Tuesday, January 22, 2008

A (few) Big Caveats

Comparison To August Is Fair, With A Big Caveat

By | 22 January 2008

The indices have held up very well today, mostly closing the gaping holes left from the close of trading last week. It has been a very impressive bounce, going further than I thought it would, but still about in line with the other times the Fed has surprised the markets with an unscheduled rate cut. The reversal today has brought up some comparisons to the low last August, and there may be some validity to that.

Similarly to then was that while the probability of being at an intermediate-term low seemed high, all the prior precedents we looked at came back down to test (but not exceed) the low of the reversal day. We didn't really see that last August, though. The S&P 500 did suffer a two-day 45 point decline about a week after the low, but it would be something of a stretch to call that a "test". The precedents that were more geared towards crash-type situations, typically did see lower lows in the days and weeks ahead.

There are several positive comparisons to last August's low and reversal, but the big (big!) difference is that we're not in an uptrend and holding above support, like so many times in the past few years, including August. For me, that tips the scales more towards other, similar 'crash-type' scenerios studied, and those were pretty clear in that the initial crash day more often than not led to further selling pressure and new lows, after one or two more days of rallying.

The big test for any nascent recovery is how much buying pressure is seen right after the low. Big up days, with heavily skewed volume into advancing stocks, is a good tipoff that buyers have found enough value and confidence to be aggressive, and that usually continues for several weeks at least. If the market hits short-term overbought readings, and keeps right on rallying (as it did in August), that's another good sign seen at almost every intermediate-term low.

I'll be on the lookout for those types of developments in the days ahead in order to judge whether it's more likely we've seen such a low or just a severely oversold temporary snapback. Unlike the past few years, I'm not ready to bet on the idea of a lasting bottom based solely on the readings we've seen lately. If we continue to rally in the short-term, the next good setup should be on the short side, and I'd be looking for any move towards 1350-1375 as a place where sellers should come out in force.

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Bond Insurers— All Fall Down?
Huge New Problems In The Capital Markets?

From Economist.Com | 22 January 2008

NEW YORK— America’s big bond insurers, which have underwritten some $2.4 trillion of private and public-sector bonds, usually go about their business largely unnoticed. But now they are looking distinctly wobbly they have started to attract attention. If one or more of them were to topple over, there will be a huge knock-on effect on banks and other financial institutions that rely on their guarantees. This in turn will further worsen the credit crunch and cause an even bigger headache for policymakers already grappling with a sharp slowdown in the American economy.

The threat of such a financial domino effect looms large. Moody’s, a credit-rating agency, has signalled that it might downgrade the AAA-ratings of two of the biggest bond insurers, MBIA and Ambac, in the near future. On Friday January 18th, Ambac said that it had dropped a plan to raise $1 billion of new equity capital to preserve its rating— making futher downgrades even likelier. In response, Fitch, another rating firm, cut Ambac's rating.

MBIA, which recently managed to raise $1 billion of new capital on top of another billion that it received from Warburg Pincus, a private-equity firm, will almost certainly need even more money if it is to preserve its AAA-rating. ACA Financial Guaranty Corporation, another insurer, is in even direr straits. In December its single-A credit rating was cut to junk status. The firm begged its trading partners to give it more time to sort out its problems. But by Friday it had still not come up with a rescue plan. The state insurance regulator of Maryland, where ACA is incorporated, has already assumed responsibility for some of its operations.

Bond insurers in effect "lend" their top-notch ratings to lower-quality debt, raising its value in the eyes of investors. Any cut in those ratings may make it impossible for the bond insurers to take on new business and would reduce the value of the securities they have already underwritten. Such cuts are now a distinct possibility because the insurers have underwritten billions of dollars of mortgage-backed securities, including those notorious collateralised-debt obligations (CDOs) that have now gone sour.

