forex trading

Good Overview of Last Week's Markets

2008-10-13T05:23:00.000-07:00

This is from Investor's Business Daily. Click for a larger image.

Market Monday's

2008-10-13T03:00:00.000-07:00

Let's take several different looks at last week's action.

The daily chart shows a very bearish orientation. Prices are below all the SMAs, all the SMAs are headed lower, and the shorter SMAs are below the longer SMAs. But let's add a few points.'

1.) Notice there are two very long candles, which occurred on Tuesday and Thursday. There are bearish.

2.) Note the escalating volume that occurred throughout the week

3.) Note the market was down about 15% last week -- that's a huge drop.

On the 10 day chart, simply notice that the week before last (the last week of September) the market stabilized a bit. Most of the damage was down last week.

On the 5-day chart, notice there were two big moves lower last week. The first occurred from the beginning of Tuesday to mid-Wednesday. The second occurred from the beginning of Thursday to almost the end of Friday. Also note the market moved lower for most of Monday. In other words, far the majority of time last week the market was moving lower.

Keep in mind that with last week's action numerous people are looking for a reversal. Considering how oversold the market is at this point, that would make sense. However, I made the observation on Wednesday that I was expecting a reversal and look how far that went.

Weekend Weimar and Beagle

2008-10-10T13:46:00.000-07:00

No pictures or movies today. I'm just glad this week is over.

I'll be on KTLK tomorrow morning for econ 101 with Johnny Wendell.

I'll be back on Monday.

Until then, relax as much as you can and think about anything except the market.

This Week Has Done a Ton Of Technical Damage

2008-10-10T08:58:00.000-07:00

Let's take a look at multi-year charts to see how the markets are looking.

As of this writing, the SPYs are at 85.9

Prices have moved through price levels established in 2002, 2004, 2005, 2006, 2007 and 2008.

Now we are looking to test lows established in 2003. That's when this multi-year rally started.

As of this writing, the QQQQs are at 30.10.

The QQQQs have moved through lows established in 2004, 2005, 2006, 2007 and 2008. Now the QQQQs are looking to test the high established at the end of 2002. Mercifully we still have a ways to go before we've wiped out this rally.

As of this writing, the IWMs are at 47.90.

The IWMs have moved through levels established in 2004, 2005, 2006 2007 and 2008. Now they are looking to test levels established in 2003.

That's a lot of wealth wiped out.

Paul Volcker Has The Answer

2008-10-10T05:14:00.000-07:00

Paul Volcker was the last great Chairman of the Federal Reserve. He was presented with a terrible situation -- stagflation, or weak growth and high inflation. He could only tackle one problem. He chose inflation. To combat the problem he increased interest rates to levels that caused a recession. In fact -- there were two recessions. However, 25 years later, we still have low inflation largely thanks to Volckers efforts. He deserves far more accolades than he receives.

In today's WSJ he offers something that is dearly lacking right now: hope that this situation will end. What has been dearly lacking from anybody (and I mean anybody in any party in any position anywhere) is leadership. Bush is a lame duck watching is legacy (what little is left) circle the bowl. Congress has lacked any dynamic leaders who inspire calm. Paulson attempted one of the largest power grabs in political economic history several weeks ago lowering his public perception. In short, there haven't been many adults anywhere to be found.

However, Volcker is an adult. His editorial is clear and decisive.

First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact.

While there is concern on my part that Bush will do everything he can to prevent international coordination from occurring, the bottom line is circumstances may overpower him. Simply put -- he really doesn't have much choice right now.

In the U.S., with higher limits of deposit insurance in place, the FDIC has demonstrated its ability to protect depositors, to arrange mergers, and to provide capital for troubled banks. Most other countries now have a comparable capacity.

Recent U.S. legislation has provided authority for large-scale direct intervention by the Treasury in the mortgage and other troubled markets. Along with increased purchases by Fannie Mae and Freddie Mac, now under government control, means of restoring needed liquidity are at hand.

Other key sectors of financial markets are now protected or supported by either the Treasury or Federal Reserve, specifically by temporary insurance of money-market funds and by direct purchase of commercial paper.

The FDIC has been working overtime over the last year. Behind the scenes they have helped to arrange important mergers that kept deposit access seamless while preventing more hits to their capital. They deserve far more credit then they are getting.

There is now authority for the Treasury to take unprecedented moves in the markets. While some may not like this -- those arguing "socialism" etc -- they should simply be ignored. The bottom line is we are far past the point of ideology. We need solutions. What has been proposed so far is clearly insufficient to solve the task. We need far more direct intervention and participation.

In addition, there are other regulatory pieces in place. SIPC will help to prevent losses at brokerage firms should there be any problems. There is talk of insuring all bank deposits and debts. In other words -- we're moving in the right direction.

