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Wednesday, October 31, 2007


fed cuts another 25bps

against some expectations -- in the face of record-high oil prices, stocks, commodities and precious metals, in the face of a positive third-quarter gdp report -- the federal reserve cut rates, both fed funds and discount, for the second consecutive meeting, this time by 25bps each. but the vote was not unanimous, a rarity, the single dissenter favoring no change. there was also a change in statement, intended (it is thought) to imply that further cuts are not now planned.

the fed notes that the economy is likely to slow thanks to intensifying pressures from housing. it should also be noted that durable goods orders are in decline and that third-quarter profits are looking to have fallen year-over-year for the first time since the last recession.

UPDATE: the stock market, of course, after a stagger, has rallied like it was the end of the second world war, the first world war and the napoleonic wars all at once -- with jesus christ himself returning to earth to boot. i obviously can make absolutely no sense of it, but it reeks powerfully.

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no, Jesus would be bad for business.

I'm telling you, gm, Marquis kicks Gibby's ass, makes Seaver look like a pussy and turns Marichal into his bitch. then he goes out and buys financials. perrone

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$163bn in fhlb loans in two months

per bloomberg:

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

the creation of yet another layer of credit which, along with the migration of siv assets back onto bank balance sheets, help account for runaway broad money supply growth in the last two months. and the fhlb's have now heavily levered themselves against credits that are highly questionable, making themselves a surrogate lender of last resort.

The home loan banks ``were the only game in town for a lot of borrowers,'' said Jim Vogel, head of agency debt research at FTN Financial a securities firm in Memphis, Tennessee. They are ``like an old watch your grandfather left you years ago, and you pull it out of the drawer and find it's the only timepiece you have.''

but they aren't as antiquated as it would seem by that quote. as a group, the twelve branch banks carry more mortgage debt on their balance sheets than fannie mae and freddie mac combined. and they have just as much trouble accounting for their assets properly.

kevin depew asks:

If the FHLB is now the lender of last resort for many of these financial institutions, some of them extraordinarily weak, what if in the course of loaning money to weak members, who in turn used that money to shore up weak positions, we begin to see the strong members of the system back out?

If confidence in the FLHB system weakens, prompting investors to get rid of FHLB debt, could this cause the collapse of one of the banks?

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Tuesday, October 30, 2007


market analysis

s&p 500

this illustrates the divergence at the recent new highs in the s&p -- net points gained, net advancers, net volume all refused to confirm the new high.

nyse tick has been refusing to confirm the progressive new highs for many months. the mcclellan oscillator has been in a series of nonconfirming declining peaks since mid-september.

percentage of issues trading over 10-day and 30-day moving averages is a shorter-term indicator, but the 30-day measure does certainly indicate narrowing participation since early october. but the narrowing of the market becomes much more obvious taking a longer term picture, using the 150-day moving average.

virtually every divergence of this kind portends further price falls. particularly amazing is the strength and duration of this divergence -- the index was making all-time highs with just 62% of its components trading over their 150dma. the most recent previous instance of that being the case, as far as i can tell: the 1994 slowdown.

using quarterly new highs and new lows, we can see a continuing divergence in issues within 5% of new highs as the index has tested new highs. as can be seen, this has been ominous for the market in the past.

using 20-day new highs and lows, we can also see a more recent breadth failure of a short-term nature. but here the question might arise, as with the participation of issues trading over their 10dma -- could enough of a washout have taken place on october 22 to have put a temporary rally in place? one which tomorrow's anticipated rate cut could capitalize on, sending the market to new highs?

it's certainly possible -- the market will do what it wants. but it would seem to me that larger divergences are now in place as a result of the rally from mid-august to early october that could well define the beginning of a more significant downdraft, and probably limit the upside of any rate cut rally without first arranging some positive basing.

nasdaq 100

the most powerful remaining individual issues in this bull -- goog, rimm, aapl, bidu -- are loaded into the nasdaq 100, which has been setting new highs too. but weakness is, though less pronounced, also clearly developing here.

there's little intimidating here, but there is some faltering in the last couple of weeks.

more pronounced breadth divergences show going back through all of october in the mcclellan oscillator and participation over 10dma and 30dma -- but here again i think the participation over 150dma really spells out the seriousness of the breadth falloff in the market:

this looks more serious than the others.

the picture in terms of quarterly new highs is also pretty fearsome.

and the 20-day new highs show much less indication of a recent short-term low.

all in all, there seems considerable reason to expect a fairly serious fall in these indexes in the short- to intermediate-term. of course, that needn't be manifested immediately -- but it certainly does seem that risk outweighs reward at this juncture.

iyf financials

i unfortunately lacked the courage of my convictions on september 11. what about now?

behavior here since october 9 has been awful, and iyf has resumed its place in the market basement (alongside real estate) over that time. new downside leadership in net advancers and net volume places this index squarely in continuing bear market territory. even the good news in net points is mitigated by the failure to improve on july levels at the same price.

there's no denying, though, that this sector has washed out very hard, and some positive divergences exist. it sounds funny to say in light of the fundamental issues facing the financials, but there might be better downside plays elsewhere.

some weakness showing in 65-day new highs as well, but not exaggerated.

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the collapse gap

a thought-provoking if deeply depressing consideration of the possibility and consequences of an american imperial collapse, using for comparison the template of the soviet empire.

the longer rumination, in three parts, follows: part one, part two, and part three. the article is put forward by one dmitry orlov, a survivor of the collapse of soviet russia.

there's a tremendous risk here of a sort of depressive hubris -- that the problems of our times must be the grandest problems, the collapses the most spectacular collapses, the failures the most gutwrenching failures. many more thoughtful people died awaiting tragedies that never came than lived to see their worst fears realized.

all the same, the lessons are not to be ignored -- particularly when it is becoming clear that the civilizational problem of peak oil is not far off, when the epicenter of the global banking system is caught in a homegrown debt disaster that could easily catapult the imperial construct down a very dark road.

this is a society where less than 1% work on a farm and are capable of and skilled in sustaining themselves with food. this is a society that is completely dependent on cheap individuated private transport -- virtually its entire layout and infrastructure, less than 80 years old, revolves around the concept. it isn't impertinent to ask: when the end does come, how would highly-civilized (or, much more correctly, highly specialized) americans survive it?

evolution is often thought of by those who understand it little as a constant march of progress toward ever-higher forms. but this is not so. forms evolve to take advantage of their conditions -- and when the conditions are static for long periods, forms become highly specialized and therefore highly efficient -- but also inflexible and fragile.

orlov here is diagnosing anglophone western civilization as just such a highly-attenuated form -- one more susceptible than other, rougher forms to change. i would be hard pressed to say he was wrong. as was noted by spengler and toynbee the better part of a century ago, the technical responses our civilization is now producing in an effort to mitigate its problems have the unintended effect of multiplying them even as they place ever greater burdens of inflexibility upon the society. even if technical responses are concocted to alleviate problems like peak oil and global warming, they will almost certainly be breeding grounds of unintended consequences -- just as fossil fuels were once seen as the salvation of western man. and they will do so as the west comes under ever greater assault from beyond the limes.



turkey turning against the united states

the economist this week noted the reversal of turkish public opinion from that of a longtime cold-war ally to dread and antagonism.

For, even as Congress has been considering a war that is almost a century old, America's present war in Iraq has made Turkey newly vulnerable to Kurdish attacks. The de facto autonomy enjoyed by Iraqi Kurds has encouraged the PKK. Many PKK guerrillas are now attacking the Turks from bases in Iraq. As many as 20 Turkish soldiers have died in clashes with the PKK in the past two weeks alone. The Turks have held back from retaliation, largely because they hoped that America would deal with the PKK itself. Its failure to do so, mainly because it fears upsetting its Iraqi Kurdish allies, is the biggest cause of rampant anti-American feeling in Turkey, which has been strengthening for some time (see chart). So although President George Bush warned Turkey, just before its parliamentary vote, that it was not in its interests to send troops into Iraq, the Turks ignored him. “The genocide resolution poured more oil on to the flames at the worst possible time,” observes Taha Ozhan of the SETA think-tank in Ankara.

Turkey is a key ally in a region where America has too few. Three-quarters of the air cargo heading into Iraq passes through Incirlik air base there. American planes fly freely through Turkish air space en route to Iraq and Afghanistan, and the American navy uses Turkish ports. Turkey provides Iraq with electricity and allows trucks laden with fuel to cross its border into Iraq. But if American politicians persist in dishing out what Turks perceive as a grave insult, it will make it harder for the Turkish government to continue co-operating so closely with America.

the issue of armenian genocide is an important one in turkish opinion, and that a democratic congress is treating it at all is just another manifestation of the thoroughly imperial problem of having confused foreign policy directives driven almost exclusively by domestic politics.

but it is completely secondary to the core issue -- turkey and turks are enraged at what the americans are facilitating in the kurdish insurgency, centered on the pkk. almost every american would be shocked to learn that the united states is arming a terrorist group that aims for breaking turkey, iraq and iran apart in favor of an independent kurdistan. and yet.

part of the flow of american arms and money has apparently been sidetracked to the pkk, which washington sees (perhaps naively) as an ally in both iraq and against iran. but those same resources are being deployed against its much more important regional ally, turkey, with new american weapons turning up in turkish raids against an increasingly active and sophisticated pkk -- to the point where turkey's government has voted under populist pressure to invade northern iraq to suppress the pkk. bombardment has begun, and talks with the american-puppet iraqi government have gone nowhere.

Apparently, the Iraqi government refused to arrest and extradite members of the Kurdistan Workers' Party (PKK) stationed in northern Iraq. The government of Prime Minister Nuri al-Maliki, already facing a difficult domestic situation in which security is completely lacking, simply cannot come to blows with Iraqi Kurds. It is the Kurdish bloc that has kept Maliki in place after most of his allies abandoned him early this summer. If he had alternatives to bolster him domestically within Parliament, like Sunnis or fellow Shi'ites, perhaps Maliki could have taken a different position to avert a military showdown.

Meanwhile, 100,000 Turkish troops remain stationed on the Iraqi border, awaiting orders from Erdogan. Already, Turkish warplanes have attacked PKK positions in the mountainous districts of Siirt, Hakkari and Sirnak near the border with Iraq. And crude oil prices rose on Friday to US$92 a barrel.

Many consider Turkey's display of displeasure as an ultimatum to Maliki; a final warning before Turkish tanks roll into Iraqi territory. That, however, is unlikely to happen before Erdogan meets US President George W Bush in Washington on November 5. General Yasar Buykanit, the Turkish chief-of-staff, commented, "We will wait for his [Erdogan's] return."

the united states is claiming -- with the fbi involved -- that corrupt american officers are selling and redirecting arms shipments intended for iraqi state forces and police to the kurds.

Regarding the PKK's use of American weapons, Gül told NTV: “After some terrorists were arrested, security forces seized their weapons. When we investigated the place of origin of those weapons, we saw that some of them were manufactured by the United States. US officials told us that those were the weapons they handed over to the Iraqi army."

Today's Zaman quoted more details from Gül's live interview, where he specified: “1,260 weapons captured from the PKK are American made. We documented it to the U.S. These are of course not given directly to the PKK by the U.S. These are the ones that were given to the Iraqi army. Unfortunately some U.S. officers were corrupt. The Department of Defense informed us that a serious investigation is underway.”

raimondo is skeptical that such a thing occured without the blessing of the vice president, but that may be a difficult accusation to sustain. and it may also be possible that these are comments fabricated by the turkish government to defuse antiamerican populist sentiment. but fbi director robert muller has been in turkey conferencing with the turkish government, and that (as raimondo notes) is unusual.

in any case, the united states is playing a dangerous game. the turkish government cannot want to invade iraq, as the economist notes -- it's likely as much a quagmire for them as it has been for us. but regardless of whether it does or not, the damage done to turkish political opinion of the united states is immense and will likely carry long term consequences.

UPDATE: more, crossreferenced with the political military.

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merrill forecasts recession

"it would take a miracle to avoid" recession now, via housing wire and nouriel roubini:

With domestic demand growth struggling to stay above a 1% run-rate, if we manage to avoid a recession with another huge down-leg in homebuilding activity and home prices, we think it will be a miracle.

merrill's forecast in the event is for rate cuts down to negative real interest rates -- again. the question, of course, is whether more of the same tonic will produce more of the same results. last time, alan greenspan ran rates to 1% nominal and negative real and we got a consumer credit explosion that fomented this housing disaster.

but with banks in a mortgage-backed securities crisis and homeowning consumers heading in unprecedented droves toward foreclosure and bankruptcy, perhaps the most important effect of aggressive rate reductions will be instead to force foreign holders of dollar-denominated securities to finally capitulate, accelerating an american credit contraction into something more egregious.

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gm -- up is down, man, first is last. I'm just, it's getting like that scene at the beginning of Rosencrantz & Guildenstern are dead, when they can't toss tails. or heads, I forget. look, just tell me something. if you were to send Jason Marquis out there against, say Bob Gibson or Tom Seaver, Marquis oughta lose, right? it's, well, for lack of a better word, nature.

so now oil is through the roof, gold is through the roof, the dollar can't buy a damn guinea shilling, the worst housing bust we've ever seen is getting worse, with no bottom anybody can see, erasing billions and billions of dollars in lost wealth and (bad) instruments -- and the market WON'T TANK. would somebody just tell me what the _fuck_ is going on? I'm just too lousy tired of having my ass handed to me. perrone

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perrone, i think the guys at minyanville are dead right in their assessment -- catchphrase: "asset class inflation vs. dollar devaluation".

the s&p is going up -- in dollar terms. but if you're a euro investor, you are at a net loss since 2002. this graph says everything, imo -- it's the dow industrials priced in ounces of gold.

the american stock market IS losing value -- just not as fast as dollars have been.

their suspicion is this: when the dollar finally catches a (deflationary?) bid, the effect on asset classes -- commodities and stocks -- will be quick and devastating.

that time might be coming very quickly. market leadership is very narrow now -- just a few bubble stocks like google, amazon, apple and rimm are driving most of the nasdaq gains, while large numbers of smaller shares are falling away from their highs. also, the financials have not done well -- and they almost inevitably lead the market.

i'm nervous about tomorrow's (presumed) rate cut. i was short the last 50 bip surprise and i'm short now. not sure if i'll lighten up into tomorrow afternoon. but it's possible that another surprise will hurl the dollar (and potentially bonds) lower and give equities more room to run.

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it's the dow industrials priced in ounces of gold.

and of course it could as well be barrels of oil or bushels of wheat or corn or tons of copper. inflation is a function of broader credit creation, and its running well beyond the control of the fed.

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Monday, October 29, 2007


the political military

via andrew sullivan, first this and then this from's glenn greenwald regarding the increasingly obvious partisanship of the american military in iraq under general david petraeus, as evidenced by its clear preference for right-wing media/propaganda outlets of the kind further discussed by justin raimondo here.

the united states military is a massive and disparate agglomeration of people, and there are many camps of thought within it competing for power and expression. when i first commented on the growing vocalization of military politics, it was to highlight a movement against a bush cabinet official, now-former secretary of defense donald rumsfeld. this view was also expressed by chalmers johnson. while such a group was very probably not one of partisan democrats working against republicans, it was very certainly a political group.

but it was also noted that the bush administration was repeatedly purging the high eschalons of the military in order to install the type of right-wing leadership core that would see eye to eye politically with proto-fascists in the vein of rumsfeld and dick cheney, if not of full blown neoconservative religionists like norm podhoretz or charles krauthammer. this is an essential element in the final consolidation of the imperial presidency -- just as adolph hitler had to co-opt hindenburg and the prussian officer corps to secure his political fortune in 1933, just as benito mussolini had to intimidate king victor emmanuel iii with blackshirt gangs of veterans and the implicit support of the italian armed forces, so must any party that aspires to rule the united states without the constitution in the longer term have deep support in the american military command structure.

whether or not this administration has that support is indeed highly questionable. but they have done all they can to force it by railroading the careers of officers who oppose or even merely disagree in principle. the elevation of general david petraeus and his press officer is the result -- as was seen earlier and is now being ever further evidenced, that is not in the interest of preserving what remains of either a government of divided powers or a foreign policy in the service of something other than a regional war over ever-rarer oil reserves.

UPDATE: more, crossreferenced with turkey turning against the united states.

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Friday, October 26, 2007


the next housing disaster: pay-option arms

the wsj spells some of it out:

These loans are known as option adjustable-rate mortgages, or option ARMs. They typically have low introductory rates and allow minimal payments in the early years of the mortgage. Multiple payment choices include a minimum payment that covers none of the principal and only part of the interest normally due. If borrowers choose that minimum payment, their loan balances grow -- a phenomenon known as "negative amortization."

An analysis prepared for The Wall Street Journal by UBS AG shows that 3.55% of option ARMs originated by Countrywide in 2006 and packaged into securities sold to investors are at least 60 days past due. That compares with an average option-ARM delinquency rate of 2.56% for the industry as a whole and is the highest of six companies analyzed by UBS.

The increase in overdue payments partly reflects a decline in home prices in much of the U.S., which has made it more difficult for borrowers to refinance or sell their homes. In addition, at Countrywide, "they were giving these loans to riskier and riskier borrowers," says UBS analyst Shumin Li.

Among option ARMs held in its own portfolio, 5.7% were at least 30 days past due as of June 30, the measure Countrywide uses. That's up from 1.6% a year earlier. Countrywide held $27.8 billion of option ARMs as of June 30, accounting for about 41% of the loans held as investments by its savings bank. An additional $122 billion have been packaged into securities sold to investors, according to UBS.

The deteriorating performance of option ARMs is evidence that lax underwriting that led to problems in subprime loans is showing up in the prime market, where defaults typically are minimal. Challenges could grow, as from 2009 to 2011, monthly payments on some $229 billion of option ARMs will be adjusted to include market-rate interest and principal, according to Moody's

It now appears that many borrowers who moved into option ARMs were attracted by the low payments and may have been staving off other financial problems. More than 80% of borrowers who are current on these loans make only the minimum payment, according to UBS.

read that again: $230bn in option arms, with 4 in 5 negatively amortizing -- meaning the $230bn figure is actually growing as the months go by -- with rate resets beginning in 2009 and hitting hard by 2010. here's the new rate reset chart being circulated by credit suisse, showing option arms explicitly.

and it is further worth noting that these loans are already defaulting at record rates -- well prior to any rate resets. once resets start, the effect is likely to be devastating.

more at housing wire as well.

first thought: it would seem to me that a lull in foreclosure pressure is likely as the subprime 2/28 resets roll off in 2009, and that the market may experience a revival of sorts in and just after that period. but 2010 and 2011 will see another, perhaps more vicious wave of housing supply. that may extend the cyclical forecast i made here, adding inventory and supply out into 2011, meaning the market may not clear and prices bottom until 2012 or 2013. mish thinks it could be longer still.

UPDATE: again via mish, there are many millions of currently vacant homes that will be entering the supply chain in coming months. this is evidence of fairly severe overbuilding, and if much of it is in fact reo then the effect on pricing is going to be dramatic.

second thought: countrywide, a major purveyor of pay-option arms, is on its way to bankruptcy by 2010, if it can stave it off even half that long.

UPDATE: russ winter notes that, while the chart above notes the rate resets in time correctly, there is a second condition that can trigger negatively-amortizing (that is, 4 in 5) option arms (or OA's) to reset to a normal amortization schedule.

Finally comes what I feel is the flaw in the analysis of pay option mortgages. There are two conditions that cause the neutron bomb recasts to regular amortization. One is the term, and CR mentions this. Most pay option ARMs have 3 and 5 year reset periods, only a few are less.

Less than 10% of Alt-A ARMs in 2005-2006 had an initial fixed period of less than 3 years.

So this gives the appearance that the problem is deferred to 2009-2011. I don’t follow the logic behind the pay option part of this chart at all, as both 3 years and 110% clauses are due to recast in the immediate period ahead.

However there is another condition that triggers the neutron bomb. That happens when the negative amortization caused by paying only 3-4% interest rates against the fully indexed and margined rate of 7-8% hits either 110% or 115% of the initial loan amount. The big data point I’m seeking and have searched for a year, is the percentage of Option Arms that uses 110%. In the case of 110% clauses, an aggressive neg am debtor will neutron bomb him or herself well before 3 years into the loan period.

so some -- probably a significant percentage -- of these negatively-amortizing option arms are going to jump forward on the reset chart to fill the 2009 gap i noted above.

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Thursday, October 25, 2007


estimates of housing-contraction wealth fallout

via calculated risk, and further citing this report, it seems to me that the new york times estimate on the wealth decline as a result of the housing depression is probably low at $4 trillion.

a return to long term trends is likely to yield something much closer to $8tn in real terms, and any overshoot in the correction -- a very likely effect -- would go farther. without overshooting, this would constitute an average national real estate price decline of some 40%.

this first estimate of wealth destruction would deduct from something like a $45tn fixed asset base at the end of 2006, of which some $18tn is residential structures, or a real decline of some 17%. one can imagine, of course, that production will continue to add to the real assets of the economy to offset this notional decline, but the shock will be something. the last year of declines in real terms was 1991, that last recessionary period, when inflation (4.25%) outstripped dollar-figure asset growth (2.56%). but this could well be a period where the deflation of housing values sparks a credit/debt contraction that brings real wealth down at more considerable rates.

that credit-debt contraction should in fact be the most devastating potential effect.

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Tuesday, October 23, 2007


subprime recovery rates disastrous

via janet tavakoli through cnbc regarding countrywide's drop-in-the-bucket move to help soon-to-be-reset borrowers stay in their homes in the face of escalating payments:

This all sounds good, but I’m still wondering why this, why now? Well I got an email this morning from Janet Tavakoli of Tavakoli Structured Finance. She practically eats mortgage data for lunch. She says Countrywide may seem like it’s doing this out of the goodness of its big ol’ corporate heart, but really it has to do with the fact that recoveries on subprime loans are far worse than ever anticipated so far.

Here’s what she writes:

“Last week I met with a major mortgage servicer of geographically diverse U.S. subprime loans. They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60% are unattainable. My average recovery rate assumption of 30% is also currently unattainable.”

Tavakoli says the servicer has been selling loans for 3-6 cents on the dollar. What are the issues? Legal costs relative to the low loan balances are huge and delays are long. Values of the homes are nowhere near what they were, so they’re looking at negative equity.

In other words, Countrywide is saving its own skin, as well as saving home ownership. The company simply has to do this because there is no way it can survive otherwise. Obviously they are seeing the recovery rates and just don’t want to risk it. This is a pre-emptive strike, and I say no matter what the motivation, it’s a positive move from Countrywide.

the most positive move of several horrifyingly disastrous possible moves, perhaps. if recovery rates on some significant slice of subprime defaults is genuinely less than 10% after time and expense considerations, the devastation in credit markets is going to be considerably worse than anyone had previously imagined. can ANY of the big five investment banks tolerate that kind of loss recovery beneath their billions of mortgage-backed structured debt? what about citibank? if this is what we can expect going forward, the value of most rmbs will be struck to zero.

perhaps it's becoming more understandable now exactly why abx indexes have completely tanked in the last two weeks.

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Monday, October 22, 2007


have we lost all connection with reality over iran?

you can say that again:

The American discussion about Iran has lost all connection to reality. ... This would all be funny if it weren't so dangerous.

fareed zakaria is of course only stating the obvious when he points out that most of what the republican hierarchy has said about iran in the last two years is completely and totally senseless -- indeed, it constitutes either obvious madness of a kind most would associate with caligula or nero -- or big-lie propaganda for the consumption of a simpleminded electorate.

for some true believers, it may well be the former. but i suspect for many in the bush administration it may be the latter. and why would they need such plebiscitarian political cover to act under?

in a word: oil.

Oil and natural-gas producers are pouring money into oilfield services that can stem production declines from aging fields in the North Sea, Saudi Arabia and Mexico.

Simmons, who has predicted crude will exceed US$200 a barrel or more, reiterated he believes today's prices are cheap.

"At US$40, US$50 and US$60 they said it's just traders and speculators,'' he said. Light, sweet grades of oil in Malaysia were US$90 a barrel earlier this month, Simmons said.

"That to me is not speculation; that's refiners struggling to find light, sweet crude,'' Simmons said. "I don't know what fundamentals they're looking at. The fundamentals I'm looking at say fasten your seat belts.''

the nascent decline of saudi arabia's northern ghawar (as well as production from the north sea, mexican cantarell and the american prudhoe fields) was the unstated primary reason for entering (or for that matter giving a whit about anything that happened in or to) iraq, and given that iran shares a similar level of potential with possible reserves on the order of saudi arabia's it's not hard to see an economic/resource calculus at work.

understanding that american oilfield management is likely to mean, for all its obvious moral drawbacks, maximum production effort is an important realization. whatever our hopes for alternative energy going forward, for now peak oil means peak economy. further consider the possible political ramifications of an oil production peak:

One of the things that it seems to me is that peak oil to many people is not yet real. When it becomes real, I think that a number of oil exporters will stop and think about what they are doing with their resource for the longer term. When peak oil is realised, oil price will increase dramatically so there will have another major windfall, financial windfall. Some of those folks, I think, are very likely to say that they will cut back on their exports in order to husband the resource for a longer period of time for their own country. In fact Mr. Putin in Russia already has said as much.

Other people in the Middle East have made noises that they may do something like that also. It becomes a matter of an individual country deciding what is best for itself versus what is best for the world and individual countries really ought to look out for their own well being which could mean that indeed a number of them decide to hold back on exports for their own purposes and that would mean that peaking would occur earlier than might otherwise be the case, and be much more abrupt. So the decline rates in a situation like that would be I think much larger than one would calculate if one thinks only about the geology.

if the example of cantarell -- the oilfield that accounted for 60% of mexican production -- is anything to go by, the ramifications may not stop at "husbanding". as production at cantarell crashes, there are serious questions about the viability of mexico as a nation-state. while countries like britain and norway are probably diversified economically and coherent politically to better endure the decline of north sea production, a "nation" like iraq or saudi arabia is very probably not.

in the main, i think the american foray into the middle east -- surreptitiously cloaked in the post-9/11 dogma of fighting "terrorism" and spreading "freedom" to make it palatable to an inherently populist and moral electorate -- has been quietly all about these two things: 1) maximizing production from what large under/misdeveloped fields in the mideast there are, and 2) negating possible political bottlenecks that would constrict such development. is there a more realistic (in the sense of 'realpolitik') course of action for the suzerain of the global economic empire?

that's not to say there aren't religious apocalyptos and neoconservative ideologues in alliance with those much more mundane forces; it is simply to say that such crackpottery would probably never have gotten nearly so far without the backing of oil multinationals and the burgeoning western financial sector that ultimately relies on reliable resource extraction as a tenet of growth.

such a strategy as pursued by the united states unilaterally has limits, however, which were probably largely unrealized and disbelieved by the men (read: dick cheney) who enacted them -- and the gross incompetence in executing any production plan in iraq has probably lowered them considerably. i don't see how america could get off the ground with any realistic plan to conquer and hold iranian oilfields at this point. but that doesn't mean it won't be attempted.

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Saturday, October 20, 2007


first siv defaults

two of the previously understood to be among the most compromised, those of british cheyne finance plc and german bank ikb's rhinebridge plc -- a default of some $7bn.

Rhinebridge, set up and run by a unit of Dusseldorf-based IKB, missed payment on $65 million of commercial paper yesterday after revaluing collateralized debt obligations, Fitch Ratings and Standard & Poor's said.

Rhinebridge has $791 million of commercial paper and a portfolio with a face value of $1.1 billion, S&P said. The market value of the assets is now 63 percent of face value, having fallen $69 million since Oct. 16 alone, S&P said. Revaluations of CDOs of asset-backed securities have caused a ``dramatic'' fall in value, the rating company said.

rhinebridge is the much smaller of the two, and its assets will be sold off into whatever market there is. cheyne is another story.

Receivers from Deloitte & Touche LLP are trying to organize a bailout of Cheyne Finance by restructuring its debt or selling its assets. Cheyne Finance hasn't paid commercial paper that matured after the receivers' announcement on Oct. 17, S&P said.

Cheyne Finance's managers said its assets are worth 93 percent of face value, enough to pay back all of its $6.6 billion of senior debt, S&P said. CDOs of asset-backed securities make up 6 percent of Cheyne Finance's holdings.

with something like $900bn in abcp unredeemed -- and similar losses on cdo's with slashed ratings (not to mention rmbs and eventually their commerical equivalent) and marking-to-market being likely widespread -- this is perhaps just the first pitch of a VERY important game.

how important? almost anyone with big capital is being intimidated by the treasury and the fed to the aid of the super-siv, particularly in light of the reticence of european banks to participate.

the help can't come too soon, if it matters at all. per calculated risk:

Rumors were flying during the last hour of trading of problems at Merrill and Bear. The Merrill rumor was of a special board meeting this weekend with possible additional writedowns - we will see.

as noted previously, it's all very likely to be not nearly enough to do more than slightly defer some severe capital destruction in western banking. alan greenspan thinks it may even hurt more than help.

This bailout was the target of criticism from Mr Greenspan, who said it was geared to support a faltering asset class. He argued that the prices of these assets should be allowed to fall until speculative excesses are wrung out and bargain-hunters emerge.

'If you intervene in the system, the vultures stay away,' he said. 'The vultures sometimes are very useful.'

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Friday, October 19, 2007


earnings growth going negative

from thomson financial:

Third-quarter earnings of S&P 500 companies have "a good chance" of turning negative for the first time in five years on Thursday, after factoring in Wednesday's profit warnings from a slew of energy stocks, Thomson Financial said.

"There's a good chance that we'll go negative tomorrow," said John Butters, analyst at Thomson Financial, which tracks earnings estimates at S&P 500 companies.

The third-quarter earnings growth rate is currently at 0.1%, and that's without factoring in the profit warnings from Chevron Corp., Valero Energy and others, he said.

However, Butters said that upwards revisions from other companies on Wednesday could keep the growth rate positive. Should year-on-year comparisons turn negative, it would be the first quarter of negative growth since the first quarter of 2002, Butters said.

the slowdown in earnings was first noticable in q42006 and has kept right on chugging into recessionary territory. the markets -- apropo of contrary sentiment indicators here and here and some technical considerations besides -- sold off hard in what some intrepid few in the press for the first time openly labeled "recessionary fears".

needless to say, i agree -- recession is upon us, nonfarm payroll revisions notwithstanding, and its roots seemed to be taking hold much earlier this year (see here and here). as if to confirm, the kbw bank index broke through 101.50 today and closed on the low. the dollar index too fell to a new all-time low -- mish shedlock wrote an incisive bit on what that may say. the cost of default insurance is, appropriately for a recession, ballooning.

UPDATE: julian robertson -- now clearly a lion in winter -- is on board with a "doozy" of a recession, centered on credit problems that he believes are almost universally underestimated.

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investors intelligence advisor sentiment up to 62% bulls

it's the highest reading of bulls since christmastime of 2004. interactive chart here.


Thursday, October 18, 2007


cheney's law

frontline this week produced the chilling 'cheney's law', which outlines the rise of dick cheney as a relentless authoritarian and the role of his counsel, david addington, in ending the rule of law via the use of signing statements.

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abx indexes in freefall again

during the downdraft in august, i noted the crashing of the abx indexes, which began to precipitate in early june and accelerated in early july, preceding the equity market fall. on february 26, i noted a nosedive in these same indexes -- just before the market began to fall apart.

as noted by calculated risk -- here, here, here and here -- those indexes on october 11 resumed their plunge to lower lows. commercial syndicated debt is also pricing in more risk, signalling the end of the fun in the heretofore booming commerical real estate market (as oft predicted by calculated risk, it is following residential with a couple quarters lag). sophisticated money is getting short low-quality asset-backed credit, making the super-siv plan look almost a diversion. indeed, though, i think the indexes are reading the plan correctly -- it will save what hopefully can be saved by pooling it, and leave the rest to what comes. "what comes" will probably entail high-pressure selling.

if recent history is any indication, i'd expect more trouble in equities imminently, led by the financials.

lee adler also noted that what may have been a key support in the rally since august 16 -- the unwinding of commercial paper vehicles (siv's and conduits) -- has worked off what it can. players have largely withdrawn from abcp what they can, and their re-employed cash helped boost all other asset markets. now the unwind has stopped, leaving over $900bn in abcp that may or may not be redeemable at all, super-siv or no -- but the cash spigot to the markets from the unwind is largely over.

One of the few places in the world where the problems have been widely reported in the media is Canada (mostly Canadian media). A couple of months ago a number of Canada’s biggest institutions were forced to roll over commercial paper that could not be redeemed when it came to term. One of Canada’s biggest banks, National Bank, stepped in to guarantee this paper. However, my insider contact in a leading Canadian financial institution tells me the holders still have only gotten about 50% of the value due, with no end in sight. He says that the media is not reporting the whole story, that the potential losses are far larger than is being reported.

The Canadian media has also recently been reporting Bank of Canada has in recent days been furiously pumping reserves into the banking system there. This has all the earmarks of a crisis coming to a head. Is the problem confined to Canada? Not likely. We heard similar horror stories coming out of Europe in August. The ECB took action at that time to stave off an immediate crisis, but as a round of ABCP again comes due, there are pipers who must be paid.

With market interest rates again on the rise and the data showing the outflows from the ABCP market slowing, the one time boost to the financial markets, driven by the movement of cash out of the ABCP market has probably reached its zenith. The market must now come to grips with the fact that cash flowing out of that market is likely to slow to a trickle. The $917 billion in nominal value remaining in the ABCP market is a fiction. A large portion of that value is likely to never be returned to holders.

The evidence suggests that crunch time, if not here, is imminent.

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Tuesday, October 16, 2007


first sign of real foreign capital flight

uh oh

more from ft:

Until now, US policymakers have appeared relatively relaxed about the dollar's decline, since there has been little sign to date that this has been been triggered by a broader global aversion to US assets. However, that attitude could change if signs emerge in the coming months that non-US investors are becoming more nervous about holding dollar assets, as a result of the recent credit squeeze.

foreign holders bailed out of the united states in a huge way in august as dollar devaluation compounded asset deflation. note that august 2007 was the first month of significant net selling of dollar-denominated securities since 1995.

some rebound, as noted by kevin depew, is likely in september -- but this kind of flight from the dollar is deeply unnerving for a financial system that is heavily dependent on foreign credit. it could suggest a material tipping point is near.

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the super-siv

the markets are taking a negative reaction to the newly-concocted and (imo) shabbily-presented ad hoc plan to liquify the abcp market. a terrific amount of skepticism is coming in from many quarters, including yves smith, mish shedlock, kevin depew, institutional risk analytics and nouriel roubini. in short, the effort appears to do little to resolve the root problems -- and the increasing awareness that a bank such as citi may be in enough trouble to require this sort of shennanigan is unsettling.

The subsidiary banks of C, for example, have about $112 billion in Tier One Risk Based Capital supporting 10x that in "on balance sheet" assets, assets which typically throw off 3x the charge offs of C's large bank peers. A modest haircut of C's total conduit exposure of $400 billion could leave that capital decimated, forcing C into the hands of the New York Fed and FDIC. Of note, looks like the ratio of Economic Capital to Tier One RBC for C at 3.75:1 calculated by the IRA Bank Monitor was not so severe as some Citibankers previously have suggested.

The fact that much of the debt issued by C-controlled SIV's was maturing in November seems to have prompted the Treasury to act, yet another example of "limited government" under President George W. Bush. Apparently there are some people at the Treasury who think that aggregating large bank conduit risk into a single subprime burrito will somehow draw foreign and domestic investors back to the structured asset trough. This notion would be laughable were the situation not so perilous.

it seems to me that the program cannot really amount to a bailout -- it isn't large enough, and it apparently won't accept either the subprime rmbs or the cdo's that are the core of the solvency problem -- and i'm hardly alone in that view.

but the plan may instead be a vehicle for extracting the most solvent assets of existing siv's and keeping them both off the balance sheet and from being marked to market (that is, heavily marked down). to some extent, it seems an admission that many of the impaired assets in conduits and siv's will have to be brought on balance sheet and written down against capital. perhaps the calculus for citi and others is that such writedowns are sustainable -- but what is not is having to write down the higher-grade assets as well, and so they will draw their line in the sand there and hope to hold it.

but it remains to be seen if this new super-siv gets funded by normal cp issuance in spite of the risk that purchasers are overpaying for the supposedly-better assets that back the super-siv.

moreover, timing is a problem -- citi is set to see its reckoning in mid-november, as its siv's come around for refinancing, and the super-siv probably won't be in place to help by then.

and of course the whole program -- which is being met coldly in many quarters -- may yet be retracted or significantly scaled down.

if it comes off, though, it might buy time on the bulk of the losses that large banks are facing in the abcp debacle, with the probable intention of deferring and prolonging the agony until after the 2008 election.

that, however, is subject to the developing consumer slowdown and commerical-real-estate collapse that would likely, in combination with the credit crunch and housing depression, send the broader economy into recession in 2008 if not sooner.

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Thursday, October 11, 2007


we are never leaving iraq

jim holt in the london review of books channels kevin phillips, whose "american theocracy" provides much of the factual ammunition for holt.

Iraq has 115 billion barrels of known oil reserves. That is more than five times the total in the United States. And, because of its long isolation, it is the least explored of the world’s oil-rich nations. A mere two thousand wells have been drilled across the entire country; in Texas alone there are a million. It has been estimated, by the Council on Foreign Relations, that Iraq may have a further 220 billion barrels of undiscovered oil; another study puts the figure at 300 billion. If these estimates are anywhere close to the mark, US forces are now sitting on one quarter of the world’s oil resources. The value of Iraqi oil, largely light crude with low production costs, would be of the order of $30 trillion at today’s prices. For purposes of comparison, the projected total cost of the US invasion/occupation is around $1 trillion.

Who will get Iraq’s oil? One of the Bush administration’s ‘benchmarks’ for the Iraqi government is the passage of a law to distribute oil revenues. The draft law that the US has written for the Iraqi congress would cede nearly all the oil to Western companies. The Iraq National Oil Company would retain control of 17 of Iraq’s 80 existing oilfields, leaving the rest – including all yet to be discovered oil – under foreign corporate control for 30 years.

The costs – a few billion dollars a month plus a few dozen American fatalities (a figure which will probably diminish, and which is in any case comparable to the number of US motorcyclists killed because of repealed helmet laws) – are negligible compared to $30 trillion in oil wealth, assured American geopolitical supremacy and cheap gas for voters. In terms of realpolitik, the invasion of Iraq is not a fiasco; it is a resounding success.

all versions of leaving iraq proposed on either side of the aisle are decoys. so did the british talk constantly of leaving, from 1922 to the 1958 fall of the hashemites. in the end, they had to be expelled by their own bankruptcy following the second world war.

neither will the united states leave until that time. particularly if northern ghawar has actually peaked, as now seems likely -- in fact, early realization of this fact by highly attuned oil multinationals and the bush administration that is complicit with them probably drove dick cheney's attachment to the neoconservative plan to conquer iraq from a very primal level.

holt goes too far, i think, in presuming that even the piss-poor plan of pacification was intentional -- no developer of oilfields wants these conditions, and what has happened to iraq is purely a confluence of ideology and incompetence. but cheney's 2001 energy task force almost certainly touched on the nearing peak of saudi oil production and the need to procure and quickly develop untapped sources, from a perspective that far transcends profit and addresses directly the root of the american model of technological dependence and consumption-driven economics. iraq is that source, the only known one on earth.

it remains to be seen if future american governments can make good on this resource-driven expansion of the american empire in the face of a burgeoning debt crisis. in spite of its moral abhorrence, as an american and a westerner, one must hope for something like success. much of what we think of as western civilization may now depend on it in the intermediate term.

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Wednesday, October 10, 2007


isee sentiment index

interactive online chart here.

here's the homebaked version. no indicator is perfect, and there are false tells here too. but there's usually at least a minor correction afoot when the spread between the 10dma and 50dma gets over 15%.

there's only two prior occurences of the spread being in the territory of 10/9/7 (over 22%):

-- early december 2002, signalling the onset of a 14% decline in the s&p 500;

-- late november/early december 2004, preceding a 6% top-to-trough decline in the s&p with ultimately ended in april 2005.


hey gm -- can you speak a little bit to the significance, or possible significance, of the divergence being in one direction (the red arrows,
down) in 2002 and 2004, and in the opposite direction (the green arrows, up) now? perrone

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p, my view is that in the 2002 and 2004 cases -- when the spread peaked over 20% -- the market was primed to correct. that condition existing today, maybe instead of a '?' i should put a red arrow.

in both cases, there were periods where the spread narrowed slightly as the market topped but preceding the down move -- maybe we'll see that now? hard to say.

but the converse seems an even more reliable (but not foolproof) indicator -- when the ratio gets below 80%, you may be looking at a deeply oversold condition that could yield a tradeable rally. the dataset would be a lot more interesting in this respect if it extended back through the 2000-2002 bear. that was true again both in february 2007 and august 2007.

in short, at this point i'm looking more at absolute levels of the ratio than divergences. does that address your q?

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Tuesday, October 02, 2007


anticipating a failure is not crazy

this is a chart of the russell 2000 as it sits today.

this is a chart of a recent past success. note the solid bottom and capacity of net points to shine while obv and a/d line at least keep pace at previous price levels as they were encountered on the way back up.

this is a chart of two failed rallies in the russell. note the inability of the rally to drive net points into a leading position, and the laggard nature of both obv and a/d line. even in the face of rebounding new highs, this presented a condition of failure.

a similar picture for the s&p, now testing its june highs.

past success, though this one not as clear as the final successes in the following chart.

here the propensity for red and yellow nonconfirms until the final, sustainable bottom is in.

here's the iyf. a series of very poor behaviors has given way to a couple green leaders on this latest post-fed-cut rally. there's a gap to fill about 3.5% up from here at 116.90, and it may get filled.

here's tech (iyw). this now looks seriously overextended with nonconfirms across the board.

there might be some more upside left to this rally, but looking at these metrics it would seem the vast bulk of it is gone -- and the market is on very thin ice, quite possibly setting up for that retest of the august 16 low that i've been looking for all along (but have traded so poorly).


in rainbows

via big picture, radiohead's new release is "pay what you want". order here.

i'm a classical music listener, though i've been many other things (indie, punk, alt-country) -- among them a radiohead junkie. for me, tunefulness matters -- but articulate soulfulness is was endures long enough to make music worth buying. it's an undefinable quality that elliott smith had in common with j.s. bach. and radiohead has it in spades, being easily the most insightful, intrepid and comprehensive articulator of the postmodern psychological experience.

i sincerely doubt this means an immediate revolution in music. chances are that the financial rewards will not be what establishment recording channels can deliver to major artists, and will present even less certainty to up-and-comers.

but it absolutely should be one in time -- the post-internet media age should in time disintermediate and disestablish businesses whose only true profit center is selling mechanical copies that are now essentially superfluous, and using their cut to make loans to artists in an effort to make them dependent on their continuing intermediation. and it should also withdraw from artists the privilege of taking a cut of those same mechanical copy sales, taking them back to a pre-recorded-media age when what artists had to sell was not dead copies but the experience of live music performance.

the true test will not be radiohead's stab at disintermediation after the fact of success -- but instead seeing bands arise from club circuits to become major acts with large followings using only their own performances, internet presence and the word of mouth that the hypercommunication age is removing most obstacles to.


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