Falling Knives
More Ahh Chou!!! Yeah sure, its "really" different this time... Hat Tip to Michael Sesit at Bloomberg... Goldman Sachs said:
"The underlying shock driving the U.S. slowdown is not global in nature but is linked to a slowing U.S. housing market."
Merrill Lynch said: "A sharp slowdown in the U.S. economy in 2007 is unlikely to drag the rest of the global economy down with it.
The good news is that there are strong sources of growth outside the U.S. that should prove resilient to a consumer-led U.S. slowdown."
The firm dismissed the potential fallout from a U.S. housing downturn with a simple, "The world doesn't build U.S. houses."
Reality Check: Japan's GDP contracted to 1.2% in Q2, down from 3% in Q1 and 5.6% in the Q406.
Meanwhile, Euro-area GDP growth was a weak 0.3% in Q2, down from an average of 0.8% for the preceding 2 quarters.
Last month, 2 of the largest German banks Landesbank Sachsen Girozentrale and IKB Deutsche Industriebank had to be bailed out... and today...
The largest UK bailout in 30 years...The Bank of England hasn't had to bankroll a U.K. lender since the 1973 collapse of Cedar Holdings.
Today, Northern Rock, NEVER a subprime lender and the U.K.'s third biggest mortgage lender... whose shares fell 26% yesterday & 46% YTD...
forced to borrow emergency funds from the BOE to remain solvent, as rising credit costs left the mortgage provider unable to make loans.
Hundreds of Northern Rock customers crowded into branches to pull out their savings. Customers were "horrified" to hear about the request for funding.
Customer comments: "It's scary", "I have my life's savings in Northern Rock", "I am going to take out the lot, every penny."
"I don't think anything is going to happen because the Bank of England won't allow it to happen."
said Paul Delamere, 46, waiting at Maddox Street to withdraw his money. Still, he was "more comfortable" with reducing his account.
We remind again, this is NOT a liquidity issue, and no amount of Fed repo injections or rate lowering can cure it. Why?
Its a SOLVENCY PROBLEM... And for anyone still in the dark on this debt market crisis, a simple explanation containing many of the points we've nattered on in the past can be found...
Jim Jubak at MSN touches on a subject dear to our heart in How safe is your Money-Market Fund?
"(ABCP) opened up the commercial-paper market to a whole new level of companies that hadn't been creditworthy enough to tap this source of funding before.
Nattering: Sounds alot like sub prime lenders and borrowers, doesn't it!
In the asset-backed market, specific issues of commercial paper are infrequently traded. Between trades, no one knows what they're worth at all.
Nobody wants to buy something for $100 if it's worth only $75, of course, so you can understand why potential buyers want to sit on the sidelines.
These companies will have to look to bank loans to get through the crisis -- if they get through it at all.
It can't be ended by flooding the market with liquidity or cutting interest rates.
It will end only when buyers believe they can trust prices on debt backed by subprime mortgages, buyout loans and credit derivatives."
Who do You Trust? & Pot Calls Kettles Black... Making a full circle...
08/28 Lehman Brothers., Bear Stearns and Citigroup were downgraded to neutral from buy.... by Merrill Lynch...
09/05 Citigroup cuts estimates on two brokers; Lehman Brothers and Morgan Stanley; Lehman downgraded two banks; Deutsche Bank and Credit Swisse.
Tues. Intel cheering with upbeat forward guidance, Wend. Texas Instrument warning, Thurs. a revenue warning from Alcatel-Lucent...
Today Merrill Lynch downgraded Intel from buy to neutral and Merrill Lynch, the biggest underwriter of collateralized debt obligations...
said it made "requisite fair value adjustments" for the impact of rising defaults on subprime mortgages and they'll be reflected in the firm's Q3 earnings.
Merrill is at risk of losses from subprime defaults because it participates as an investor, lender, counterparty and guarantor in markets tied to mortgages.
They include CDO underwriting, other structured credit products and leveraged finance.
Falling Knives or Sale of The Century?...