But we need leadership:

None of that is easy. Some of it poses risks for the taxpayer. All of it is decidedly unattractive in the sense of large official intervention in what should be private markets able to stand on their own feet. Unattractive or not in normal circumstances, the point is the needed tools to restore and maintain functioning markets are there. Now is the time to use them. To that end, the immediate and critical need is determined, forceful and persistent leadership -- extending across administrations and Congresses. Both the public and private sectors must be involved

Forex Fridays

2008-10-10T04:44:00.000-07:00

On the dollar's weekly chart, notice the following:

-- Prices have clearly broken through the multi-year downtrend

-- All the SMAs are moving higher

-- The shorter SMAs are above the longer SMAs

-- Prices are above all the SMAs

-- Prices are using the 10 week SMA as technical support

On the daily chart, notice the following

-- Prices are above all the SMAs

-- All the SMAs are moving higher

-- The shorter SMAs are above the longer SMAs

-- Prices have twice broken through technically important resistance levels

Bottom line: both of these charts are bullish.

Today's Markets

2008-10-09T14:03:00.000-07:00

This is a multi-year chart. Notice that it's dropping off a cliff. Also note the volume -- it's huge.

The SPYs have dropped 42% since their highs a year ago.

I've got nothing left to say.

US Considering Nationalizing Banks

2008-10-09T11:00:00.000-07:00

From the NY Times:

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Let's look at this plan. The US government essentially injects capital (money) directly into banking institutions. The US government gets some kind of ownership interest in the bank (usually preferred shares). The idea behind this is in giving the banks money the banks will turn around and make loans.

The primary benefit of this program is taxpayers will get an ownership interest in the banks. Therefore, when the banks become more profitable the taxpayers various interests will increase in value and therefore provide a return on the investment.

There are serious drawbacks to this plan:

1.) The US government becomes an owner of banks. How many owners are hands off? Not many. Is this a good idea?

2.) There is no reason to think this will be cheap. We've already seen over $500 billion in writedowns. With 1 in 6 US homeowners now underwater there is no reason to think the trend in writedowns will diminish anytime soon. In other words, if someone says this will be cheaper they're not seeing reality clearly. Any option is going to cost serious money.

3.) Why will banks magically start to lend? We're seeing increased problems according to the latest Quarterly Banking Profile from the FDIC:

The continued downturn in the credit cycle, combined with lingering weakness in financial markets and falling asset values, had a pronounced negative effect on banking industry performance in the second quarter. Insured commercial banks and savings institutions reported net income of $5.0 billion for the second quarter of 2008. This is the second-lowest quarterly total since 1991 and is $31.8 billion (86.5 percent) less than the industry earned in the second quarter of 2007. Higher loan-loss provisions were the most significant factor in the earnings decline. Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago. Second-quarter provisions absorbed almost one-third (31.9 percent) of the industry's net operating revenue (net interest income plus total noninterest income), the highest proportion since the third quarter of 1989. A year ago, provisions absorbed only 7.3 percent of industry revenue. The average return on assets (ROA) in the second quarter was 0.15 percent, compared to 1.21 percent a year earlier. Large institutions as a group had more substantial earnings erosion than smaller institutions, but downward earnings pressure was widely evident across the industry. At institutions with assets greater than $1 billion, the average ROA in the second quarter was 0.10 percent, down from 1.23 percent a year ago. At institutions with less than $1 billion in assets, the average second-quarter ROA was 0.57 percent, compared to 1.10 percent in the second quarter of 2007. More than half of all insured institutions (56.4 percent) reported year-over-year declines in quarterly net income, and almost two out of every three institutions (62.1 percent) reported lower ROAs. Almost 18 percent of all insured institutions were unprofitable in the second quarter, compared to only 9.8 percent in the second quarter of 2007.

In other words, this is not an environment where banks will start to make loans -- it's the natural time when banks start to slow down anyway. My guess is banks will use the cash to shore up their balance sheets.

Here's the real bottom line. There are no good answers to this problem. There are no magic bullets. The financial system is in serious trouble. The Feds are one step ahead of the latest domino falling. But the dominoes will continue to fall for awhile.

Media Appearance

2008-10-09T08:54:00.000-07:00

I'll be on the BBC's World Have Your Say at noon CST.

What Will Be the Chain Of Recessionary Events

2008-10-09T08:00:00.000-07:00

There's a great article in today's WSJ which uses California as an example of what will happen to the rest of the US. This gives us a good template for how events will unfold. Let's take a look:

But even before the most recent blows to the national economy, Californians were feeling the downward drag of a consumer-led recession -- in which shrinking home values caused people to rein in their spending, fueling unemployment and, in turn, sparking further spending cuts and joblessness.

This explains why the housing downturn is so incredibly destructive. It's not just home prices that take a hit. Homes are the single biggest asset most people own. When its value is dropping it hits homeowner's psychology incredibly hard. And dropping home prices are.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Also consider the drop in the case shiller home price index (chart from Calculated Risk):

As those prices have dropped people have cut back on their spending.

John Luc has seen how housing problems bleed into the broader economy. Mr. Luc is the 36-year-old manager of Homestore Furniture in Ontario, a middle-class community 40 miles east of Los Angeles and one of the centers of the housing bust. Since last year, retail sales have fallen, while unemployment and office vacancies have soared. Eighteen months ago, he watched a nearby Levitz furniture store close down in a bankruptcy sale. Since then, he said, the few buyers who've visited his store ask for discounts. "Everybody negotiates," he says.

The other day, Mr. Luc was presiding over the store's going-out-of-business sale. Although the father of two young children expects to get a job at another Homestore outlet, he and his wife have checked their spending. He says he saves $50 or more each week by packing a lunch each day, and he makes coffee at home instead of stopping at Starbucks during his long commute. "I haven't gone into a steakhouse like a Black Angus for dinner in six to eight months," he says.

When 2/3 of economic growth comes from the spending described in the above graphs, you've got serious problems.

Thursday Oil Market Round-Up

2008-10-09T04:40:00.000-07:00

On the weekly chart, note the following:

-- Prices are below all the SMAs

-- The 10 and 20 week SMA are both headed lower

-- The 10 week SMA has crossed below the 50 week SMA

-- The 50 week SMA is turning sideways (and will start moving lower within the next few weeks).

Bottom line: this is a bearish chart

On the daily chart, notice the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

-- Prices have been dropping for about three months

-- Prices are using the 20 day SMA as technical resistance

Bottom line: This is also a bearish chart.

Today's Markets

2008-10-08T14:40:00.000-07:00

A look at the chart reveals a very bearish chart.

-- Prices are below all the SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

BUT, also note

-- Today was a high volume day, with a

-- The candle is an upside down hammer

However, by all technical indicators the market is extremely oversold right now.

The MACD is the lowest its been in three months, as is

The relative strength index.

Stochastics are also scraping the bottom.

In other words, don't be surprised to see a relief rally over the next few days.

Consumers are Reigning Spending In

2008-10-08T11:30:00.000-07:00

From the WSJ:

As the U.S. economy entered into crisis mode in September, so did the retail sector, ramping up discounts and special offers to entice reluctant shoppers.

But the retailers who reported September sales results Wednesday -- with the exception of Wal-Mart Stores Inc. and other discounters -- are indicating the promotions hardly helped. Many retailers reported worse-than-expected declines, with some -- such as Target Corp. and J.C. Penney Co. --- issuing downbeat estimates for the quarter.

.....

For the most part, the discount sector has been the only one to perform well amid recent economic troubles. Shoppers increasingly have been turning to warehouse and big-box discounters as they try to get the most for their money. Most other sectors have been suffering as shoppers continue to pull back on discretionary items, despite retailers' efforts to lure the bargain-hungry shoppers with greater discounts.

A rise in discount sales at the expense of all other stores is a bad development. It's worse when you consider that 70% of US growth comes from consumer spending.

Consider the following charts.

The simple line chart tells us that real retail sales (inflation-adjusted) have been stalling for some time).

The year over year percentage change shows that retail sales have been dropping hard for some time.

Personal consumption expenditures -- which also include durable goods -- shows the same decline.

The bottom line is the consumer is definitely pulling in his spending.

Round 2 Of the Credit Crisis

2008-10-08T06:27:00.000-07:00

I say round 2 because this is the first step of a coordinated effort by all the central banks in the world (or at least the really big ones) to make a coordinated effort to stave off the credit crisis. Why the coordinated effort? Because the problems are now worldwide. Consider the following news from last week:

Fortis nationalized:

The governments of Belgium, the Netherlands and Luxembourg took partial control late Sunday of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley early Monday.

Germany injects 50 billion euros into Hypo Real Estate:

The German government and the country's banks and insurers agreed on a 50 billion euro ($68 billion) rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered.

Germany's financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement. The federal government's guarantee for the credit line remains unchanged, Albig said.

The government and the Bundesbank have said that Hypo Real Estate, Germany's second-biggest property lender, is too big to fail. They met with banks and insurers in Berlin all day yesterday to discuss a revamped rescue package after private banks on Saturday withdrew their support for a 35 billion-euro rescue package brokered a week ago.

The Fed and ECB doubled their credit lines:

Additionally, the European Central Bank joined with the U.S. Federal Reserve in doubling the credit swap line that makes dollars available to cash-hungry banks from US$120 billion to $240 billion. The Bank of England doubled dollar availability to US$80 billion, while other central banks offered smaller amounts.

Yesterday, the Fed announced it would now start lending to private companies:

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

And today Britain announced a very bold plan:

Britain's banks will get an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.

The government will offer to buy preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, and provide about 250 billion pounds of loan guarantees to refinance debt, the Treasury said in a statement today. The Bank of England will make at least 200 billion pounds available. The plan doesn't specify how much each bank will get.

The emergency action came after the FTSE 350 Banks Index fell almost 20 percent in the past month. Prime Minister Gordon Brown is following U.S. President George W. Bush, who approved a plan last week to spend $700 billion to prop up financial institutions with untested measures as equities plunged around the world.

``The global market has ceased to function,'' