David Walker

David Walker is on CNBC today and he is telling it like it is-the government is broken. Financial commitments are big and getting bigger. In fact, the commitments are massive-unfunded liabilities are 50 trillion at the low side of estimates and growing

More bottom callers

Bill Miller of Legg Mason fame is calling the bottom is in. This is the same fund manager who owns a whack of financials. Probably bot more in the last few days. On the other side-Dupont comes out today and says the economy stinks and will remain that way well into 2009. Dupont is in autos, construction and manufacturing . Freeport McMoran said the same thing yesterday. I knowinvestors have to look across the valley, unfortunately that valley is wide
The bottom will be in when Bill Miller and the rest of the long funds either lose their jobs, or they go bearish on the mkt. On top of that-Bill Miller suggests the US Federal Government should buy stocks to help the US consumer-or help out Wall Street and the Den of Thieves. Having the US Gov't (or PPT) buy equities is a plan fraught with disaster-but they are already doing it under the table. Bill Miller and his frat pack are so disconnected from Main Street that it is laughable.

As a prediction for tomorrows employment report-expectations are for 350-400k-I suspect the report will show that, BUT there will be a revision in January to a much larger job loss. The central planners are out in full force.

Debt Markets remain the key

The debt market remains the key to the markets. The spreads between mortgages, corps, junk and municipals to Treasuries are at extreme wides. RISK is a four letter word. With hedge funds seeing massive redemption requests and mutual funds seeing sales requests, selling pressure remains intense. What do hedge funds own-spread product. The carry trade overheated and is still unwinding. This is the Tech Wreck 2000 Redux. No traditional asset manager wants this rocket science product. They are protecting their job, their assets, and their scarce capital. The unwind will take months if not years.
Banks are not lending as their balance sheets are a disaster. Who knows what they own off balance sheet. There will be short covering rallies as the calendar moves through year end, but the business model for the financials needs to be revised. Gone are the days of the wealthy and not so wealthy paying up for a piece of the action. Slow growth is the norm.

The list of Problems Grows

Where to start. Since my last post, the global economy has tanked. No bounce-straight down. Announced job cuts are growing day by day. Today we have AT&T 12k, Dupont 2.5 K, plus several other smaller ones. It is getting nasty.
Today, the big 3 go back to congress with tin cup in hand. The US gov't is becoming the owner of more companies-can you spell socialism. This is getting ridiculous. The financial sector is getting massive amounts of capital to stay alive. The big 3 are next. Soon the airlines and homebuilders will be lining up for gov't money. The only problem I can see is where is all this money going to come from. I am not even including the unfunded liabilities regarding social security and medicare. The states are now following-California is struggling with a 10+ billion deficit. Of course the typical response from the political circles is borrow more money, and kick the can down the road. How many times do we have to do that to realize the next generation is not going to enjoy the current standard of living. Planet ME and I want it now generation is driving the economy over the cliff.
Financial Reckoning Day is rapidly approaching.
Despite this, US Treasuries are yielding absurd levels on the pretense of the gov't buying FNM and FRE bonds, plus US Treasuries. This known as monetizing the debt. This could turn out like Iceland-the bonds stay the same price, but the currency becomes virtually worthless. In fact all fiat currencies are in a sad state of affairs.

Solving the US crisis

In the immortal words of Walter Ruether-'That's great Henry (Ford), now who are you going to sell your cars to'

Executives better realign their moral compasses and realize that shipping jobs off shore to low wage countries is killing their consumer base. Low wage countries buy basic necessities, not luxury items. In addition, CEO compensation of 500X the average employee pay is ridiculous, as it was at 300X and 400X. Maybe the top brass should take a pay cut and come down from their exalted ivory tower.

Going forward, I suspect the democrats to implement policies that are going to be hard on the wealthy. Whether or not some 'income redistribution' takes place via gov't actions remains to be seen. But given the fat cat pay packages on Wall Street being slashed, expect to see all sorts of layoffs in the staf of these people. No more trickle down economics.

Hedge Fund Implosion

Hedge funds remain in liquidation mode: Important dates going forward

Nov. 15: Last day to announce the intention to redeem for Nov. 30.

Nov. 30: Yr end for Goldman and Morgan Stanley, plus hedge fund liquidation

Dec. 31: YR end-tax loss selling, capital gain crystalization.

US Unemployment

In true US Gov't fashion, the employment report shows a drop of 240K for October. But more important, a massive downward revision to August and Septemeber. Gee, was there an election this yr-u betcha. Workforce increased 800k, and of the 800k-600k were unemployed. Finally the US is getting back to reality. Expect large revisions to q3 GDP and for the recession to be dated for early 2008. Once again the rear view mirror is crystal clear with the gov't.

Going forward-expect to see an unwind of all the Republican efforts to make the economy better than what it was before the election. That ploy failed miserably-maybe the gov't will learn that doctoring/shading numbers is a failed strategy and will only affect short term decisions. Unemployment rate up to 6.5%-proabably on its way to 8-8.5%. One bright spot-avg hourly earnings up slightly.

FACT: The largest economy is in a tailspin. NOW that the truth is out and the disease has been identified, maybe the proper treatment can be administered.

As an aside-part of the large revisions is due to reduced government employment. Deficits do matter Mr. Cheney.

GE and Buy Backs

Last week GE released an earnings update-they would miss the ANALYSTS expectations. They maintained their dividend, but they cut their share buyback program. How much have they bought back over the last 5 yrs and what was the average price. According to their annual report, GE purchased 13.9 bln of stock (357mm shares=avg. cost of 38.9) in 2007. In 2006, GE purchased $7.8 bln of stock (229 mm shares=avg. cost of 34.06). Today they issue 12 bln of common stock at $22.50. WHAT is WRONG with this picture. Very simply management is inept-buying high and selling low. Instead of paying down debt and giving shareholders a bigger dividend, GE wasted its capital buying back shares that were issued under employee/executive pay programs. The more complicated the books, the more likely their is some dirty laundry in the mix. On top of that, Warren Buffett continues to build his cash spinning empire by buying a special class of preferred shares (10% dividend yield) plus warrants thrown into buy the common shares. Sounds to me like another round of expensive financing ala Goldman Sachs.
On a positive note, LIBOR dropped to 4% today from 6%, so all those short term LIBOR based loans are a little less expensive today. Let's see how long this lasts.

Solving the problem

Either the world deflates as in 1929, or the world infltes like 1923 Germany. I suspect 1923 will be the choice .

The Day After

Mkts cratered yesterday as the spineless and undercapitalized/over leveraged mkt participants were all leaning on the bailout going through. Call it a rescue package or whatever, but it does not help the average US citizen. In fact, the homeowner up to his eyeballs in debt is in the drivers seat. They can just stop paying their mortgage and and then wait for the bank to try and foreclose-good luck as the bank probably has no paperwork regarding the titile to the property. The mortgage has been packaged and re packaged and probably repackaged again. It will take months if not years to put all the pieces back together. Wait unitl the majority of subprime borrowers and then Alt-A borrowers and then credit card borrowers and then Auto borrowers go through the same process and then realize that if they stop paying, the banks/financial institutions have recourse only to the pledged asset. Given that the pledged asset is upside down, highly unlikely the banks are in a rush to take the asset back.

Fireworks

Listening to the Financial News on the MSM, one would think the world is coming to an end. Maybe the financial world, but not the real world. In a capitalist society, bankruptcy is necessary to reign in excessive risks. Thw wise and strong will survive, while the ignorant and weak wither. For the last 8 yrs, risk control has taken a back seat to greed. Now the opposite is happening as risk control has shifted to the other side and fear reigns supreme. How long this lasts is anybody's guess. The 'Free' Market will sort it out eventually, but the markets have been anyhting but free in the last 12 months. Heavy PPT intervention, followed by excessive rule changing has completely screwed the system up. Let the Mkts work-set the interest rate, provide liquidity and then help the players build a solid base to continue business. The fact is that when the retail investor has been duped into buying stocks that are supported by a 25-1 leverage ratio-bad things happen. There are some great investments out their right now, but with capital short and tied up in illiquid and junky assets, it can not migrate to the better investments. The Paulsen plan would help free up some of that capital, but it is being bogged down in Congress as the cost of the plan is being difficult to sell. The US gov't has abandoned the middle class in the last 8 yrs while pandering to the rich. The gall to ask for taxpayer funds to support the Fat Cats is ridiculous. Let the mkt work it out-sure there will be bankruptcies, but that is life. The sun will rise in the East and Set in the West-life will go on, but it will not be as nice as it was when money and credit were cheap and esy to get.

Fed Losing Influence

One thing to note that is being downplayed by the MSM is that the Treasury had to go to the market for more money to initiate some of its programs. The US FED is raising NEW MONEY to pay for these bailouts. In the past the FED was able to use its existing balance sheet to bailout financial institutions or influence the mkts. More fund raising required.

An early morning Saturday note is the Pres. Bush has just requested Congress to raise the National Debt limit to 11.3 trillion from 10.6 trillion. This is after Paulsen and Bernanke had the debt limit raised form 9.8 trillion to 10.6 trillion for their rescue plan for Frediie and Fannie (also AIG). The ink is not even dry on the proposals and the price tag is rising (just like oilsands projects). In the last 2 months, the National debt limit has been raised from 9.8 T to 11.3 T or 15% (1.5 T total). If it was not so sad, it would be funny. To put it into context, each and every US citizen has just gone $5,000 deeper into debt.

Saturday Notes

Capital markets rally huge on Friday as the World Gov'ts intervene in the mkts. Banning short selling in the finacials resulted in a massive short squeeze. Other events-guaranteeing MMKT funds, creating a RTC and/or RFC type gov't agency to take the bad debts off the banks balance sheet. What has become clear in the last month is that US Financial Institutions are a protected species. They are also an endangered species are on the protected list-NO HUNTING US BANKS.