Target considering a sale of its credit card receivables... if business is good, why sell? Does somebody need additional cash?...
or are the card payers delinquency rates rising? And with the debt market crisis who will touch this ABCP with a 10 foot poll?
San Francisco Bay Area house and condominium sales fell 25% last month to the lowest for an August in 15 years.
Southern California home sales plunged 36% last month, to 1992 levels. But, SF median sales prices are up 4% and SoCal +2.7%.
While real prices are actually declining, median sales prices get skewed up on 750K+ sales encouraged by price cuts.
Read, too many optimistic suckers with more money than sense, who think we've bottomed.
Hovnanian Enterprises will start a 3 day sale tomorrow, dubbed the "Deal of the Century" in 18 states.
The homebuilder has lost 75% of its market value this year, and is offering discounts of up to $149,000K
Reverse Multiplier Effect...
Many times, we've commented on the multiplier effect going into reverse; the effect of reduced MEW (mortgage equity withdrawl) and the 33% decline in housing starts.
An excellent missive from Michael Panzner quotes the WSJ re: the effect of falling tax receipts.
"Florida, considering deep budget cuts to offset a projected $1.5 billion funding gap. California forecasts a shortfall of at least $5 billion in next year's budget.
States are collecting less in sales tax -- which can account for as much as 15% to 20% of their total revenue...
partly because builders have cut back on buying construction materials and fewer homeowners have been withdrawing equity from their homes to remodel or buy furnishings."
Treasury Budget for August reported at -$117.0 Billion vs -$65 Billion. Get ready as home price declines & reassessment lead to tax receipt shortfalls...
causing some already strained State, County & City budgets to the point of insolvency or pension plan obligation default.
See here for private sector deficits, here for Pension Deficit Disorder and here for state & municipalities.
Artificial Flooring or Sink Hole???
We reported on 03/24/07 paraphrased from Jim Jubaks Why The Debt Bubble Hasn't Burst - Yet:
"The recent unwind and narrowing of spreads is the first round in a debt market deflation.
If these (debt market) investors, with their exposure to high yield and long maturity debt, can just hold out until the Federal Reserve cuts interest rates, they'll make a killing.
The prices of risky, high-yield, long maturity debt soar when interest rates decline. Things to contemplate:
1. The debt bubble is much larger than subprime.
2. The possibility of Fed lowering will put a temporary floor in the debt market, delaying the debt market deflation.
3. The debt bubble will burst with an economic downturn.
4. Expect more episodes similiar to the last few weeks as "trapped" debt market participants attempt to unwind their positions."
At the moment, we are seeing #2 effecting a pause in the debt market deflation. Rest assured, the impending recession and US consumer pullback will fully burst the debt markets bubble...
as profit margins fall, taking out seemingly healthy companies with overleveraged LBO's & stock buy backs who cannot service their debt.
Between a rock & a hard place... Rate cut speculation has buoyed the stock market awaiting the FED decision.
If the Fed cuts, there will be further decline in the dollar, already at an all time low vs Euro in anticipation of a cut...
Any Yen gain vs a falling dollar would exacerbate leveraged Yen carry trade unwind and cause further credit contraction and debt market stress...
oil prices would soar from an all time high of $80 to $90 a barrel, worsening the stagflation dilemma.
For a flight from risk, look at the SOXX divergence the last 8 trading days, its DOWN while the NDX is UP in a flight to safety.
More safety in large caps... This "cap weighted" indices "flight to safety" rally has to end sometime.
Look at a chart of PG's parabolic divergence with the market since 07/19. if we see PG peak out around $68 and start to fall...
then the rest of the large cap stock market will fall or have fallen no later than Oct 31st. Watch PG closely.
We still hold that the Fed will remain pat until being forced to LOWER (thanks Herb.) on Oct 31st by the fallout from the ABCP 21% market crash.
How about about this wicked set up? A Fed cut of only 25 bps on Sept 19th, then just as everyone expects another cut on Oct 31st... take the Halloween candy away.
