Friday, September 26, 2008

Weekend Wiemar and Beagle

Actually, this week it's all Beagle. And an amazing Beagle to boot. Just watch this escape artist in action.

I'll be back on Monday. I'll be on KTLK tomorrow morning at 9:00 CST (I think).

A Closer Look At the Financial Sector

Considering the financial sector has been he focus of a great deal of talk lately, let's see how this sector is performing from a technical perspective.

On the yearly chart, notice the following:

-- Prices are still in the downtrend that started about a year ago. While prices spiked to the 200 day SMA on talk of the bail-out, they quickly retreated to below the downward sloping trend line again. In fact, prices opened above the line and then closed below the line.

-- Since roughly mid-July, prices have moved in a tighter pattern, moving primarily sideways. Prices moved between essentially 20 and 23. While we saw moves below that level last week, we can attribute that to extreme market responses to the AIG/Fannie and Freddie situation etc...

The yearly chart highlights the need to understand technical developments in a fundamental light. While reading charts is incredibly important to understanding the market, this chart especially would be a bit hard to understand without an understanding of the fundamental backdrop.

On the three month chart, notice the following:

The 10, 20 and 50 day SMA are in an extremely tight range, highlighting the fact that traders are equally split between bullish and bearish sentiment. The big uncertainty is the bail-out package. Until that situation changes I wouldn't expect the sector's outlook to change.

Employment Picture is Deteriorating Badly

Click on the images below for a larger image

Consider the following charts from the St. Louis Federal Reserve:

The bottom line is it is getting harder to find work. This indicates the labor market is deteriorating. Also consider this chart from Calculated Risk:

Friday Forex Round-Up

On the weekly chart, notice the following:

-- The dollar has broken out of a multi-year downtrend.

-- The 10 and 20 week SMA are both moving higher

-- Prices have technical support at the 10 and 20 week SMA

-- Prices also have technical support at the long-term downward sloping trend line that prices broke through a few weeks ago.

On the daily chart notice the following:

-- Prices have fallen through the two month rally that started in mid-July

-- Prices are using the 50 day SMA as technical support

-- The 10 day SMA has moved through the 20 day SMA

-- The 20 day SMA is turning lower

This is a borderline chart. While the shorter SMAs are indicating a downward trend, the 50 day SMA is moving higher. This means the long term trend (which is higher) is intact.

Thursday, September 25, 2008

We're Nowhere Near A Bottom In Housing

Read this. Now.

Today's Markets

(Click on the image for a larger image.)

On the daily chart, notice the following:

-- Although the SMAs are technically in a very bearish position with the shorter SMAs below the longer SMAs, the SMAs are very close together. Compare this to the technical position at the end of June/beginning of July when the 10, 20 and 50 had more daylight between them. The current orientation indicates a bit more confusion about what direction the market wants to go in.

-- Also note there is no clear long-term trend in place. Compare the current situation to the beginning of June/beginning of July situation or mid July to mid-August. The market simply has not run consistently in one direction or the other for a bit.

-- There are a lot of reasons for the market to move in either direction right now. The economy as a whole is not doing well right now. But there are signs a bail-out is all but done. That could give the market a shot in the arm to move higher.

We're Nowhere Near A Bottom In Housing

From Reuters:

Prices of U.S. existing homes suffered a record drop in August and the rate of sales tumbled, offering little sign of improvement in the source of the financial crisis in the United States.

The pace of existing home sales decreased 2.2 percent to an annual pace of 4.91 million units while the median national home price declined a record 9.5 percent to $203,100, the National Association of Realtors said on Wednesday.

In what would normally be a potentially bright spot, the overstock of homes for sale shrank. However, the trade group said as many as 2 in 5 home sales were by borrowers who have seen their property lose value or are facing foreclosure.

"The NAR estimates that 35-to-40 percent of all sales are of distressed property, so underlying private activity is weaker than the headlines (imply) and there is little sign of imminent improvement," Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The inventory of existing homes for sale fell 7.0 percent to 4.26 million from the record-high overstock reported in July.

The existing home market is about four times the size of the new home sales market, making the existing home market more important.

Record price drops are a sign of weakness. They indicates sellers are desperate to move product (whatever that product is) and are willing to cave in price negotiations. Don't expect this process to end anytime soon -- especially as job losses intensify.

In addition, a larger percentage of the inventory is "distressed". This indicates the problems in the housing sector are intensifying. Again -- not good.

That problem is increasing in the new homes market:

The annual sales pace was down 11.5 percent from July to 460,000 homes and was sharply off the 510,000 pace expected by economists. The August decline was the biggest since November 2007.

The median sales price of $221,900 was off 5.5 percent from July, the lowest since $211,600 in September 2004.

The August sales pace was the weakest since 401,000 in January 1991.

See the above comments on the existing home market, as they apply to the new home market as well (with the exception of the distressed situation).

At the beginning of this year I wrote a piece that I hoped at the end of 2008 we would at least know when we would have some

The President's Speech

Here is a link to the text:

First, how did our economy reach this point?

Well, most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business. This large influx of money to U.S. banks and financial institutions -- along with low interest rates -- made it easier for Americans to get credit. These developments allowed more families to borrow money for cars and homes and college tuition -- some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit -- combined with the faulty assumption that home values would continue to rise -- led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages who had been planning to sell or refinance their homes at a higher price were stuck with homes worth less than expected -- along with mortgage payments they could not afford. As a result, many mortgage holders began to default.

These widespread defaults had effects far beyond the housing market. See, in today's mortgage industry, home loans are often packaged together, and converted into financial products called "mortgage-backed securities." These securities were sold to investors around the world. Many investors assumed these securities were trustworthy, and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac. Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

In actuality, this isn't a bad explanation of the central problem of what went wrong. In fact -- it's actually pretty accurate. Record low interest rates + lack of due diligence = recipe for disaster.

There are a few points I would add.

1.) There was a lack of regulatory oversight. The central problem securitzation causes is it divorces the need to perform due diligence from the loan offices. If I'm not going to hold the loan, there is little incentive to actually perform due diligence. This means some type of oversight is that much more important. And there wasn't any here.

2.) The President talked about the investors not performing due diligence. I would have added the ratings agencies were also to blame for passing out AAA ratings like they are candy.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses. Before long, these securities became so unreliable that they were not being bought or sold. Investment banks such as Bear Stearns and Lehman Brothers found themselves saddled with large amounts of assets they could not sell. They ran out of the money needed to meet their immediate obligations. And they faced imminent collapse. Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

That's also a pretty damned good explanation of why various investment firms are having trouble right now. I would add a that most of these firms were leveraged to the hilt which means that downward moves in their asset prices is a huge problem.

I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There's been a widespread loss of confidence. And major sectors of America's financial system are at risk of shutting down.

The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

Fellow citizens: We must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem -- and to make improvements to the proposal my administration sent to them. There is a spirit of cooperation between Democrats and Republicans, and between Congress and this administration. In that spirit, I've invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.

OK -- snark time. The Republican party can no longer claim they are the party of free market capitalism. They have purchased one of the world's largest insurers, they are agreeing to a huge bail-out, they have banned short-selling.

More to the point -- yes, all of the above could happen. That's the end result of the reckless policies pursued over the last 8 years. When you base an economy entirely on easy credit, you end up with this type of problem. The entire economy is now swimming in debt that is being devalued because people are no longer making complete payments. As a result, the debt on everyone's balance sheet is clogging the nation's financial pipes. It's that simple.

Instead, we're now supposed to come in and bail-out a system that is deeply flawed. Regardless of how it's packaged, it just doesn't feel right.

Thursday Oil Market Round-Up

On the weekly chart, note the following:

-- Oil broke the 1+ year upward sloping trend line a few weeks ago. This indicates the major rally that has been moving oil higher is over.

