips to the mall.

Last time I checked in the earliest seasonal roll out ever, back to school goods shoved summer goods out the door about three weeks ago.

In addition, despite crude approaching $80 then falling back to $72, prices at the pump had backed down most of the summer from 3.30 to 2.80.

Really? You don't say? AIG reported net realized capital gains declined 16.5%. AIG's mortgage guaranty unit (mortgage insurance) lost $78M vs. a profit of $110M in Q1.

The domestic 2nd lien business was the primary contributor to the decline in operating income, and AIG's domestic 1st lien business also experienced an increase in incidence and severity of losses.

AIG indicated that it sees mortgage delinquencies spreading beyond subprime to prime.

Damm it, Can't You Bail Any Faster? Last week, the German government arranged the bailout of IKB Deutsche Industriebank...

Today, through temporary Open Market Operations, the Federal Reserve added $24B in temporary reserves to the banking system, the most since early April.

And, the fastest increase in overnight Libor since June 2004 ($ Libor went to 5.86% from 5.35%)
spurred the ECB...

To provide unlimited cash at the below market rate of 4%
, as banks are reducing the supply of money.

Last night, the ECB loaned 94.8 B euros ($130B), exceeding the 69.3 B euros given on Sept. 12, 2001.

Chris Low, chief economist at FTN Financial:

"This is not a small thing. A credit crunch, when the short-term credit markets seize up, is extraordinarily serious, almost always the precursor of a significant recession."

Watership Going Down... Moody's Investors Service: Companies are extending the maturity of existing short-term debt.

Units of American Home Mortgage; Luminent Mortgage Capital; facing margin calls from lenders, and Aladdin Capital Management this week exercised options allowing them to delay repaying debt.

The three companies borrowed using short term debt that is backed by assets, known as asset backed commercial paper.

They are probably the only companies to defer payments since extendible asset backed commercial paper was first sold 12 years ago.

Does it get worse? Oh Yes!!! The Goldman Sachs flagship Global Alpha fund gained almost 40% in 2005 and its annualized return is 15.1% since launch in 1995.

In just the week ended July 27, it made a loss of 7.7%, taking its performance for the year to -12.1% before fees.

That stretches its run of disappointing returns to more than 18 months, having reported a loss of 6% last year.

The Nattering One smells another "halt to withdrawls" or freeze coming on this one.

Caught Holding The Tool Bag... Home Depot may not get the $10.3 B that buyout firms agreed to pay for its contractor supply unit.

Forcing the world's largest home improvement retailer to scale back plans for a stock buyback, shares fell 7%.

Michael Souers, an analyst at Standard & Poor's: "These actions are a direct response to the impact of tightening credit markets."

Debt investors have rejected bond and loan packages for buyouts of companies including Alliance Boots, DaimlerChrysler and ServiceMaster.

Banks and private equity firms are seeking to renegotiate terms of the loans and bonds to make them more palatable to investors.

It is estimated that as much as $400 B worth of debt is backed up in the pipeline to be syndicated to fund such purchases.

With nary a taker in sight, during the interim, the debt sits on the books of the warehouse banks that issued the bridge loans.

Holding A Cat in A Bag? Again? That Trick Never Works... Dutch investment bank NIBC Holding NV said today that it lost at least 137M euros on U.S. subprime investments this year.

"Severe instability" in U.S. credit markets reduced the value of its U.S. asset-backed securities.

The company expects "further mark-to-market losses." And they won't be the only ones...

The Big Chill spreads... BNP Paribas SA, France's biggest bank, FROZE withdrawals from three investment funds Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia.

Why? Because it couldn't "fairly" value their holdings after U.S. subprime mortgage losses roiled credit markets.

The funds had about $2.2 B of assets on Aug. 7, after declining 20% in less than two weeks, 33% of the money is in subprime securities rated AA or higher.

BNP Paribas: "The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating."

Alain Papiasse, head of BNP Paribas's asset management and services division: "For some of the securities there are just no prices. As there are no prices, we can't calculate the value of the funds."

This brings to mind the old axiom which holds true for ANY asset that must be liquidated: "It's only worth what someone can and will pay for it."

Many are about to find out that their most "valuable and trusted" assets are about to get a sizable "haircut".

Initial Claims 08/04 +7K at 316K Full Report

Inside the number: prior claims revised up 2K. 4 week MA +1.75K at 307.75K. Continuing unemployment +39K at 2.55M; 4 week MA +2K at 2.54M.

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