NO FED CUT, cancelling Santa's rally and popping the headfake up to twin tops? That would be an evil twist. Hmmm...
"The underlying shock driving the U.S. slowdown is not global in nature but is linked to a slowing U.S. housing market."
Merrill Lynch said: "A sharp slowdown in the U.S. economy in 2007 is unlikely to drag the rest of the global economy down with it.
The good news is that there are strong sources of growth outside the U.S. that should prove resilient to a consumer-led U.S. slowdown."
The firm dismissed the potential fallout from a U.S. housing downturn with a simple, "The world doesn't build U.S. houses."
Reality Check: Japan's GDP contracted to 1.2% in Q2, down from 3% in Q1 and 5.6% in the Q406.
Meanwhile, Euro-area GDP growth was a weak 0.3% in Q2, down from an average of 0.8% for the preceding 2 quarters.
Last month, 2 of the largest German banks Landesbank Sachsen Girozentrale and IKB Deutsche Industriebank had to be bailed out... and today...
The largest UK bailout in 30 years...The Bank of England hasn't had to bankroll a U.K. lender since the 1973 collapse of Cedar Holdings.
Today, Northern Rock, NEVER a subprime lender and the U.K.'s third biggest mortgage lender... whose shares fell 26% yesterday & 46% YTD...
forced to borrow emergency funds from the BOE to remain solvent, as rising credit costs left the mortgage provider unable to make loans.
Hundreds of Northern Rock customers crowded into branches to pull out their savings. Customers were "horrified" to hear about the request for funding.
Customer comments: "It's scary", "I have my life's savings in Northern Rock", "I am going to take out the lot, every penny."
"I don't think anything is going to happen because the Bank of England won't allow it to happen."
said Paul Delamere, 46, waiting at Maddox Street to withdraw his money. Still, he was "more comfortable" with reducing his account.
We remind again, this is NOT a liquidity issue, and no amount of Fed repo injections or rate lowering can cure it. Why?
Its a SOLVENCY PROBLEM... And for anyone still in the dark on this debt market crisis, a simple explanation containing many of the points we've nattered on in the past can be found...
Jim Jubak at MSN touches on a subject dear to our heart in How safe is your Money-Market Fund?
"(ABCP) opened up the commercial-paper market to a whole new level of companies that hadn't been creditworthy enough to tap this source of funding before.
Nattering: Sounds alot like sub prime lenders and borrowers, doesn't it!
In the asset-backed market, specific issues of commercial paper are infrequently traded. Between trades, no one knows what they're worth at all.
Nobody wants to buy something for $100 if it's worth only $75, of course, so you can understand why potential buyers want to sit on the sidelines.
These companies will have to look to bank loans to get through the crisis -- if they get through it at all.
It can't be ended by flooding the market with liquidity or cutting interest rates.
It will end only when buyers believe they can trust prices on debt backed by subprime mortgages, buyout loans and credit derivatives."
Who do You Trust? & Pot Calls Kettles Black... Making a full circle...
08/28 Lehman Brothers., Bear Stearns and Citigroup were downgraded to neutral from buy.... by Merrill Lynch...
09/05 Citigroup cuts estimates on two brokers; Lehman Brothers and Morgan Stanley; Lehman downgraded two banks; Deutsche Bank and Credit Swisse.
Tues. Intel cheering with upbeat forward guidance, Wend. Texas Instrument warning, Thurs. a revenue warning from Alcatel-Lucent...
Today Merrill Lynch downgraded Intel from buy to neutral and Merrill Lynch, the biggest underwriter of collateralized debt obligations...
said it made "requisite fair value adjustments" for the impact of rising defaults on subprime mortgages and they'll be reflected in the firm's Q3 earnings.
Merrill is at risk of losses from subprime defaults because it participates as an investor, lender, counterparty and guarantor in markets tied to mortgages.
They include CDO underwriting, other structured credit products and leveraged finance.
Falling Knives or Sale of The Century?...
Target considering a sale of its credit card receivables... if business is good, why sell? Does somebody need additional cash?...
or are the card payers delinquency rates rising? And with the debt market crisis who will touch this ABCP with a 10 foot poll?