-- The 10 and 20 week SMAs are both moving lower

-- The 10 week SMA crossed below the 20 week SMA

-- The 10 week SMA is about to cross below the 50 week SMA

-- Prices are below all the SMAs

-- Prices are using the 50 week SMA as upward resistance rather than support

On the daily chart notice the following:

-- The 10, 20 and 50 day SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices have moved through the 10 and 20 week SMA. However, this is due to a huge market problem caused by the bail-out issue. The assumption was if the bail-out goes through the US economy will stabilize which will increase oil demand. Now it loos as though traders are re-thinking that idea.

-- Prices are still using the downward sloping trend line as resistance.

Bottom line: these are still bearish charts.

Wednesday, September 24, 2008

Wednesday Commodities Round-UP

OK -- back to the charts....

On the weekly CRB chart, notice the following:

-- Prices are below the all the SMAs

-- The 10 and 20 day SMA are both moving lower

-- The 10 day SMA has crossed below the 20 and 50 SMA

-- Prices have broken the uptrend started at the end of the summer last year and have fallen about 50% (that's an eyeballing computation).

Bottom line: the weekly chart is bearish.

On the daily chart, notice the following:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- The 20 day SMA has acted as an important are of activity. While prices have moved above it, they have quickly retreated as well.

-- Prices have been dropping for three months.

Bottom line: this is a bearish chart as well

Complete and Total Full Disclosure From Bonddad About the Bail-Out Package

So -- why is Bonddad now urging his readers to call Congress critters and ask them to vote against this terrible bill?

Let me back up a bit. I have really attempted to keep partisan politics out of my analysis. I hope I have succeeded but have probably not done as good a job as I would have liked. While I am a conservative Democrat (socially liberal, fiscally conservative) I really come down more in the Lewis Black mold. Towards the end his last special he stated (and I'm paraphrasing here), "In September, I'm hoping the Democrats and Republicans simply decide to not show up. I've been doing this for 30 years. I keep thinking it won't get worse, and it does." That's exactly how I feel about the last 8 years of, well, bullshit. Everybody who is even remotely involved should be kicked out and exiled to the most remote part of the planet possible. They should also be forced to listen to months straight of the worst televangelist on the planet (Robert Tilton comes to mind).

Here's the basic problem. For the last 8 years this country has become a fiscal train wreck. I say this over and over again, but it's worth repeating. According to the Bureau of Public Debt, the US has issued over $500 billion dollars of net new debt per year since 2003. During the good times -- that is, the times when the economy was expanding -- Congress acted more than recklessly with the nation's finances.

On top of that, the remarkable lack of regulatory enforcement is horrendous. How many food recalls have we had? Or toy recalls? Does anyone remember the FBI is investigating literally every major mortgage lender in the US? How about all of the mea culpa's regarding the auction rate securities market? Now everyone is acting like "it wasn't me -- it was the other guy." Bullshit. Everybody who was in Washington watching and participating in this crap is guilty. Plain and simple.

And let's not forget Alan "bubbles" Greenspan who has yet to meet an asset class he cannot inflate into the stratosphere. Mister "I had no idea 0% interest rates and lack of regulatory enforcement would lead to this" who stands as the architect of a failed Ayn Rand policy perspective that is ruining the country fast should be beheaded, his head bronzed and placed on a pike sitting outside the NYSE with a sign below it that reads, "Asset inflation does not equal real GDP growth". Anyone entering the NYSE must ponder this thought for 5 minutes each day and submit a 100 word essay each month on its meaning.

Let me quote a friend who goes by the screen name of New Deal Democrat:

And so, they have finally done it. Washington has finally bet every dollar of earnings and wealth you and I and every other taxpayer has ever made in our entire lives; every dollar that will ever be made by our children's generation; and every dollar that will ever be made by our grandchildren's generation; in an attempt -- that is by no means guaranteed to succeed -- to prop up the reckless and malign neoliberal "shadow banking system" of Wall Street.

This was a crisis that wasn't just foreseeable. It wasn't just foreseen. It was shouted about from the rooftops for almost half a decade. And yet Washington refused to hear, because the shouters were the Dirty Unwashed Hippies who live outside the zone of neoliberal economic consensus that is elective Washington, D.C.

And they will not hear now, either. Awash in their elective sinecures and their corporate campaign contributions, all that remains is the Rendering of the Bill to the suckers and the chumps. That's us.

Pray tell, exactly why did Congressional leaders sit in "stunned silence" on September 18, 2008 as it was explained to them that the collective unpayable $ TRILLIONS of debt of millions of ridiculous mortgages for houses and condos bought at unsustainable values, debt that was packaged and sold and then borrowed against at rates of 30 or 40 to 1 by a shadow banking system that they and the Administration birthed and nurtured, debt that had been booked as ficitious profits by that system, debt that in the real world represented money that was never ever going to be paid back, was in danger of bringing down the entire financial system?

This crisis was not just foreseeable, it was not just foreseen, it was shouted about from the rooftops since 2004, on blogs like Ben Jones' housing bubble blog, by Calculated Risk, by Mike Shedlock, by Russ Winter, by Barry Ritholtz, by Robert Reich, by Paul Krugman, by Joseph Stiglitz, by James Kunstler, by Stirling Newberry -- in short by just about every housing or economic blogger right, center, and left, from bonddad at Daily Kos to blackhedd on Red State, not to mention myself.

And yet two nights ago, Pelosi, Schumer, Frank, Reid, and everybody else in the Capital sat in "stunned silence" as Bernanke and Paulson spelled out the situation for them. Where were they all these years? Protected from the noise of the Dirty Unwashed Hippies beyond the beltway, by their cocktail party neoliberal free market cone of silence in Washington, that's where.

And so, panic-stricken, they will hurriedly and without reading carefully enact into law what will undoubtedly be the "Economic Patriot Act" of the Bush Administration, with all of the corruption and hidden destruction of rights that conveys, an act that has been estimated at costing up to $1,000,000,000,000 (that's $1 TRILLION) of taxpayer moneys. And still may not succeed.

Truer words about the current situation could not be spoken. This was bound to happen. But now collective Washington is now acting as though it's some kind of shock they have to do something. Folks, this has been on the horizon for years. Those of us who talked about it were called chicken littles (or worse). And no -- I take no pleasure in being right.

However, there is one way to prevent this nightmare from happening again. And it is not in bailing out stupid decision makers with yours and my money, or giving this money to Hank Paulson and Ben Bernanke hoping their magnificence and true humility will help them act in the country's best interest. The way to prevent this from happening is to let the idiots who got us in this mess feel the pain from their decisions. And that means let these bastards rot.

Or -- if the government really wants to do it's job like enforce the rules that are existing and then creating a new regulatory framework that works with the current financial industry -- then please do so. But that means growing a spine and saying, "we aren't doing x unless we get y." Period.

Contact Information For Senate Banking Committee

Here is a link to all the members of the Senate Banking Committee.

If you are so inclined, please contact each member and express your displeasure with the bill as proposed.

Why Congress Should Oppose the Bail-Out Package

Let's go through all the arguments against this package.

Let's start with the text of the deal:

(a) Authority to Purchase.--The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

(b) Necessary Actions.--The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:

(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;

(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;

(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;

(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and

(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.

Note all of the authority given to the Treasury secretary. He buys and sells securities at terms he deems necessary. He appoints firms to be "financial agents of the government." He creates any vehicles used to deal with this mess. In short, he is given a huge swath of power to handle this mess.

Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.

He makes literally no reports to Congress. After three months and then "semi-annually thereafter." That is way too much time between reports. Also note there is no mention of what information he is supposed to present to Congress. The Treasury Secretary could come into Congress with nothing -- no reports, not facts, no stories to tell -- and be in compliance with this act.

Sec. 6. Maximum Amount of Authorized Purchases.

The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time

Did you catch that? There's a great little language shift. The Treasury Secretary's authority is limited to $700 billion outstanding at any time. That means he could buy $700 billion -- then sell some at a loss -- and then buy more to get back to $700 billion. This is a revolving credit line, not a firm upper limit. It's conceivable the Treasury could but and sell trillions of dollars under this authority.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Excuse me? What country are we living in? Paulson could grant total authority to, say, Goldman Sachs (his former employer) and we the taxpayer would have nothing to say about it.

Folks, this is a boondoggle for several reasons.

1.) There is no oversight. Period. No one should be given this amount of power without any check and/or balance.

2.) Why this huge dollar figure?

“One of you mentioned that you will use about $50 billion dollars a month. If that’s the case, and you’re certainly not going to use all $700 billion immediately, and as you can see there are a lot of questions about whether this will work, we understand you’ve done your best and you think this will work best, but it’s clear we’re in uncharted waters. But what about doing this in tranches? Why couldn’t you ask us for $150 billion, and on January 15th or January 20th we would come back, we would assess how this worked and grant some more money if it’s really working?”

He's asking for 25% of the 2007 federal budget in one fell swoop. That's a ton of cash.

3.) Bernanke's statement regarding purchase prices yesterday is pure crap:

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''

Really? I've been involved with finance for 15 years, and I have never heard this distinction before. When I was a bond trader, I do remember getting calls at the end of the month asking for bids on bonds because clients had to mark their portfolios to market. But I don't remember anybody every saying, "let's mark this to "hold-to-maturity." This distinction is bullshit, plain and simple.

This is a huge boondoggle waiting to happen. If we give all of this authority to the Paulson we will live to regret it in a big way. And so will our children.

A friend of mine (New Deal Democrat over at Economic Populist) made an observation. Over the weekend we saw people in Congress "shocked" by what was happening. Paulsona and bernanke also qualify as the "deer in the headlights" for this mess. In other words -- everybody who should have seen this coming is now shocked we're in this mess. The only people to get this right were the bloggers -- or as NDD says, the "dirty hippies." Now, these same people who have gotten nothing right over the last year are desperately seeking money to help stave off a disaster. These people have no credibility on this issue. None. Nada. Zip. Zero.

Please call your Senator and Representatives and tell them to vote no on this piece of legislation unless there are major revisions.

Tuesday, September 23, 2008

Bernanke to Congress: Please Use Fantasy Prices

From Bloomberg:

Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis.

``Accounting rules require banks to value many assets at something close to a very low fire-sale price rather than the hold-to-maturity price,'' Bernanke said in testimony to the Senate Banking Committee today. ``If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.''

Bernanke's remarks, an unusual departure from his prepared testimony, come as lawmakers and the Bush administration negotiate a rescue plan aimed at easing the worst financial crisis since the Great Depression. The Fed chief said paying prices higher than the bad assets would fetch in the open market would help ``unfreeze'' credit markets and aid the economy.

Analysts said Bernanke is essentially advocating that government use a pricing model that assumes that the debt will be paid in full over a long period of time. That is different from the mark-to-market model used by investment banks that prices assets at what they are worth on a given day.

The risk is that the model does not provide transparent pricing of the assets taxpayers are taking on, said Ann Rutledge, partner at R&R Consulting in New York, a firm that specializes in structured finance. Many of the securities ``are not going to pay at maturity,'' Rutledge said.

This is 100% pure crap, bullshit or whatever else you want to call it.

1.) These are not "firesale" prieces. They are the prices the current market will tolerate. Has it ever occurred to anyone why these assets are priced where they are? They're crap. It's that simple. But ol' free market Ben and laissez faire Paulson won't have any of that market stuff when an investment bank might actually have to lose money.

2.) What Ben is essentially saying is, "please pay a price that has no one has any possibility of ever getting for this paper. That will make everything better. Really." Over pay, screw the taxpayer, and bail out wall street for their really stupid ways.

3.) Consider that most of these assets are backed by mortgages. Also consider that that delinquencies are increasing. Take a look at this chart from the latest Quarterly Banking Profile from the FDIC


This plan is pure bullshit. Plain and simple.

UPDATE: A comment noted that I used incorrect phrasing on the mortgage issue. Mortgage delinquencies are increasing, but most are not delinquent.

Who's To Blame?

There are a ton of great theories being floated right now. A few of them are laughable. Two that stand out are the following:

-- The Community Reinvestment Act caused financial institutions to lend to people who weren't credit worthy. This is crap. The CRA was signed into law in 1977 -- over 20 years before the current crisis. The second problem with this theory is the CRA only applies to banks and thrifts. Most of the mortgage lending during the last boom came from -- mortgage lenders who aren't regulated by CRA.