Interesting timeline. IN 2004 the SEC granted 5 US Broker Dealers with the ability to leverage themselves up from 10-12X to 30-40 X. Who were they-Bear Stearns, Lehman, Merrill Lynch, Morgan Stanley, and Goldman.
3 of the 5 have blown up or been married off. If that was not bad enough, the top talent from these firms went off to set up hedge funds which in turn were levered 20 to 40X. So the capital pyramind not only get bigger, but it almost got more unstable. NOTICE the SEC created this mess and the greed on Wall Street amplified the mess. Was this a plan by the NEOCONS to finance the US economy. This entire leveraging experience is going to unwind. The process is 1/3 to 1/2 way through.

The FEDS are taking the inflation way out. Instead of letting asset prices fall to a clearing level-DEFLATION, they are going to maintain asset prices by deflating the value of the USD. All of these plans by the government are going to require new debt to be issued and new money to be created to pay for this. The US TAXPAYER is going to get creamed in the next decade. The US is going to muddle along for years as the excesses are unwound. The fraud is coming out and it is just like ENRON and Worldcom-only larger. Interest rates are going a lot higher as they full faith of the US GOV'T has been compromised. Foreign investors are skeptical of the US Gov't actions. The theory it will never happen due to mutual economic destruction (similiar to the Nuclear arms race) is now toast. The Chinese, Middle East, and Europeans are going to build their domestic economies up and stop relying on the US for there products. The Chinese have 1.2 Trillion of reserves and part of that is going to be used to maintain a positive domestic economy.

Hang on-my fearless forecast: Interest rates, Precious Metals up, oil prices flat at 80-120, copper up (due to the electrification of global economies), base metals down to flat, food crops up as the third world wants to eat, stocks down as the higher interest rates will decrease the multiple investors are willing to pay. In addition as the demographics swing to a retiring population, the asset mix is going to favor fixed income/dividend products. Corporate bonds are trading at wide spreads as default rates rise. If 5 yr corporate bonds are yield 6%+, why buy equities?

Is anything safe?

The US government is confiscating companies left and right. What is next after Fannie and Freddie go down. AIG is bailed out, Lehman obliterated, and Merrill forced to marry Bank of America. When the smoke clears in a year or two, the strong will be stronger and the weak will be dead.

GOLD vs OIL

Here is the quandry, which asset goes up the most in a reflationary cycle. I thought it would be oil, but have been switching back to gold as oil is more economically sensitive. Storing gold is infinitely cheaper than storing oil.

The ratio has been swinging in gold's favor the last week so it bears watching.

THE United Socialist States of America

The US Government is out of control. Banning Short Sales of 799 Financials for 10 days (over qtr end funny enough) is another act of desparation. The unwinding of trillions of OTC CDS contracts is causing massive balance sheet distortions. Insurance companies thought they had is not necessarily there-hence forcing asset right downs. What a CON JOB.

The reflation trade is taking place. Printing money to buy garbage assets-bailing out banks and bank execs. With no shorting of financials, it gives the remaining executives a chance to unload their shares before they get the Bear Stearns and Lehman treatment. Gold is going to soar after the Exchange Stabilization Fund has shot its last bullet.

The US Government finally acknowledged the existance of the ESF as it will lend 50 bln to insure money market funds. The LIBOR rate has yet to drop below 3%. That is key as it should trade 20-30 bps over funds. It has been trading around 2.80 over the last 2 weeks, so things are still uncertain in financial circles.

China cuts rates

In what maybe the start of looser financing in the overheated kingdom, the BOC dropped interest rate 27 bps last night to 7.20%. Also they lowered the reserve requirements by 1% for the smaller banks-larger banks get no break.
Fed meeting tomorrow-rumors of a 25-50 bp rate cut-I think unlikely, but I suspect DOVISH talk and another liquidity injection.

Is there enough blood yet?

The bankruptcy of Lehman, followed by Merrill being acquired by Bank of America, and AIG desparately seeking capital. All equities are for sale as the realization that they actually do go to zero is resulting in a repricing of risk. Good, BAd and purely awful stocks are for sale-no buyers of substance. Expect more selling tomorrow as the mutual fund redemptions get exercised.
Some of the losses are truly amazing as the lack of capital across the spectrum is hampering any buying. The Hedge Funds-especially the undercapitalized ones are getting squeezed.

SEC is making comments about short selling -tightening the standards for short selling-trying to curb the abuse. Nothing like trying to influence the markets after the cow has left the barn. Unless there are serious consequences for 'illegal' shorts, they will continue.

Gold up, but not by much-only 2%. Oil crushed as the reality of a prolonged economic slump takes hold. Waiting for a supply response to the demand drop. Already hearing chatter about some oil sand projects being shelved. Treasury bonds are getting bid to the moon as the flight to safety continues. USDX is up as the USD benefits from the return of capital to the US-all the emerging mkts are under pressure as deleveraging continues. Not sure about property rights in emerging markets.

Stay tuned, the beginning of the end is near as the panic level is rising. Maintain capital.

Killing the Golden Goose

In what amounts to a huge amount of irony, the hedge fund mavericks have killed their golden goose. By attacking the Wall Street IB and the weaker financial institutions (small regional banks), they have effectively shut off the flow of blood to their brains-ie cheap financing. These funds have put short term gains ahead of long term plans. Now they are being forced to reduce their positions, take losses and hence be below the high water mark and hence no bonus payments. What a bunch of 2 qtr mgrs. The hedge fund community has cut off their noses to spite their face. Good bye multi million $ penthouses, hello to 2 bedroom apartments in Brooklyn. Wall Street is going to feel the pain for yrs to come.

Dr. Copper

A bottom -temporary or not-may be forming in the commodity sector. Copper is holding the 3$ level and oil is hovering around 100. Gasoline and Heating Oil are rallying sharply. This engineered selloff by the authorities to blast the overleveraged hedge funds out of the market has had the desired result of reducing the froth in the hard asset camp. Now the return of demand will provide a fundamental floor for some of these commodites. The big scare of slowing Chindian economies is not really happening-the law of large numbers is taking hold. .

Dr. Copper is indicating that global growth is not going to go negative, but it will slow down to more sustainable levels. Brazil is raising rates, while New Zealand and Australia are chopping rates. The Baltic Freight Index has dropped as the supply of ships is overwhelming the amount of goods to be transported. US Retail sales are weak-no surprise since no one can get financing. US is in recession and the slow growth and credit contraction period has a long way to go.

As a side note-whenever the mains stream media (MSM) run articles making predictions about future price levels from secand and third tier fund managers-perk up your early warning indicators. Who cares what a 50-100m $ fund thinks-there are 3000 of them around. Watch the charts and look for divergences-that will tell the true trend.

Brazil's Central Bank

What are they thinking raising rates 75 bps to 13.75 %. They will be cutting rates to 11% within 12 months.

As for China, the Hang Seng continues to be pressured-it needs help also. Global equity markets are deleveraging and investors are realizing that stocks sometimes go to ZERO. Risk is being repriced. Leverage is disappearing. The Central Banks are going to respond, maybe next week. Shock factor will be required to have maximum impact. Probably coordinated action.
China's central bank will soon drop reserve requirements from 17.5%-probably all the way to 12.5% in the next 12-24 months.

The Central banks have been resisting the Nuclear Option of dropping interest rates to re inflate the system since that would hurt their Masters the most-the Banks. The Banks in a hyper inflationary environment get paid back in deflated $. Debt holders get to pay back with deflated $.

Baltic Freight Index

Many rock star hedge fund mgrs are pointing to the plunge inthe Baltic Freight index as a sign of slowing economic growth. That is only partly true. The index is not a measure of tonnage moved, it is a index of prices paid to move that tonnage. There is going to be an oversupply of ships on the high seas as the total tonnage of ships available has outgrown the the total tonnage of goods to be moved. Stay tuned as shipping rates will continue to plunge as the number of new builds oversupply the mkt. The classic value trap is being built in the shipping stocks.

There is no doubt he rapid growth rates in CHINDIA are moderating, but moving from 11 % to 8% is partly due to unsustainable growth rates and partly due to the law of large numbers. Growing from 100 to 110 is 10% growth, but gowing from 110 to 120 is 9%. Growing from 120 to 130 is 8.3%. Of course the growth seekers view this as negative, but the value managers see this as a positive.

Copper

Despite the drop in commodites across the board, copper is hanging rather well. WHY? Because the world is going to electrify and that requires massive amounts of copper. Copper is becoming the new oil.

Are we going to see the BIG ONE

Lehman is on the ropes. WaMu is on the ropes. Will they get bailed out, or will the gov't see how their damage control plans works?.

Lehman is a prime broker and it is no doubt reducing financing to the hedge fund crowd. As is every other prime broker reducing financing to the hedge fund crowd. The bankers are saving their own skin once again, not helping their clients. The strong banks are sitting back and waiting for the plunge-hoarding cash waiting for even better prices. Why buy LEH at 10-13, when u can buy it for 2?

Asset sales are global, the pain is starting to bite which means the downtrend is probably half over. I expect a policy shift at the next FED meeting to move some of this hoarded cash off the balance sheet. The PPT is busy trying to help the US consumer out-dumping crude contracts as well as a host of grain contracts. No problem here with that process, but how long will it go for. OPEC has already announced a supply response. THe grain crops are going to be massive in Australia this year, but if prices drop too far, the North American crops will be reduced next yr. The government should get out of the price adjusting game and let free market mechanisms work.