San Francisco Bay Area house and condominium sales fell 25% last month to the lowest for an August in 15 years.
Southern California home sales plunged 36% last month, to 1992 levels. But, SF median sales prices are up 4% and SoCal +2.7%.
While real prices are actually declining, median sales prices get skewed up on 750K+ sales encouraged by price cuts.
Read, too many optimistic suckers with more money than sense, who think we've bottomed.
Hovnanian Enterprises will start a 3 day sale tomorrow, dubbed the "Deal of the Century" in 18 states.
The homebuilder has lost 75% of its market value this year, and is offering discounts of up to $149,000K
Reverse Multiplier Effect...
Many times, we've commented on the multiplier effect going into reverse; the effect of reduced MEW (mortgage equity withdrawl) and the 33% decline in housing starts.
An excellent missive from Michael Panzner quotes the WSJ re: the effect of falling tax receipts.
"Florida, considering deep budget cuts to offset a projected $1.5 billion funding gap. California forecasts a shortfall of at least $5 billion in next year's budget.
States are collecting less in sales tax -- which can account for as much as 15% to 20% of their total revenue...
partly because builders have cut back on buying construction materials and fewer homeowners have been withdrawing equity from their homes to remodel or buy furnishings."
Treasury Budget for August reported at -$117.0 Billion vs -$65 Billion. Get ready as home price declines & reassessment lead to tax receipt shortfalls...
causing some already strained State, County & City budgets to the point of insolvency or pension plan obligation default.
See here for private sector deficits, here for Pension Deficit Disorder and here for state & municipalities.
Artificial Flooring or Sink Hole???
We reported on 03/24/07 paraphrased from Jim Jubaks Why The Debt Bubble Hasn't Burst - Yet:
"The recent unwind and narrowing of spreads is the first round in a debt market deflation.
If these (debt market) investors, with their exposure to high yield and long maturity debt, can just hold out until the Federal Reserve cuts interest rates, they'll make a killing.
The prices of risky, high-yield, long maturity debt soar when interest rates decline. Things to contemplate:
1. The debt bubble is much larger than subprime.
2. The possibility of Fed lowering will put a temporary floor in the debt market, delaying the debt market deflation.
3. The debt bubble will burst with an economic downturn.
4. Expect more episodes similiar to the last few weeks as "trapped" debt market participants attempt to unwind their positions."
At the moment, we are seeing #2 effecting a pause in the debt market deflation. Rest assured, the impending recession and US consumer pullback will fully burst the debt markets bubble...
as profit margins fall, taking out seemingly healthy companies with overleveraged LBO's & stock buy backs who cannot service their debt.
Between a rock & a hard place... Rate cut speculation has buoyed the stock market awaiting the FED decision.
If the Fed cuts, there will be further decline in the dollar, already at an all time low vs Euro in anticipation of a cut...
Any Yen gain vs a falling dollar would exacerbate leveraged Yen carry trade unwind and cause further credit contraction and debt market stress...
oil prices would soar from an all time high of $80 to $90 a barrel, worsening the stagflation dilemma.
For a flight from risk, look at the SOXX divergence the last 8 trading days, its DOWN while the NDX is UP in a flight to safety.
More safety in large caps... This "cap weighted" indices "flight to safety" rally has to end sometime.
Look at a chart of PG's parabolic divergence with the market since 07/19. if we see PG peak out around $68 and start to fall...
then the rest of the large cap stock market will fall or have fallen no later than Oct 31st. Watch PG closely.
We still hold that the Fed will remain pat until being forced to LOWER (thanks Herb.) on Oct 31st by the fallout from the ABCP 21% market crash.
How about about this wicked set up? A Fed cut of only 25 bps on Sept 19th, then just as everyone expects another cut on Oct 31st... take the Halloween candy away.
NO FED CUT, cancelling Santa's rally and popping the headfake up to twin tops? That would be an evil twist. Hmmm...
Comments
is this a typo? if not please explain