-- The theory that not putting Fannie and Freddie under a new super-regulator in 2005 caused the problem. The problem here is this administration is notoriously lax with any regulatory oversight. They're been asleep at the switch for 8 years (how many food recalls have we had? Or toys? How many mortgage brokers are being investigated by the FBI for fraud?) This is also laughable.

There are two real culprits that deserve a ton of blame.

The Federal Reserve for lowering interest rates to 0% after adjusting for inflation. Lower the price of anything available for sale and people will buy more of it. That's exactly what happened. Household debt exploded. Total household debt outstanding increased from $7.6 trillion in 2001 to $14 trillion in the second quarter of this year. That's a huge increase. Most of it was .... mortgage debt, which increased from $5.3 trillion to $10.6 trillion over the same time period. All of that debt had to go somewhere -- namely the balance sheet of every financial company on the planet.

Here's a great summation:

The Federal Reserve, which has encouraged excessive borrowing, is to blame for the credit crunch that has gripped world markets for more than a year, Marc Faber, the author of the Gloom Boom & Doom Report, told CNBC on Tuesday.

"About 15 percent of U.S. households have negative equity. Who supplied the leverage into the system? It's called the Federal Reserve Board," Faber said.

"If I'm the drug dealer I'm not responsible that everybody takes drugs, but I facilitate it, especially if I give it out free of charge, I can enlarge the market share, and that's what the Fed has done."

Any economist who says "I had no idea low interest rates would lead to this" is lying through his teeth.

The Federal Reserve was warned about the effects of lack of regulation several times over the last expansion:

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of "best practices" and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.

And leaders of a housing advocacy group in California, meeting with Mr. Greenspan in 2004, warned that deception was increasing and unscrupulous practices were spreading.

John C. Gamboa and Robert L. Gnaizda of the Greenlining Institute implored Mr. Greenspan to use his bully pulpit and press for a voluntary code of conduct.

"He never gave us a good reason, but he didn't want to do it," Mr. Gnaizda said last week. "He just wasn't interested."

I should add the ratings agencies are also extremely culpable in all of this. They said all of this paper backed by mortgage was AOK. Well, it wasn't. And this paper isn't just blowing up in a few instances -- it's blowing up at alarmingly high rates. That indicates someone was asleep at the switch.

Add these three together and you get serious trouble.

Why Paulson's Plan Could Lead To More Trouble

From Bloomberg:

Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

``This is sobering, absolutely sobering, even to someone who doesn't drink,'' said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.


``The market is very, very negative because of the consequences of raising the debt ceiling and the increase in debt in general,'' Manfred Wolf, head of currency sales in New York for HVB America Inc., a unit of Germany's second-largest bank. ``Foreigners may not be that attracted anymore to U.S. assets.''

Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 percent of gross domestic product.

The Treasury is already borrowing to fund Federal Reserve efforts to inject liquidity into credit markets. Last week it announced sales of $200 billion in short-term debt.

``We've all used the phrase `uncharted waters' so often, yet we keep finding new uncharted waters,'' said Louis Crandall, chief economist of Wrightson ICAP, a research firm Jersey City, New Jersey. ``The fact that the Treasury's borrowing operations are now being affected on such an unprecedented scale adds new uncertainties'' to bond markets.

Bad-Debt Purchases

The Treasury's potential use of all $700 billion to purchase impaired assets would raise the country's debt to more than 70 percent of GDP. The last time American taxpayers owed as much was in 1954, when the nation was still paying down costs incurred during World War II.

``It's an alarming level of debt given that we're not fighting something like World War II,'' said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog group.

The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233.

``We're putting a lot of debt on the books and people are going to be spending a lot of money paying that off for a long time,'' Bixby said.

Why is all of this so scary? Here is why:


Above is a chart of the current account. All this means is the following: the US buys more stuff from abroad then we sell abroad. The problem is we don't have the money to pay for all of this. Why? Because the US savings rate is terrible:


Notice how the US is saving less and less. That means we have to borrow money to buy all of this great stuff.