Good Bye Hedge Funds

Hedge Funds are going the way of the Dodo bird. Not all hedge funds or alternative investment vehicles, but the days of 27yr old math whizzes raising 500mm and then levering 20X are over. The 2 plus 20 payout is going to be an endangered species. When Blackstone went public last yr, no one was contemplating the peak of hedge fund importance. Now they are in survival mode as prime brokers pull back their lending lines and the system goes through a deleveraging. Everything is for sale and if it has a bid, then short it. Money is being created hand over fist, but credit is contracting at a much faster pace. The power of deflation in credit vs inflation in cash.
The bailout of Fannie and Freddie delay the collapse of some financial institutions, but the US consumer is still retrenching after yrs of sub par wage increases.
The concept of the global economy picking up the slack of a weak US and European economy have been dealt a cold dose of reality. Time will tell if the Chinese shut down for the Olympics and Para Olympics has longer running ramifications. The Asian growth stroy has been put to rest for the time being.
The USD is rallying partly due to a re patriation of dollars from foreign markets which have been crushed this year. China down 50% for example. Qtr end in 3 weeks is also resulting in a deleveraging of positions across the financial spectrum. In addition, the problems of Spain and Italy are putting pressure on the Euro. The Euro is a currency with no country, but speculation has surfaced regarding the Club Med Countries running into trouble fiscally and thus put pressure to reduce the value of the Euro.

Buyers are on strike in the equity markets. As equity holders recently found out-sometimes equities go to zero (FNM, FRE) With corporate debt trading close to 10%, equities are no bargain. Against treasuries, stocks look reasonable, but comparing a AAA to a BBB corp credit is not a fair comparison.

Fannie and Freddie BAILOUT

It has finally happened. The gov't of the USA has nationalized FNM and FRE. They had to do it. Quote of the day goes to Treasury Secretary Hank Paulson (and I paraphrase): 'I did not want to do this, but this action is sooo much better than the next best alternative.'

Winners and losers in the aftemath; common shareholders are losers-massive dilution and last in line for any profits-likely decades into the future if at all. Preferred shareholders are losers-dividend toasted and again they stand below the equity holders-ie the gov't. Subordinated debt holders and above-Winners. The new financing is below existing debt holders. Most vocal action plan man Bill Gross wins has 61% of his portfolio is in agency paper-Nice Gamble Mr. Card Counter. Now lets see what you do-does PIMCO pony up more capital to go in with the Treasury's capital infusion.

Major Losers-US Taxpayers. Once again the Wall Cheaters take care of their own. A slap on the wrist for the total disregard of risk management. The taxpayer is getting the bill while Wall Cheaters take their multi million/billion payouts to the bank. No downside risk results in ridiculous risk taking. The system is broke and needs to change to get on better footing.

Will this fix the system. NO. US consumers are bloated with debt and that is going to require time and real wage growth to correct. As William Ackerman states: 'This is a Band Aid." The banks and financial institutions are getting some breathing space to recapitalize and again that will take time. Until the banks rebuild their balance sheets, lending will be tight.

Uptick rule

The bottom of the mkt will occur when the SEC reinstitutes the up tick rule. WHY? Because the need for levered money to relentlessly pound on securities will drive the gov't to stop the process and it is good for the country. As John McCain says-change is coming and the death of hedge funds is soon to be upon us. The Gov't has already stopped large funds from taking positions in commodities since that exposed the amount of capital that is floating around the system. Too much money/credit has been created in the last 10 yrs-that credit is shrinking in the US and is not being created in other global mkts.

Banks saving themselves

Have not posted for a while, but now that I am back from summer vacation only to watch the markets melt down , my brain is on full crash alert. The mkt lacks leadership in both stocks and institutions. The banks are trying to save themselves from insolvency. Global financial institutions are sticking it to their clients as they refuse to lend capital. If you want money-too bad. They are going to save themselves first and then maybe help their clients. This is extremely bad for the economy and the long term inflation implications. The Greenspan doctrine was to lend money to everyone and create competition -thus keeping a cap on prices. If competition declines-watch prices rise or at a minimum not cecline. Look at the auto and airline industry-price cuts after price cuts as an industry inmassive oversupply tries to survive.
Investors have their hand on their wallets as there appears to be little appetitie for additonal risk taking. Bill Gross's commentary basically calling for a bailout of the financial system indicates 'things' are bad. Hedge funds, banks, and brokers are deleveraging in a massive way-everything is for sale. Good, bad and ugly assets are for sale-no bid is a bad bid. P/E multiples are inaccurate as are EV/EBITDA, P/BV and any metric. This survival of the fittest.
This mornings employment report drive home the point that US workers are losing jobs-more to come as the full effect of auto shutdowns and financial lay offs filter through the system.

Capital preservation followed by dividend/interest income are the two priorities. Capital gains are not in the cards for 95% of financial assets.
As a side note-the credit mkt spreads are wide and remaining wide-indicating capital is scarce. We have the FED plowing money into the banks, and the banks hoarding it because their balance sheets are a disaster.

Naked Short Selling

The campaign is gathering steam. More and more influential fund/money managers are organizing to stem the abuse from naked short selling. More company execs are starting to increase campaigns regarding the abuse of Wall St. and Bay St. ( and Howe St. in Vancouver).
Now the FBI needs to get involved and step over the SEC which is a toothless liger in the back pockets of the Big Money of Hedge Funds.

Speculators in the News Again

The CFTC is being pressured by the US Congress to stop the evil Speculators. The solution to the problem is the same solution that would have defused the Housing Bubble. RAISE margin requirements. If the FED or Treasury or whoever oversees US Financial institutions should have increased down payment requirements instead of letting the no doc, 0% down mortgages. Now the CFTC should jack up margin requirements on all commodity contracts. Allowing too much credit in any mkt distorts the fundamentals of the mkt. JACK up margin and reserve requirements. Funny enough, aren' t the Chinese doing this.

The Crux of the Issue

Doug Daschle (via CNBS) had a very interesting comment regarding the inflation/deflation debate and the role of specualtors.
In essence he says that from 2002 to 2007, everybody loved specualtion because the specualtors were buying stuff that people were generally long-houses, equities, bonds. Now the 'speculators' /investors are buying stuff that people are generally short-oil and food. Hence we now have a situation where US consumers are long stuff that is going down -due to an oversupply of houses, stocks and bonds (funny how that is a the laws of supply always rule in the long term). To make things worse, US consumers are short the stuff going up-food and oil. Talk about a margin squeeze.
The only way out of this mess is for the US consumer to cut back on their consumption and to earn more money. That will be tough given global wage arbitrage. Time will be required and it could be a long time.

Drinking their own Kool Aid.

Quick comment how the insider buying in the Financials and the big stock buybacks in Financials over the last few years has blown up large. Not only are those purchases massively underwater, but these very same firms are now issuing stock (in large amounts) to rebuild their capital bases. Most Wall Street execs and producers are paid in stock and options at bonus time. When the price is rising substantially, everybody wins-except the shareholder. Of course when the stock is tanking, nobody wins. The Wall Street brokerages are on life suppport-soon to be joined by 50% of the newly created hedge funds. As history will show-when Sam Zell sold his real estate empire-the top was in for real estate. When Blackstone went public, the top was in for Private equity and Hedge Funds. The Top is in for now-just like the top for brokerages was in shortly after Goldman Sachs went public in mid 1999.

The real Oil Speculators.

Over the last 3 weeks, I have been racking my head over who is buying oil at 125+. Surely the Chinese and Americans do not want it this high-I doubt they have been chasing especially given the demand destruction over the last month or two. How about the Saudis? Not likely. Maybe the Russians? More possible but also unlikely as they are happy cranking out 100$ bills for every barrel. Then maybe this is a forced buyin-ie a massive margin call on some of the 'shadow financial' system. For years there has been plenty of commodity selling in the paper form-whether oil, nat gas, gold, wheat, copper-and delivery was always put off as most contracts settled for cash. But ever since the oil price went to contango, the game has changed. My theory is that there is a massive short in oil among the US Brokerages as they played the same game with oil as they played with sub prime mtgs. Keep piling on the positions until it breaks. Well they have broken. Selliong oil at 60, 70, 80, 100, 110, 120 etc has taken its toll on the capital of these firms. With these firms busy diluting themselves (ala Nortel) by raising capital at decade lows, all capital requiring positions are going to be unwound. If the CFTC wanted to limit the speculation in the mkt-raise margin requirements. Unfortunately that is probably the last thing they want to do since the buyers are cash buyers while the sellers are on margin. Raising margin requirement would involve the brokers and financial intermediaries needing to raise even more capital to cover their margin calls.

SP 500-1340 remains the key

Will the SP 500 hold 1340. Technicals on bonds and stocks are not positive. The retail money is not entering the mkt-why? because they have none. They are busy paying off mortgages, car leases, and credit cards. The last thing they are doing right now is saving for retirement. On top of that, levered money is deleveraging-more pain to come. Mkt not yet at the slam bids everywhere stage, but there is plenty of stock above the mkt.

Here comes a policy shift

G* meeting today and tomorrow. US May CPI .6% , core at .2%. Yoy 4.2 % and 2.3% respectively.
Theory-Interest rates are going up, but money supply is also going to increase and Fed Liquidity is about to kick into high gear.
If interest rates go up, US financial institutions will be under margin pressure. The Yield curve has flattened significantly ( Two 3+ sigma events took place in the last 2 weeks) Hedge funds and levered money is in the cross hairs of the Central Banks. Central Planners are trying to regain control of the elements. The battle rages.
This theory is a twist on the Greenspan doctrine-print money at low interest rates and allow anybody to build anything and that creates intense competition-witness the automakers and airlines.

Energy prices are too high for the avg US citizen-demand has dropped. Question is will they fall or just stop going up.

Unintended Consequences

US interest rates are going UP. Why? Because nobody with money-ie Asia and the Middle East want to invest at 3% with a currency dropping like a stone. Bernanke will raise rates because he has to, not because he wants to. Foreigners are swimming in USD and they do not need anymore, in fact they are spending them on infrastructure projects.
China has raised reserve requirements again. Going up to 15 on June 15 and then 15.5 % on June 15. Hong Kong dropped 4.4 % and the Shanghai dropped 7.7%. China is going to slow in q2 and q3 as the heavy industries are geared down to clean up the air before the Olympics. I suspect late q3 and early q4 will see a significant rebound in activity.

LIBOR: Revised parameters for setting the rate. Not good for financials. Already today the rate moved from 2.68 to 2.77. Higher financing costs for financials equals lower profits-especially if you are levered 16-30X.
Hedge funds could become a dying breed-notice the drops in the CME and NYX. Could trading volumes be plunging?

More tough talk from Bernanke

Once again the US Fed Head is talking tough on interest rates. The 'massaging' of perceptions continues, but as Peter Schiff points out-'what is he going to do-raise interest rates 100 bps-big deal'. In addition, Treasury Sec. Paulson is talking once again about a 'strong dollar' and would not rule out intervention. No doubt they are going to do something about the relentless weakening of the USD. But how far they will go is anybodies guess, but the tough talk is unwinding some of the excess speculation. 2 yr bonds are closing in on 3%-currently 2.87%, while 10 yrs are at 4.05. The flatter yield curve and rising interest rates are not going to help the US Financials repair their balance sheets.
Lehman Brothers raises 6 bln in capital (4 bln common equity, 2 bln preferred at 8.75%) and participation is mainly US based-very little foreign buying. Maybe the foreigners (SWFs) have told the US that their money is no good anymore until they do something to stop the decline.

What does that mean-SLOW Growth if growth at all. The FED is once again following the mkt and not leading. ECB President Trichet called out Bernanke. Inflation is a problem and rates need to go up. Until rates rise above the money supply growth figures-talk is cheap.
Question remains-how vigilante, how long before initial move, how will higher rates affect the financials and real economy.

Time for Sacrifice

Here we are at the crossraods of history. The US needs to make a stand, or its role as the only remaining super power is about to be diminished. Over the last 20 yrs, the US has squandered its lead in technology, commerce, free speech, civil rights, and a host o other issues as the mistakes of history get repeated-AGAIN. The more things change, the more they stay the same as human nature is a difficult animal to corral.
The US is in a war-whether it is a War on Terror, or a War of Christian beliefs vs Islam, or a War of Imperical Power vs Colonial autonomy-it makes no difference. It is a war. In War, sacrifices need to be made. To date, 4000 US service men and women have sacrificed their lives. In addition, the secret, private war of third party combatants has also claimed numerous lives. What are the sacrifices at home. Besides the skyrocketing price of oil and essentials, there is no sacrifice. No taxes have been raised to pay for this war. No programs have been implemented to increase the war effort to add supplies and soldiers to the program. There is a clear lack of direction at the top. It is like a blind fighter swinging wildly at his opponent with no help from his trainers regarding direction. Something needs to be done to change this path of ruin.
Some sort of National Plan needs to be implemented. The War Hawks are running roughshod once again through the halls of the US Gov't. Remember Manifest Destiny. It is back. How many pompous US Congressmen and wamen have been hijacked by the indusrtial military complex. It is becoming ludicrous. In the past the US just printed more of the reserve currency. But that game is up. The Rest of the World (ROW) is up to their eyeballs in US$. They have enough. Now they want to spend them on either their own citizens or to consolidate their power. Strategic Resources are wanted. Food, Water, energy, shelter and Land are in demand. Things are going to get tense and hostile in the next decade. Is the US going to seize the day and return to glory, or will it join the Roman empire as a neat bit of history that my great grand children will read about.

More to come in later letters.

Plenty of action y'day

In what could be a turning point for the mkts in general y'day, stocks, and commodities rallied hard while bonds sold off. Maybe the inflation trade is starting to gain traction. In the early stages of an inflation, everything goes up-including interest rates. However, the trick remains to contain inflation before it gets out of control-difficult to do.

Some notes- the GLD and SLV have been rumoured to have loaned out their holdings. As qtr end approaches, the loans will have to be called back as the accountants step in. Could be interesting. Silver starting to outperform gold-maybe a warning sign of a top, or a sign of the long talked about short squeeze. Gold equities starting to outperform the physical, but it is still a way from normal levels.

Oil tacked on 5+ $ y'day to end close to 128. I still think we will see 110-115 this summer (not alone as several oil bulls have pulled back their horns-namely Frank Holmes and the Aden sisters). Oil is statistically overbought, but even the few brave souls looking to short are quick to cover-mainly because they have been burned since the 105 break.

If the inflation trade is going on-stocks are in and in particular real asset stocks. Still avoid financials-more writedowns dead ahead. MBIA and Ambac got downgraded y'day-the spiral continues.

China Slow Down

Expect China to slow down its growth trajectory as it heads in to the Olympics? Counterintuitive perhaps, but all the supplies China needs to build the facilties for the games are already in the country. Maybe food and fuel will remain unscathed, but a drop in other materials is likely as China shuts down some of their toxic polluters to 'clean up the air' for the games. Coal is obviously a suspected loser as is iron ore.
However, after the games, expect a renewed surge as the need for China to rebuild the Sichuan area after the earthquake and house the migration of 250mm rural citizens into the cities over the next decade continues.

June 30

June 30 is qtr end for the fast money crowd. There is 3 trillion sitting in mmkt funds-part of that is retail and part is fast money hiding. Watch for the money to gravitate towards the qtrs winners. GOOG, AAPL, RIMM could trade up on money flow. I suspect the sp500 trades higher into q2 end, but fails to break to new intermediate highs. We will see.

Also I suspect the mutual fund side will continue to see redemptions as the lifestyle of many consumers is going to see savings eaten into.

Watch the Bond Mkt

Long term yields are starting to move higher. Technicals have confirmed a downtrend in Price, possibly a 75 to 100 bp back up in long term yields. Either the mkt is sniffing inflation ( possibly) and/or foregn buyers of US debt paper are not as interested. This weeks bond auctions were not well received.
The stock/bond model still suggests stocks should outperform bonds. Not entirely true as the writedowns in the financial sector are not included in estimated SP500 earnings. Bonds are expensive given the inflation picture, stocks are still expensive, but just not as expensive.

Oil/Gold and other commodities.

The commodities complex is enduring a bout of profit taking. There is no doubt that 4$ gas and 130 oil is starting to destroy demand. In any bull market, it is not the peaks that are important, it is the valleys-how much of a pullback can we expect. Taking the standard 20% from 135 gives us a 108 target.
As for gold, 20% of 1030 is approx. 830. The mkt needs to wash out the johnny come lately, weak handed momentum players who chase performance. This will happen and I look for the mkt to consolidate through the summer, before the late q3, early q4 move higher. Risk is being pared back, and even more important is credit/leverage is being reduced.

Another one bites the dust

Fed Governor Mishkin-a close confidant of Bernanke- has resigned. That leaves only 4 Fed Governors since Senator Dodd is in stall tactic mode to get Democratic supporters nominated for the FED. This could become a problem, especially if the need arises for 'emergency Fed action'. If Bernanke is as good as the financial media say he is, then why is his closest confidante leaving? Way to help out your friend. It smels like Bernanke has sold his soul to the bankers-just like Greenspan-and is about to emabark on another bubble blowing mission.

What is happening?

The world is in flux once again. The US inflation trade is running out of steam as the media is in an all out blitz to heap praise onto Bernanke for his bold action in responding to the subprime problem. Financial executives are all over the media talking about the end of the sub prime credit issue. On that point, I could agree that subprime has largely been accounted for, but the full effect of the subprime issue has yet to pass through the economy. In addition, the next leg in the credit down cycle is about to hit-starting in Oct.-that being Alt-A ARMS. This section of the mtg mkt is just as big and expectations are not built in for the train coming down the track.

Oil Supply Peak

Taking the supply peak further, what does that mean. Recently their has been talk of oil pushing the 3rd standard deviation from its 200 dma and hence on a statisitical basis, it should correct to at least 1 std dev. In addition, the oil/gold ratio was pushing multi year lows. However, as with the great sub prime model, everything works fine until one of the variables becomes in accurate. The concept of supply peaking is going to result in all sorts of model distortions.

Oil Prices-why the 20$ move

As always the news is now out why the back dated oil contracts have outperformed the near contracts. The IEA has drastically cut its supply forecast for oil. Instead of forecasting 116mm barrels a day in 2030 of supply, it is now only forecasting 100mm. Matt Simmons seems to be vindicated. What does that mean for the various equities. Oil service stocks strangely ehough may suffer as the current producers who have in the past rushed to produce as much as possible, may now actually curtail spending as the resources they seek are finite. Oil is not an ipod. Hence, rationing supply in a tight mkt is what a long term mgr may consider. Alternative energy stocks should benefit as would coal. If the amount of energy to be supplied by oil declines, the slack will be taken up by other forms of energy-solar, wind, nuclear, geo thermal, etc.

Recent oil spike has claimed more victims-namely the airlines and truckers. Airlines are based on a terrible model-they will merge to make a giant money losing business as opposed to several money loing businesses.

Oil Prices

Nothing but commentary on 134$ oil this morning. All the signs of a short term top in place. Main evidence is an underperformance of the oil/energy shares vs the underlying commodity. I suspect the oil chart is going to resemble the gold chart from March 20 to May 8-a quick 15-20% drop. The only evidence of a top not being in is that everybody is calling a top. Talk of oil bubbles and commodity bubbles usually do not occur at turning points. This could be like the Nasdaq in 1998 where the top callers were right for 6 weeks only to watch the index rocket higher 50% into Jan. 2000. Plenty of shorts in oil and maybe the squeeze runs until it is not just overbought, but ridiculously overbot.