On Wednesday Ambac announced a $3.5 billion writedown— as well as the ousting of its chief executive— $1.1 billion of which was related to CDOs. The insurers’ exposure to these and other exotic products is a huge multiple of their flimsy capital bases— and the chances of them having to cover claims has soared as the economy has slowed. Small wonder, then, that their share prices plummeted this week— proving that the market has already decided they no longer deserve such lofty ratings and creating a vicious downwards spiral. Ambac’s falling share price has severely dented it chances of raising fresh capital.

There are already signs that the insurers’ woes are contagious. On Thursday Merrill Lynch wrote down $3.1 billion on debt securities that it had hedged with ACA and other bond insurers. Other banks have also made writedowns to reflect their lack of confidence in ACA’s ability to meet its commitments. The full extent of the "counterparty risk" banks face in dealing with bond insurers is only now becoming apparent. Jamie Dimon, the boss of JP Morgan Chase, has said that the fallout from the bond-insurer crisis could be "pretty terrible" for the debt markets. If a big insurer such as Ambac or MBIA were to take a tumble, that could look like an understatement.

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Stock Markets Plunge Worldwide
ANOTHER Big Vote Of Confidence For the American Way!

By Toby Anderson, AP | 21 January 2008

Stocks fell sharply worldwide Monday following declines on Wall Street last week amid investor pessimism over the U.S. government's stimulus plan to prevent a recession.

U.S. markets were closed for Martin Luther King Jr. Day, but the downbeat mood from last week's market declines there circled through Europe, Asia and the Americas. Britain's benchmark FTSE-100 slumped 5.5 percent to 5,578.20, France's CAC-40 Index tumbled 6.8 percent to 4,744.15, and Germany's blue-chip DAX 30 plunged 7.2 percent to 6,790.19.

In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent to 23,818.86, its biggest percentage drop since the Sept. 11, 2001, terror attacks. Canadian stocks fell as well, with the S&P/TSX composite index on the Toronto Stock Exchange down 4 percent in early afternoon trading. In Brazil, stocks plunged 6.9 percent on the main index of Sao Paulo's Bovespa exchange.

Investors dumped shares because they were skeptical that an economic stimulus plan President Bush announced Friday would shore up the economy that has been battered by problems in its housing and credit markets. The plan, which requires approval by Congress, calls for about $145 billion worth of tax relief to encourage consumer spending.

"We've taken our lead from the Asian markets who have not been impressed by the U.S. There's debate if there's going to be a recession in the U.S. I don't think there's much chance of that though," said Richard Hunter an analyst at Hargreaves Lansdown Stockbrokers Ltd. in London. Concerns about the outlook for the U.S. economy, the major export market for Asian companies, has sent the region's markets sliding in 2008. Just last Wednesday, the Hang Seng index sank 5.4 percent. "It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus (package) is too little, too late and investors feel it won't help the economy recover."

Japan's benchmark Nikkei 225 index slid 3.9 percent to close at 13,325.94 points, its lowest close in more than two years. China's Shanghai Composite index plunged 5.1 percent, partly on worries about mainland Chinese banks' exposure to risky U.S. mortgage investments. "People are certainly nervous about a potential recession in the U.S. spilling over to the rest of the world," said David Cohen, Director of Asian Economic Forecasting at Action Economics in Singapore.

"Maybe there's still some wariness about if politicians are able to come up with a compromise and act sufficiently quickly" on a stimulus package, Cohen said. "I think the impact would be marginal anyway." Investors took cues from the negative reaction to the president's plan on Wall Street on Friday, when the Dow Jones industrial average slid 0.5 percent to 12,099.30, bringing its loss for the year so far to nearly 9 percent.

Traders also have shrugged off assurances from Federal Reserve Chairman Ben Bernanke that the U.S. central bank is ready to act aggressively— which means a likely big interest rate cut later this month— to help the sagging economy. Some analysts predict that Asia won't suffer dramatically from a U.S. recession because increased trade and investment within Asia has made the region less reliant on the United States than in the past. Excluding Japan, 43 percent of Asia's exports go to other nations in the region [[but mostly for products whose end sale is in the U.S.: normxxx]], Lehman Brothers calculates, up from 37 percent in 1995.

But on Monday, uncertainty and pessimism reigned.

In Tokyo trading, exporters got hit hard, partly because of the yen's recent strength against the dollar. Toyota Motor Corp. lost 3.3 percent and Honda Motor Co. sank 3.4 percent. Shares of Bank of China dropped 6.4 percent in Hong Kong after the South China Morning Post newspaper reported that the bank is expected to announce a "significant write-down" in U.S. subprime mortgage securities, citing unidentified sources. In Shanghai, the bank's stock declined 4.1 percent.

India's benchmark Sensex index fell 1,353 points, or 7.4 percent— its second-biggest percentage drop ever— to 17,605.35 points. At one point, it was down nearly 11 percent. The decline hit companies across the board, with power utility Reliance Energy Ltd. falling 16.4 percent. Major software company Tata Consultancy Services Ltd. slid 7.6 percent.

"A gloomy U.S. climate has affected the global markets. Even if those markets recover, it will take sometime for the recovery to reach India because today's fall has been so drastic," said Jayant Pai, of the Mumbai investment company IL&FS Ltd. Still, Pai and others suggested that the declines could lead to a buying opportunity. "The sell-off today takes us close to the bottom," she said.

Since the start of the year, Japan's Nikkei index has declined 13 percent, while Hong Kong's blue-chip index is down more than 14 percent. Even China's Shanghai index— which nearly doubled last year— has fallen 6.6 percent over the same period and nearly 20 percent from its all-time closing high on Oct. 16.

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Cue Bernanke

By Brady Willett | 21 January 2008

With the potentially multi-trillion dollar meltdown in the U.S. housing market well underway and a bear market in equities taking root, President Bush mentioned a $150 billion stimulus package last week. Given the U.S. consumer’s rapidly deteriorating financial position and the non-prospect of wage gains being able to fill the void that falling asset prices threaten to create, it is unlikely that $150 billion is a large enough counter-ripple to seriously combat an economic tsunami.

Needless to say, it is impossible to forget that Mr. Bush passed multiple stimulus packages starting in 2001 based upon the pledge that government deficits now would be forgotten about when growth picked up later. Sorry Mr. Bush: with a U.S. government surplus nowhere to be seen and even more government assistance likely on the way, your perversion of Art Laffer’s curve is quickly coming into view.

The stark reality, for those that care to think about it, is that the U.S. government cannot perpetually help avert painful recessions and economic crises because eventually the government’s financial position will itself become the crisis. And yes, not many U.S. politicians today, save Ron Paul, seem to ‘care’…. To the dismay of deficit hawks, Bush spoke of no plans to pay for the giveaway— and insisted during his address the package should "not include any tax increases".

While another round of fiscal stimulus may or may not be able to slow the housing depression and equities plunge, an even less certain outlook can be gleaned when looking at U.S. monetary policy. Having already tinkered with interest rates, expanded what it deems acceptable discount window collateral, and launched a more secretive 'auction lending' process [[a was to shield the bigger banks from the 'shame' of their 'toxic' investments, which BB is all but promising to make good at near face value (well above their market rates): normxxx]], Bernanke and company will likely continue to toil with novel lending platforms while reducing interest rates. But what the Fed may not be able to do is spark the positive and lasting reaction it so desperately needs from the marketplace. Quite frankly, as U.S. consumers and investors threaten to seriously retrench in tandem for the first time in almost 30-years, the danger is that Fed rate cuts have lost the all important element that is psychological gas.

[ Normxxx Here:  Moreover, the U.S. Fed is now just a tail trying vainly to 'wag the dog' which is composed of the whole international financial system plus all those international investors who so naively and trustingly turned over their hard earned cash for that 'toxic' waste  ]

In short, after Bush’s announcement last week global stock markets plunged to begin this week. Unless there is a material improvement in stocks soon, Bernanke is about to take the stage… [[and, lo, we got our 75 basis point, emergency rate cut— for whatever good it will do.: normxxx]]

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Fullblown Panic

By Jim Kunstler | 21 January 2008

Knees knocked last week from sea to shining sea as the shape-shifting monster of economic reality cut a swathe of destruction through the markets and financial ranks. The exact nature of this giant beast still remained largely concealed in a fog of accounting gambits, policy blusters, and reporting dodges, but a few intrepid scouts who glimpsed the behemoth up close said it looked like Godzilla with Herbert Hoover's face. George W. Bush, tried to appease the beast by offering each American adult the dollar equivalent of half a month's mortgage payment— with the exhortation to drive forthwith to the nearest WalMart and blow it on salad shooters and plasma TV's— but Hooverzilla just laughed at the offering and pounded the equity markets further into the dust of loss, while the "bank-like" guardians of wealth lay in the drainage ditches bleeding from their ears and eyes.

I resort to such admitted extreme hyperbole because it may be the only language that an infotainment-drunk society can still process in the face of an epochal calamity that will transform the lush terms of everyday life as we've known it into something like a bleak surrealist landscape in the manner of Tanguy. That crashing sound out there is the armature of confidence needed to support an economy based on faith that borrowed money will be paid back. It's as simple as that. (Doesn't seem so exciting now, does it?)

The United States is so broke, its people at every level from the Federal Reserve on down don't know whether to shit or go blind. The homeowners cringing in the media rooms of their 5000-square-foot personal family resorts don't know how long they can stay put microwaving pepperoni hot pockets with the default clock ticking. The mortgage "servicers" don't know how they will persuade interested parties like, say, the Illinois State Cafeteria Workers' Pension Fund (holder of X-amount of mortgage-backed securities underwritten by, say, Merrill Lynch or Deutsche Bank) to foreclose on properties scattered everywhere from Key West to Bainbridge Island— or if there is actually any legal mechanism known to man that would make it possible to "work out" the sliced-and-diced collateral. The millions of maxed-out credit card holders and the issuers of their plastic are stuck together paddling a leaky tub in a sea of troubles every bit as wide, deep, and polluted as the one the mortgage junkies and their enablers are sinking in. The developers of malls, office parks, and power centers are weeping into their filing cabinets as the harsh daylight of insolvency stops the orgy of "consumption" and the retail tenants pack up their unsellable goodies for the liquidators, and the rent checks stop arriving in the mail, and the notes on this mall and that mall enter the eerie realm of "non-performance." And, of course, there are the genius wonder boyz and Wall Street playerz whose algorithms and turpitudes underwrote the script of this horror show— for all I know they'll end up laughing into sugary skull drinks on a beach in the Cayman Islands, or doing Chinese fire drills in federal prison (or simply hacked to pieces on the granite countertops of their Tribecca aeries by mobs of angry, repossessed, swindled former American dreamers pouring into Manhattan from the tract house dormitories of New Jersey and Long Island).

There's a lot to be concerned about out there. I don't mean to be too cute about it. But, as the master once said, nothing beats gallows' humor.

A whole closet full of "other shoes" is now waiting to be dropped. Surely the biggest clodhoppers in the closet belong to the hedge funds, representing trillions and trillions of dollar-denominated "positions" which, however hallucinatory, had previously yielded enough real "money" year-by-year to keep all the realtors and Humvee dealers in the Hamptons goose-stepping to Goldman Sachs's drumbeat. These "positions" can't help now from moving into counterparty crisis territory, especially as the bond insurers such as MBIA and Ambac go up in a vapor, and if that happens the damage could be so colossal globally that Stephen Hawking might have to be brought in to run the "black hole," which would be all that remained of the Federal Reserve.

This is going to be a rough week. Fastening your seat belts may not be enough for this ride. Better superglue yourselves to the floorboards and pray for God's mercy.



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