Above is a chart of foreign ownership of US government debt. Notice how it has doubled over the last 8 years. In other words -- we're in debt to foreign central banks up to our eyeballs

So let's review:

-- The US is living beyond it's means; we buy more stuff than we make.

-- As a result, foreigners lend us money. This is the equivalent of vendor financing. Think of it like the global GMAC account.

-- Now the US really needs to increase it's debt level. The problem is we've been doing that during the good times. So now we're near the point where a massive issuance of debt could spike interest rates, sending the rate ever higher on the mammoth amount of debt we already have. Great news, huh?

A Big, Inter-Market Post

First, I live in Houston. Right now my wife and I are using her old house which we are selling because our house is still without electricity. I am using a wireless card, but AT&T has lost a fair number of cell towers in the area so internet access can be spotty.

The news has been coming fast and furious. Usually I focus on a particular market each morning. Unfortunately I have gotten out of that habit this last week as the Wall Street meltdown has progressed. So I'm going to play a bit of catch-up in one big post. This is a great example of what Charles Murphy calls "inter-market analysis". All that means is money flows between markets. As one goes up, one goes down.

Let's start with the SPYs

Last week's action, we wound up bout where we started. However, more to the point, let's see what the chart is telling us:

-- The SMAs are bunched together in a close range

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

The first point somewhat negates the remaining points. When there is a fair amount of distance between all the SMAs and they are all heading lower it's more bearish than the current chart. A group of bunched up SMAs indicates indecision.

As a result of chaos in the markets, gold rose:

Gold is an inflation hedge. As commodities have dropped so has gold. However, last week's uncertainty created a rush back into gold as investors looked for some kind of safety.

Note the following:

-- Prices broke through the downside resistance level that started in mid-July.

-- Prices broke through all the SMAs

-- The 10 and 20 day SMAs are starting to move in a positive direction.

The dollar was rallying. That changed last week. Note the following:

-- The dollar broke though the upward sloping trend line started in mid-July

-- The dollar broke through all the SMAs

-- Right now the 50 day SMA is providing support

The IEF (7-10 year Treasury) has been really interesting. Note the following:

-- At first this ETF rose, largely because of its safe haven status. However,

-- As details of a plan emerged, Treasuries dropped hard, largely out of concern for the plan's effect on the nation's deficit and debt.

Oil has also benefited, as traders have bet that the bail-out package will help to bolster economic growth and increase oil demand. Notice the following:

-- The shorter SMAs are still below the longer SMAs

-- Prices moved through the 10 and 20 day SMA

-- Prices are right at the downward sloping trend line that started in early/mid-July

-- The 10 day SMA is starting to turn positive, but

-- The 20 and 50 day SMA are still clearly negative.

The bottom line is the market situation is extremely fluid right now and could still change on a moments notice.

Monday, September 22, 2008

Bonddad vs. ATT Internet Access

Mr$ Bonddad here. Bonddad and ATT are engaged in an epic battle for internet access, unfortunately, ATT is winning at this time. I have my mace at the ready in case he needs help. Damn the Man!

The 1.8 Trillion Bailout

From CNBC.

Here is a list of all the proposed programs proposed.

—Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.

—Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.

—The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.

—At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.

—Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.

—$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.

—At least $87 billion in repayments to JPMorgan Chase [JPM 47.05 --- UNCH (0) ] for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers [LEH 0.2151 --- UNCH (0) ]. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.

—$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.

—$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.

—$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.

—$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.

—At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.

Pretty really scary.

Paulson Plan Part II

Advanced warning: there will probably be a lot of posts on this topic over the next few days. In addition, it will probably be awhile before I have a clear, comprehensive analysis/explanation. Events are coming fast and furious right now, so getting a complete thought in edge-wise is a bit difficult.

From the WSJ:

Valuing these assets will be one of the trickiest questions. For the plan to succeed, financial institutions must be able to get these assets off their books at a high enough price that their balance sheets aren't further pinched.

Treasury Secretary Henry Paulson pressed for Congress to act on the bailout plan, calling this a "humbling time" for the U.S.

The government is, in some respects, constrained in driving a hard bargain because the whole point of the program is to help banks get back on solid footing -- not to force them into deep write-downs, potentially exacerbating their pain. At the same time, the market turmoil has complicated efforts to determine the "real" value of the assets.

The mechanics of any sale are expected to be worked out between the asset managers and the Treasury. One option is a reverse auction. In that case, the Treasury could determine a type of asset it wants to buy (say, all AAA-rated mortgage-backed securities) and would then buy securities from financial institutions that offer to sell at the lowest price.

Congressional officials suggested the plan would create a rolling borrowing authority, with the $700 billion limit acting as a cap. That gives the bailout a potential value that's bigger than the entire annual Pentagon budget.

The proposal also calls for raising the public debt limit to $11.3 trillion. It would be the second time this year that ceiling has been lifted.

Treasury wants broad discretion in the program. If market conditions worsen, for instance, it wants flexibility to buy more or different assets.

Actually, valuing the assets isn't difficult. Everybody is saying in one way or another the market is valuing these assets improperly. The chaos is lowering the price, the uncertainty is lowering the price, the illiquidity is lowering the price etc.... Well, yes it is. All of those factors can effect the price. All of those factors are suppose to effect the price. Lack of trading in an asset makes it illiquid, and therefore less valuable. When the collateral backing a bond is experiencing increasing foreclosures, defaults and rising delinquencies the value of the bond goes down. Everyone is acting as though factors that correctly determine the value of assets in the market for some reason shouldn't apply to this situation. The bottom line is some of these assets (CDOs, CLOs, CMOSs etc...) are crap. The market should value them as crap. Simple.

It is not the government's responsibility to ensure none of these institutions fails. Some will. That's just part of the game right now. Institutions that own a ton of crap should pay for that decision. It's called responsibility.

I've written an awful lot about the national debt. There are several reasons for this, but the biggest is the debt issue indicates the US not willing to make hard choices. Over the course of the latest expansion, the US government was issuing over $500 billion dollars of net new debt per year since 2003. That indicates no one was saying, "we can't afford this." Instead, everyone was saying, "kick the problem down the road." This plan highlights how incredibly foolhardy that method of dealing with problems is. We're going to raise the debt ceiling again. What the hell -- what's a few more hundreds of billions of dollars.

This situation is approaching the unreal.

Hank Paulson to the US -- Grab Your Ankles

This is one of the worst bills to ever be proposed. Let's look at the primary problem:

If the Bush administration has its way, anyone harmed by the Treasury Department's handling of the $700 billion Wall Street bailout might have no remedy.

Draft legislation proposes sweeping powers for Treasury Secretary Henry Paulson to buy and sell mortgage-related securities however he sees fit. Aside from requiring periodic reports to Congress, the bill provides no oversight of the bailout's management -- and specifically bars any court or agency from reviewing it.

There is no mention of any accountability in this bill. Much like the problem that got us in this mess -- no oversight -- the exact same problem continues throughout the bailout.

Let's look at some other glaring problems:

Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets

Like -- what other kinds of assets? How about a car owned by the president of the IMF? That's an asset, isn't it? This is way too broad an authority to anybody.

Reporting. Within three months of the first asset purchases under the program, and semi-annually thereafter, Treasury will provide the appropriate Congressional committees with regular updates on the program.

So -- twice a year we get to hear how out tax dollars are spent. That will probably mean it will be accompanied by some report. But that's it. That's just not enough.

To qualify for the program, assets must have been originated or issued on or before September 17, 2008. Participating financial institutions must have significant operations in the U.S., unless the Secretary makes a determination, in consultation with the Chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets.

Basically, the Treasury Secretary has the ability to determine anybody is eligible if be sees fit. It's hard to see Bernanke disagreeing on anything Paulson says.

The bottom line is this bill is replete with statements of "The Treasury Secretary's discretion". That's just not going to work when somebody wants $700 billion.

I would encourage you to please read what others have written. Every major econ blog has a post (usually two or more) on this very important bill.