Ron Rosen Comments

Ron has an interesting commentary today:
http://www.kitco.com/ind/rosen/may212008.html

The comparison of the 1978 to 1981 period of rapidly rising commodity prices to the present ramping up of commodity prices. In short he predicts a top in gold and silver in the first qtr of 2009 (Feb 18/09 for gold, Jan. 14/09 for silver) . In terms of equities he is anticipating a March 2009. He looks for low below the 2002 level in the SP500. The quarterly MACD has turned negative and that does not happen often-a longer term early warning sign. Selling rallies is probably the correct strategy and buying only oversold dips.

Moody's- You have to be kidding

There is a story circulating that Moody's has 'discovered' a computer glitch that incorrectly rated some debt securities-most likely CDOs got rated AAA. You have got to be kidding. That mismarking of debt securities was due to payola from the Wall Cheat rocket scientists. That story is going to get blasted along with the dog ate my homework excuse. Moody's is going down not because of a 'computer glitch', but because they are going to get sued to death by angry toxic waste holders-namely the pension funds.

Is the Oil elevator full yet?

Headlines in all the major business sections lead off with the price of oil. Currently trading at 129 for July. On top of that, the talking heads on the financial stations are now talking of the contango in the oil futures mkt. Dec. 2016 now at 140$ with increasing open interest. This could be the beginning of the super spike that eventually crushes demand-just like gold and silver in 1980. I expect margin requiremnts for future contracts to start increasing.

Related news. Petrobras is ordering $30 billion in deepwater rigs for their recently discovered off shore oil firelds. In addition, PBR has locked up 80% of the deep water rigs (16 of 21) for the next several years. Looks like future oil is going to be more expensive that oil 5 yrs ago. The oil mkt is trading similar to the gold mkt as it breached the 1000$ level. Once the upward momentum wanes, it will crater and find its true level around 105 to 110. 95 to 100 is the max downside I see.

Refiners are starting to trade better. Either gas prices are going higher, or the cost of crude is going lower. WTIC is trading at a discount to its normal relationship with Brent.

Tech Upgrade by several Analysts

Tech Stocks are about to sold by the Wall Street and Conn. crowd. A plethora of upgrades by the Wall Cheat analysts will more than likely result in the blind, underperforming mutual funds buying positions in tech. TECH is cyclical and the US economy is heading South and at best, heading East(ie flatlining). What the BRICs buy in terms of tech is up for discussion, but tech spending in the BRIC nations is not close to tech spending in Europe and North America.
Tech is cyclical, not secular. Tech is cyclical repeat and repeat again. As Don Coxe states-INTC sold at 11X earnings in 1994, before it morphed into a hyper growth stock to trade at 50+X peak earnings. It will trade at 11X earnings again. same with the rest of tech.

Oil Prices

What is up with oil prices. 125 and tight despite dropping US demand and now increased Saudi output. Saudi increasing production 300k bpd starting June 1. No impact. Mkt is realizing that BRIC demand will outpace US and European demand destruction.

Gas at the pump must rise in order to slow demand growth even more.

Fannie and Freddie being sacrificed

Here we go again-US politicians creating more problems by trying to solve existing ones. The US Congress is meddling in the housing mkt trying to stop the tidal wave of foreclosures. It wil not help until prices drop to levels where real buyers emerge. In the latest move, FNM and FRE are allowed to buy larger loans with only 3% downpayment. Isn't that how the mkt got in this mess. BAD BANKING practices. God help the US taxpayer. Once again the profits are privatized and the losses are socialized.
FNM and FRE are going to lose money hand over fist as the toxic waste get rammed down their throat. The taxpayer eventually finances these GSEs and it is another round about way of the PTB unloading the problem onto the US taxpayer, and in particular the middle class.

April CPI-the joke continues

April CPI released- +.2%, core +.1 %

Food up.9%. energy flat in April vs March. Are you kidding me. Oil is has gone from 110 to 125. Nat gas is pressing 12. I guess all those cheap wind and solar farms are producing cheap energy.
I suspect the Owners equivalent rent and car prices dragged the index lower.
Given that number, any suspicion of higher rates from the FED just went out the window.
So what do we have-a FED giving credit away-that sets the stage for problems down the road. Bernanke is trying to save his job and his Republican masters. Full speed ahead into November.

Deer in the headlights

Fed Chair Bernanke looked like a deer in the headlights y'day as he spoke to the Atlanta Fed. He was either suffering from a severe case of gas, or he was lying through his teeth. Terrible poker player. (still looking for video)
His suggestion of an increase in the TAF auction coupled with comments about the financial mkts being far from normal indicate that there is more pain to come. Expect rates to remain low for a while-even if inflation kicks up. Fed can always stop inflation-crank up rates, but stopping a Japanese style deflation is much more difficult. So far devaluing the USD and making money free is delaying the process. Time will tell if this strategy works. The US financials remain on life support. More equity raising coming from both Freddie and Fannie. Citi will be back as will MER and LEH.

Deleveraging

Hedge Funds are being targeted by the prime brokers. The prime brokers are forcing the hedge funds to reduce their leverage ratios as the need for capital continues to intensify. FED Chair Bernanke stated that he is prepared to raise the TAF auctions. I thought things were getting better, but that announcement indicates things are getting worse. The traditional ratios are all breaking down. Gold/USD, Gold/oil, yield curve, carry trades. The mkts are being dislocated as the hedge funds all switch from one side of the boat to another. The old boys club is all trying tosqueeze through the same fire exit. Despite record short interest, the equity mkts trade well. Either there is a pile of pairs trade, or the mkt is setting up for a fall. With the Fed and other central banks forcing credit down the banks throat and then not giving them any benefit to sit in cash, it is flowing to the most liquid asset-stocks.

China's Paul Volcker

There is no doubt that the Chinese are masters in studying history. It is a sad day for the global economics of the Western World when the most respected banker is from a communist country. The Chinese central bank has raised reserve requirements again as it tackles inflation. O/n rates are at 7.47 % and reserve requirements will rise to 16.5% from 16%. Talk about constraining the banks. Consider the US banks that have 8.5% in tier 1 capital ( of what we know). In addition, US banks have been exposed for their off balance sheet entities-who knows what is out their in numbered company land.

Walter Ruether where are You

Back in the 1930s when Henry Ford was boasting to Walter Ruether (head of the auto workers union) that his new automated assembly line would reduce the need for his unionized workers and may even eliminate them, Walter replied (to paraphrase) 'That is great Henry, but who are you going to sell your cars to?' That same situation is currently the US and the Western worlds problem. But outsourcing their production to low cost countries, Western companies have destroyed their buying base. Profits have risen tremendously in the past 10 yrs, but the slow deterioration of the consumption base has finally caught up to the process. There is a massive time lag as the developing world catches up to the living standards of the West. They need basic necessities, not luxury items. They will buy a Chevy and not a Cadillac. They will buy food and fuel, but not Cartier watches.

Where the Rot IS

Fannie Mae (FNM) just reported earnings and to say the least, they were terrible. 2.57 loss per share for the quarter, and the need to raise another 6 billion in capital. Expectations were for a .81 loss-the spin from the media will be interesting. More important, they state in the release that 2009 credit losses will be higher than 2008 losses. Hello Alt-a and Prime and ARM resets. Dividend to be cut. Once again the US taxpayer is going to get the short end of the stick while the Wall Cheat Fat Cats keep their ill gotten gains.
UBS just annoubnced another massive qtrly loss-10.9 bln, cutting 5500 jobs. The rot continues. The one bright spot is that they managed to sell 21 billion of subprime and Alt-a mtgs to Blackrock for 15 billion. So at least we know a reasonable valuation for some of these assets. Lazard reports a loss as does Legg mason. The bottom for financials is not in, it will be in when housing prices stop going lower or when US workers wages rise to a level to afford a house.
Speaking a covering their assets, SP had an announcement on Friday stating the expected recovery rates for the various tranches of CDOs. Even the highest rated tranches of the CDOs are expected to return 60-70% of the principle amount. That means the majority of the lower rated tranches are worth 0. There is more pain in financial land to come. Deleveraging and hedge fund blow ups will be commonplace.

Oil testing 120 and all the commentators are busy top calling. Nobody seems to believe the move. Even myself consider oil to be ahead of itself, but I am not short, but reduced long. If oil stays above 105 for the 2nd qtr, oil company profits are going to be ridiculously large.
Gold holding above 850, but it seems to lack any buying power-more likely short covering. It is dead money for a qtr or two.

CNBCs Steve Liesman is part of the hedge fund crew. Very opinionated-not reporting the news, but interpreting the news and part of the happy go lucky crowd. Lies Man is appropriate.

The circle of credit

Here is an interesting article regarding the price of oil

http://www.financialsense.com/editorials/engdahl/2008/0502.html

Very interesting, especially if you take it one step further. What if the US gov't in collaboration with the Saudis have been holding the price of energy high to pay for the US Gov't deficit. One can not just raise taxes in the US to pay for the spending of the US Govt, no, one just puts an indirect tax on the entire globe, but in particular the relatively poorer emerging giants China and India. Is oil worth 115/barrel, not likely but more like 80-90 given the cost of the marginal barrel. The Saudis in turn take their windfall profits and then buy USTs to complete the circle of credit. Unfortunately this arrangement will eventually break down as all price fixing schemes do-eventually more supply hits the mkt and the pyramid collapses-more than likely once George and Dick leave office. In addition, the Mid East oil producers are busy building the 21st century edition of the Great pyramids. Check out this website:
http://burjdubaiskyscraper.com/

With gas pushing 3.50 a gallon, and WTIC at 115/ barrel, the refiners are getting hammered. Also Nat gas is @ 10.60 , the ratio of oil to gas is North of 10, when it should trade at 8. However, one has to look at Nat Gas to refined products, and that is not quite as dramatic in the ratio, as that Nat Gas to gasoline ratio has ranged from 9.0 to 2.5-currently at 3.6.

Fed doing what it always does

The Fed is busy helping out its owners-the Banks that use its discount window. Rate cuts and TAF are only helping out the banks-not the citizen on the street.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a1ctn1Xfq5Do&refer=home

Check out the rates from Bloomberg May 2 2008
Current 1 mth Prior 6 mth Prior

Fed Funds 2.00 2.25 4.50

3 month Libor 2.77 2.70 4.86

5 yr AAA Bk & Fin 4.59 4.30 4.79

10yr AAA Bk 5.56 5.50 5.38

15 yr MTG 5.29 5.29 5.54

30 yr MTG 5.72 5.75 5.91

1 yr ARM 5.90 5.55 5.65


So, despite rate cuts of 250 bps in the FF rate, mortgage rates have not dropped and in fact have gone up. The FED is holding up the banks by taking their crap in repo collateral, but the banks are not lending-Because they have no capital. This charade can go on for a while -Just like Japan. The US consumer needs capital and they are not getting it from the banks-look for credit card balances to increase as the desparation sets in.

Just buy anything not fixed income

The money masters are at it again. The FED succumb to the mkts and cut rates by 25 bps and then spun the move as hawkish on inflation. Then the Treasury Sec. says the worst of THIS crisis is almost over (I agree, but there are more crises around the corner). Things are so good that the FED has expanded the liquidity at the TAF to 75 bln and by expanding the list of permissible collateral. As explained earlier, by allowing the Wall Street Banks to borrow USTs which can be margined at at least 20:1, and giving the FED toxoic junk which has no margainable quality (maybe 3:1), the FED has stopped the forced selling. On top of that, the pile of cash in FI is getting forced into the mkt since rates are so low. The game continues again.
Maybe the mkt will wake up and realize what is going on, but right now the bears are getting a margin call. 1420 on the SP500 was the bounce back retracement and 1450 maybe the outside objective. Remember the Wall Street and the monkeys story. The big money has been buying for the last 4 weeks and now the marketing campaign accelerates to bring in the retail buyer. The only question is how much money does the retail investor have given their credit card is bulging and their mortgage needs to be refinanced.

Even the Las Vegas casinos are struggling-they need to find some new marks-same with Wall Street. Wall Streets' reputation is in tatters across the globe as the garbage they produced on these securitized instruments spread. As the saying goes-u can buy anything you want, but selling it to someone else at a profit is the trick.

The mkt tone is good as the flood of new liquidity finds its way into the mkt. Housing is dead, so the money will find its way into more liquid assets. Oil needs to correct to 100-105, but gold is back to its break out level of 850. All sorts of media talking of the commodity bubble being over, while it is time to buy financials. Don Coxe thinks otherwise. Lets see what the real money-ie foreign money mgrs think. China and India need to feed and house their citizens, not support Wall Street execs pay packages.

US Dollar

The Fed cut rates to 2% from 2.25% y'day and the spin from the media was that this is it for rate cuts. The futures mkt is predicting a rate rise by the end of the year-15%, while 13% indicate one more cut by yr end. Makes no difference as the shadow financial system has disconnected from the official rates. The Fed is trying to regain control of the system-first by eliminating Bear Stearns and then by legislating broader powers.
The USD failed y'day to rally, but the overnight crowd got the call and has pushed the USDX up .36 to 72.94. I fully expect a rally in the USD to 75 to 76, before the bear trend reserts itself. What is likely to happen now is that other central banks will be pressured to cut their interest rates as the local economies stall. US real rates are negative-helps the borrowers and punishes the savers-funny how the US gov't is going to need to borrow 400+bln this FY. Also interesting how it is an election yr. Negative real rates lead to consumption as saving is punished, unfortunately the borrowing capacity of the US consumer is stretched to say the least. The Fed has to be aware that the US mkt may become the carry mkt of choice for the shadow banking system-hedge funds borrow in USD and then sell the USD to buy assets in other currencies and mkts.

Gold and oil are unlikely to break higher in this scenario, but oil and gold companies may benefit as they have been handicapped by the rising domestic currencies. Brazil and Canada are the prime examples. Lately the C$ has retreated, but the Brazilian Real has rocketed higher, especially after SP upgraded the local debt to investment grade.

April Month End

What a day for price influencing. Month end for the hedge funds, Fed Meeting and Oil inventories. Not sure what games are going to be played, but mkt action is sure to be interesting as the game of bluff continues.

Citibank raising more cash to rebuild the balance sheet. Short positions in US Financials continues to build. Bearish sentiment on Oil continues to build. Bullissh sentiment on the US equity mkt has rebounded to 'normal' levels.

CDN Tax day

April 30 is Tax Day in Canada, that means investors tend to sell their mutual funds or position to pay for any taxes owing. TSX got clocked for 200+ points yesterday as oil,gold and commodities got a pasting dur to the FED spin of the last 25 bps cut to 2%. What a joke-2% or 2.25% -does it make a difference when the shadow financial system is creating credit north of 10%. The Treasury for Toxic waste program allows the banks to hold onto their poor investments-just like Japan in the 1990s.

Cdn Feb. GDP dropped .2% in Feb.-worse than expected-likely to lead to another rate cut by the BoC late in q2 -probably 25 bps

Japan announced it was not biased to raising rates in the near term-despite inflation rising above 1%. They do not want to risk the same mistake they made in the mid 1990s-raising rates too early and snuffing out the recovery.

Brazils' recent oil find

Details are becoming available regarding the massive oil find off the coast of Brazil. Early talk of 30 bln barrels has been circulating but now the facts coming out that the oil is trapped-much like the Arctic natural gas. The oil is 30,000 feet below the waves and is in rock that is at 500 F. The cost to drill a single well is north of 100mm. This oil will come out if oil is at 125 and above for a sustained time. Looking at the oil strip curve shows that after 2012, the oil curve starts tomove back up. In particular the curve is as follows: Dec.2011-107.37, Dec 2012 107.30, Dec. 2013 107.50 , Dec. 2014 107.77, Dec. 2015 108.12, Dec. 2016 108.71.

Employment

Who has been the biggest employer over the las century. It is the government at all levels. That is going to be put to a test over the next few years-particularly at the state and local level. The latest Case-Shiller home price index shows a 12.7% decrease in home prices. As home prices decline and foreclosures go home, revenues to the state and local governments are going to decline. To date, governments are not laying people off, but with budget deficits starting to pile up-we know which way the trend is. The next surprise for the mkt is going to be job growth or more importantly lack of job growth. Longer term I am constructive on the US employment situation as the lower USD is going to bring some companies back to the US and also the lack of quality in certain Asian products is going to create a back lash. However, in the short term, government hiring is going to drop and that coupled with the financial and real estate layoffs is going to push the unemployment rate to 6% and above IMO.

As for the Fed-does it really matter anymore what their rate is. The Shadow Financial system circumvents the Fed anyhow and it will be years before the FED regains control. Over the last 3 weeks, 2 yr USTs have moved from 1.85 to 2.35 %. The mkt has alreaady priced in no more rate cuts. The Fed is going to play the probabilities game of seeing the US economy level off from the plunge and thus allow the FF rate to remain at 2%. (of course that is after tomorrows 25 bps cut). Real estate is still heading south as the oversupply of homes and lack of income from the bottom 75% of the population keeps the affordability index from reaching the proper levels.

What would you rather have?

What is the USD? It is a medium used for the exchange of goods. The car manufacturer sells their car to the salesman who got his money from the ABC widget company. Now that the US gov't has embarked on a USD devaluation program, foreign countries are waking up to the plundering of their resources by the US empire. Trade restrictions and nationalization of resources is happening across the developing world. They do not want a piece of paper with a dead president on it. They have seen the value of different currencies evaporate overnight as the color changes from blue to green. These people want tangible assets-whether it is corn, wheat, copper, gold, gasoline-but it is something that has barter power.
The Euro is no better as it looks like the Club Med economies are grinding to a halt-mainly due to real estate issues (Again). The pressure on the ECB to weaken the Euro will build. Right now the Germans have control of the ECB, but the French take over in 2009 and things ay become a little different. The Armstron cycle model predicts early 2009 as the equity mkt top and then a swoon through to 2011.

Silver

I prefer Silver over gold for 2 main reasons. Central gov'ts do not have a stockpile of silver to throw into the mkt. Silver usage is expanding-medical benefits and more importnatly now is that Mitsui has developed a silver based catalytic converter. The converter will be available in 2012 and will be applied to farm equipment and other lower horsepower diesel motors.

Credit Spreads

A quick look at the credit mkts from the St. Louis Fed page:

Feb. 1 /2008: Fed funds: 3.50 April 25 /2008: 2.25
2 yr Int. Rate Swap 2.88 3.08
Corp Aaa bonds 5.38 5.56
Corp Baa bonds 6.63 6.96
5 yr UST 2.84 2.96
10 yr UST 3.67 3.75

So despite a 125 BP decrease in Fed Funds, the credit mkts actually have higher yields. That is bad for borrowers and good for lenders. The steep yield curve and wider credit spreads will help the financials rebuild their balance sheets over time. But that only applies to new loans! Existing loans are an anchor to earnings as they get marked down to current market levels. When the writedowns end and the bank start lending again (or corps start borrowing), the financials will scream. Is the worst over for the financials? Not sure, but I expect one and maybe 2 more legs down as the expectations for an end to the real estate bubble bursting are quashed.

3 Trillion in MMKT funds

Plenty of talk of the amount of money in mmkt funds. The main issue is what about the amount of money owed on housing and credit cards and other auto loans. has this money been earmarked for debt repayment, or is this discretionary savings from the upper 25% that will rotate back into risky assets. Some is definitely going to equities as the real rates in short fixed income instruments are negative. The rally in fixed income due to the belief that the FED was going to cut rates to Japan like levels is over. The inflation bogeyman is starting to wake. Long term bonds have broken their uptrends. Rising rates are not going to help equity valuations. Portfolio mgrs still use the FED model of earnings yield vs the inverse of the 10 yr treasury yield. That is wrong IMO as the credit quality is mis matched. The 10 yr BBB yield index is more appropriate.

Monday Morning Playbook

Fed meeting on Tuesday and Wednesday will hold the focus early in the week. My expectations are for a 25 bps cut followed by text that states that they are going to take a pause and see how their actions over the past qtr transpire. There will likely be a split vote as some voters will cite the inflation issue. If the Fed does not cut, it will signal they are really worried about inflation. Economic data suggests the US economy is still slowing down, but interest rate cuts take 6-9 mths to show an effect. US stimulus checks are in the mail-let's see how many get used to buy TVs and how much pays down their debt.

Plenty of talk in the press regarding the bulging MMKTs accounts. That is dead money. Buyers of fixed income are not adding to their positions as the FED rate cutting program gets cut short. Few are talking of rate cuts to the 1% level now, but 3 weeks ago, the mkt was convinced deeper rate cuts are on the way. 2 yr UST are at 2.20% from 1.80% 2 weeks ago. Japan showed its fastest inflation rate in 10 yrs and the bond mkt sold off vilolently. Interest rates remain negative and investment pros are starting to shift out of FI and into equities. Risk is being forced back intothe portfolios just like 2002 and 2003.

China-Strengths and Weakness

What is China's greastest strength and weakness? Its vast population. Over the last 10 yrs, China has mobilised its citizens and migration from subsistence farming to urbanite continues to impress even the most hardened skeptic. However, as the mass of people move up the economic food chain, their demands increase-starting with food. Is it any surprise that the US has thus mandated bio fuel use to increase. Did they not know the damage the use of bio fuels would have on the developing and poor nations? Of course they did, but they need to slow the China economic miracle. Using food as a weapon is not new and it will continue. The developed nations spend the least amount as a percentage on their food bills. While the developing nations spend a much larger percentage on their food. An army marches on its stomach comes from the Napoleonic times and it still holds true. The US can not stop the Chinese and Indians from advancing their economies, but they can make life more miserable for their leaders as the cost of food skyrockets. Resource wars are starting to erupt. Why is the US stockpiling oil? Are they going to attack Iran? Maybe, but they know they are printing useless pieces of money and they are buying as many hard assets as possible. Why are futures contracts settling above cash prices? Because the buyers actually want the product and the paper shorts are unable to deliver. Most futures contracts get settled for cash, not actually delivery. However the system is breaking down as the physical buyers are starting to overwhelm the paper sellers. Gold is going to be last commodity to accelerate as the political significance of gold will be paramount with the PTB. Consummables are going to outperform-copper, zinc, oil, nat gas, corn etc.

As the 'all powerful' Fed meets this week, talk is that 25 bps will be cut to put the FF rate at 2%. The spin will be that the worst is over and the Fed is being prudent. Reality is that any more cuts will ignite a commodity rally. The nations of the world realize they have been duped over the last 10 yrs taking USD for their valuable resources-now they are nationalizing assets and kicking US firms out-witness Big Oil in Venezuela. More to come in other jurisdictions in other commodities-witness mining in Ecuador. The barter system could return as the USD reserve currency gets called into question. The power of the US military only keeps the power of the USD viable, but the lack of result in Iraq is depleting the USD power.

Subprime resets

The bulk of the sub prime resets should be attempted by the end of May. Judging by the early data, the resets are not going well as defaults are moving higher and deliquencies rise. That is only half the problem. The lenders are under the pressure of not receiving any income, yet still being required to pay their financing costs. This will have profit implications in q3 and q4. In addition, there is a time delay from when a home goes into foreclosure and when it is taken over by the financing unit. Hence, homeowners are stiffing the banks. Nice.
The subprime resets tail off in q3 and q4, BUT option ARMS and alt-A resets start to accelerate in q1 2009 and accelerate all through the yr. That coupled with a Democratic President and Congress and Senate could spell significant trouble for the US financial markets. The US Treasury mkt is one to watch. The bearish economic news ahas not resulted in a rally in the Treasury mkt-plenty of bubble callers in US interest rates. IF UST start to back up significantly, that could be trouble for the eequity mkt since so mauch talk of fair value rests on FED model, ie a 4% 10 yr yield implying a 25 X multiple. That is ridiculous. According to the latest St Louis Fed release, Corporate Baa bonds have moved from 6.63 on Feb.1 to 7.01 on April 17. Using the equivalent calculation results in an implied multiple of 14.3X-that is more realistic. Of course the Fed has cut rates by 125 bps since that time, but that has only helped banks and not consumers as the lower interest rates have not filtered through.

Prediction

With little economic data between now and month end, the mkt will focus on earnings and only earnings. The mkt is going up as the sellers have stayed too late at the party and the buyers are going to be joined by the short covering bid. Oil and Gold will trade weak until at least Tuesdayas the PTB makes its move. The SSEC (Shanghai) index continues to give backs its gains as the mkt prices more closely with its HK equivalents. As an example-Petro China has lost half its value (595 bln) as the arbitrage goes whittled down (As a refresher PTR was trading with a mkt cap north of 1 trillion in Shanghai, but only at less than half that value in the US).
The USD is due for a technical bounce, but that is it. Gold and Oil will suffer-probably testing 900 and 105 respectively. However, the mkt action on the equities will be interesting over the next 3 days. Watch for divergences

Canada is starting to catch the US cold. Housing sales dropped markedly in Feb. (partly due to the weather) and the LEI dropped .3. This is likely to play out in other countries as growth slows.

Here Comes the Spin

The plan is unfolding as the Master Planners are hard at work trying to spin the recent news on earnings. GOOG blew past earnings estimates, C posted terrible earnings (15 bln in writedowns), but the talk remains that the kitchen sink was thrown intothe numbers and the worst is over -for now. MER was the same situation y'day as the shorts did not get enough bad news to maintain positions. The mkt sentiment is too negative and a relief rally for the SP500 to 1400-1420 is likely.
Needless to say, the gold and oil mkts are being used as a source of funds by the hot money crowd. The talk is shifting to the FED being one and done (25 bps on April 30). Hence that is being perceived as positive by the USD bulls as the spin of the FED being concerned about inflation has the mkt looking to lock in recent profits.
CAT reported good earnings-mainly due to growth outside the US-a recurring theme. NOK reported poor earnings, partly due to the strong EURO. European politicians are all over the ECB to lower rates, but the ECB being controlled by the Germans is not budging-inflation still running ahead of the upper end of their band.
US Treasuries have been hammered this week as the mkt wakes up to the fact that the world is not going to end. The 2 yrs have moved from 1.60% to 2.20%. There is a pile of money on the sidelines (2-3 trillion) by some estimates and it will soon be forced into the mkt. What they buy is anybodies guess, but I suspect financials and tech.
As I write, gold is down 30$ to 912 and oil is down 2$ to 113. These are the weak $ tradesand they are being unwound as the chatter from the street regarding a vigilant FED and the crisis being over takes hold.

What Now?

Equity mkts took y'day on rumours of better earnings from certain companies and a relief rally that has the 'street' short. The mkts are right up against resistance levels. Can they break through? My guess is yes as the 2 yr treasuries are now above 2%-up from 1.6%. Mkt players are coming to the realization that the FED is not going to slash rates to 1% unless a major problem develops before the US election. 25 bps at the next meeting is the most likely outcome.
Stocks are diverging, financials are still for sale while real economy companies are delivering results ahead of consensus.
Commodity companies blasted off y'day lead by the agri companies. POT announced a 200% increase in potash prices. That is unbelievable. Arcelor Mittal announced a surcharge on US steel contracts. Oil trades above 115, and gold trades above 940. Copper testing 4$.
The mkt is starting to revalue some of these base commodity producers and discount the financials. Merrill announced a 2 bln $ loss as they marked down their positions. But once again, the balance sheet is so confusing to obfuscate the damaged positions. Until the B/S clears up, the bid for financials in general will be limited as there will be plenty of sellers on upticks. JPM-which avoided most of the subprime issue-is looking to raise 6 bln in prefferred shares-yielding 7.9%. US 10 yrs are yielding 3.70%. Generous to say the least.
Mkt action is to sell the rallies if as and when companies beat earning expectations. Intel beat yesterday and guided higher-opened higher and then sold off all day despite the Dow being up 250 pts and the NDX up close to 3%-No follow through. IBM beat expectations and price action today indicates a sell on news scenario. NOK missed and is getting hammered. Risk still resides on the downside

Oil service companies are taking off-especially the Cdn drillers-either some hedge funds got caught short or there is some big aggressive buyers pouring in. CET.un and PHX.un-2 directional drillers are up 40-50% in 3-4 weeks. Maybe the depressed drilling fleet in Western Canada is starting t be used. Plenty of promotion of the Bakken in Sask., Montney in NE BC and the gas shale in Quebec.

Gambling Trends

In the never ending quest to relate real life events with financial trends, news from MGM cutting 440 employees from MGM Grand due to a decline in gambling is in my mind clearly a sign that the wealth effect is in reverse. When people are flush, they are more apt to head to Vegas to try their luck-not anymore. What does this mean for the casino on Wall Street? Probably less volume, and in fact the volume figures have declined in last 3 weeks. Part of this is due to the de leveraging of the financial institutions. Hedge Funds are going the way of the Dodo bird, since they were not hedge funds at all, but rather overlevered pools of capital. Some will survive, but most will fail. Unless of course the FED bails them out. Another reason for interest rates to rise as the buyers (black box gurus running a failed model) retreat.

Interest Rates

As one looks around the investment universe, it is hard to believe where some products are trading. Dividend yields on some good quality stocks are at 2x the level of 2 yr treasuries. As this financial mess works its way through the python, these spreads are going to narrow. The easy trade right now is to be sitting in cash which implies 1yr or less paper-and given the issue of what is some of this paper, the less sophisticated are buying treasuries. Even some munis are suspect now that real estate prices have declined-(munis get their revs from property taxes).
Bonds are the next bubble to pop-once the flight to safety runs its course, investors are going to wake up and realize that interest rates are way too low.

More Financing details

Here are the details of the Wachovia financing
http://www.theaustralian.news.com.au/story/0,25197,23535528-643,00.html

More Financial Dilution

The capital raising from US financial institutions continues. Wachovia (WB) latest -raising 7 bln at a 15% discount. WM also raised some cash last week from the PE group-suspicions about the FED to JPM to PE firms to Financials entities circles are being mentioned. Merrill and Citi are expected to announce more major writedowns.
The financial tricks are running rampant-LEH repackaging LBO debt into a SIV to securitize and get rated AAA by SP and then sent to the FED for treasuries. Professor Bernanke is getting a portfolio full of toxic waste. How much abuse can the FED take before it realizes the sharks of Wall Cheat have once again taken full advantage of the system to remove money from the publics pocket?
Financials remain overlevered with more loan portfolios.

G7 let down

Stocks got pummeled on Friday due to the GE earnings miss and a lack of buying interest. The G7 meeting on Friday also had investors on the sidelines as the 'expect the unexpected' thinking reigned supreme. More importantly though was that The Masters was taking place and no doubt the big power brokers and fund mgrs were in Augusta being wined and dined by the Wall St crowd (Trevor Immelman won for the record).
The G7 meeting was a bust as they stated they were concerned about the pace of the USD fall, but not about the fall. They were watching mkt developments closely, but no policy initative was announced. Talk about a toothless tiger.
Oil and gold have become the anti $ trade.

Things 2 remember

Everytime the stock market drops, the cheerleaders state that you would miss out on the gains if you are not in the market. They are correct, but every law has a corollary. How much money would you lose if you were fully invested during the 5% biggest down days in the last 40 yrs. A couple of examples include the 1987 mkt meltdown-20% in 2 days. 1994, 1998, 2000-2002. U would be broke. The fact is that the biggest rallies occur during bear markets as the shorts get scared and bid up prices as profits try to get locked in. Hence in bull markets, the biggest drops occur for the same reason. In this environment-renting stocks-buying OS and selling OB is the strategy. Buy and Hold is not going to perform.

The solution nobody wants to talk about

Why is the US is a downward spiral-demographics, poor monetary policy, poor fiscal policy are contributors to the problem. However, the outsourcing of labor and the subsequent diminishing of the true middle class has resulted in the US having fewer consumers. SP500 chieftains took full advantage of the outsourcing option brought about by the instant communication via the internet. The World is Flat highlighted the benefits of the profit potential from moving high cost labor to low cost countries. As long as those countries were stable and friendly to Western policies, US corps were able to expand their bottom lines at the expense of the average US worker who was forced to take lower paying jobs. What the corporate chieftains failed to realize they were also taking away the buying power of their products. This did not happen overnight, but it was the product of a decade of outsourcing. So until the developing countries finally develop, the mkt for finished goods is going to be limitied. The developing countries like China, Russia and India are more centrally planned and therefore the main task is to build the infrastructure to make life more amenable for its inhabitants. That means less plasma TVs and more roads. The free trade argument has been abused by corp. executives and now has come back to bite them. From the Henry Ford/Walter Ruether conversation='that's great Henry,but who are you going to sell your cars to?' There has to be a balance between corp. bottom lines and workers making enough $ to support the economic landscape. I suspect the unions are going to gain power in the years ahead and if the Dems take Washington, Free trade is going to run into some roadblocks.

The Circle of Credit

Here we go again=JPM is going to loan Blackstone and Carlyle group 2bln. Where is JPM getting the money? More than likely from the FED Discount window. Where is the money going? Probably to buy some of the toxic garbage from C's balance sheet. Once again the FED is becoming the banker of last resort using JPM to skirt the law and implement its program. Blackstone, Apollo and TPG are in the process of buying some LBO loans from Citi-some are probably their own paper for 90 cents on the $, but backed buy a 20% indemnity from C. This is to sidestep the issue of marking the paper to true mkt and thus forcing the rest of the garbage portfolio to be marked accordingly. The deeper the problem, the elaborate the balance sheet manouevers.

Banks have the real mtg problem

All this talk in the press regarding the US homeowner as being in distress from the mortgage resets is not entirely true. Lets go through an example of the average person who bot a home in 2006 for 500k. They put down less than 5% (25K). Rolled their closing costs and taxes into the original mtg. Approx. 3K month is the mtg payment at 6% int. So after 2 yrs, the owner is in for roughly 100K. If the house is only worth 400k, the owner has broke even, but if the house is worth less, the bank is in trouble. Because this where the homeowner gains the upper hand over the bank. In the past, the banks assumed that real estate appreciated always and thus any foreclosures could be sold at a level above the remaining amount on the loan. Not so any more. In addition, given the problems with the paper regarding the mortgage (more than likely sold off to a third party and then sliced and diced into a securitized debt obligation), the current homeowner should stop paying their mortgage and wait for due process to take place. More then likely the current owner could live in the house for another 8-14 months rent free. Now who is in trouble. Even if the current homeowner could pay the mtg, why would they. They could simply refuse to pay and threaten to leave the property once their due process is complete. Foreclosures and the subsequent auctions are not what the banks want so the current homeoqner holds the upper hand. To date, few realize this fact, but given time they will figure it out and then the banks will be scrambling to negotiate loan terms.

Too many Bears

Here we are on April 10, 5 days before US Tax payday and the mkts are taking a pounding as GE's earnings have sapped any mkt momentum. The weak handed bulls are being forced out while the Mutual Fund crowd is no doubt receiving redemption notices form their unit holders as they raise capital to pay their taxes (or mtgs). This could be another test of the lows and it will be interesting to see if the lows hold. Not sure if the will-Timw will tell (twt)

Steer clear of Financials

Plenty of stories today, GE missing by a mile in its q1/08 earnings-mostly due to the financial side of the business. Jeff Immelts comments following the announcement summed up the battle in the mkts=financial side is depressed while the real economy outside of the US continues to expand. Other comments regarding US domestic consumption, in particular the housing sector continue to show weakness. Mkt impact was to start lowering the bar for all financials as q1 reporting season gets under way.
The Wall Street firms are once again trying to hide their terrible balance sheets by accounting gimmickery. GS and MS have already moved some of their assets into the Level 3 (L3) category as the recent letter regarding pricing of L3 assets suggests a more lenient interpretation. In addition, the WS dealers have been repackaging all sorts of financial garbage(CDOs, CMBS, LBOs,etc) and then lending them to the FED via the TLSF. On top of that, the FED has then re lent the re packaged garbage out. The balance sheets of the US Financials are not to be trusted and they are delaying the day of reckoning hoping to trick some investor to take some the garbage. Latest money supply stats show the banks are technically insolvent=http://www.federalreserve.gov/releases/h3/ . Non borrowed reserves at -98 bln while TAF at 100 bln. Next week should put them over the top.
G7 meeting this weekend might result in a plan being developed to lift the load from the Financials, but I suspect there is great disagreement between the US and European interests.

Commodity Fight

The commodity complex went on a tear yesterday as the US $ lost more ground. BoE droppeed rates 25 bps to 5%- 3% more to drop. ECB held fast at 4%. The debate on commodities continues-on one side the slowing Western economies and on the other side the raging Asian and SA economies. Demand remains firm-though not surging, but supply is stagnant. Problems with nationalization and costs to develop mines have inhibited mine development. Copper testing 4$/lb is a sign that Asia continues to move ahead. In addition, the Middle East is on a building boom-re investing all the petro dollars.
US is in recession-probably a long, extended one as the excess credit boom deflates.

Level 3 Assets

The Balance Sheets of the WS brokers are not getting any better. GS and MS both revealed substantial increases to their Level 3 assets (Assets that are illiquid and hence hard to value-best guess at what they are worth). Goldman's surged 39% to 96.4 bln, increase the value of level 3 assets to 8.1% of total assets. Of course the off balance sheet items are not available and only GOD knows what and where they are. MS level 3 assets increased 6.1 % to 78.2 bln or 7.2 % of total assets. LEH actually reduced its level 3 assets from 6.1% to 5.4 %. Maybe GS and MS are 'helping' out their WS brethren and buying what they perceive as value. Time will tell.

The Balance Sheet Shuffle

As always there is more to the story than the headline. It turns out the euphoria surrounding Citi (C) selling 12 bln in LBO loans to a group of hedge funds is nothing more than a balance sheet shuffle. What is really happening is that C is selling the loans at 90 cents on the dollar to TPG, APollo, and Blackstone and then financing the purchase of these loans. It will probably be revealed in time that the loans are actually TPG, Apollo, and Blackstone LBO loans so in essence the hedge funds are buying back their own paper. The PE entities do not have access to the discount window, but C does and therefore they can borrow as much as they like at the current 2.50% and move that through to the PEs. This is a balance sheet move as C is subject to regulatory filings, while the PEs are basically unregulated-plenty of tax haven and off shore entities tied to these entities
Once again, the opaqueness of Wall Street is evident-this action should give investors more concern about the balance sheets of the US financial firms.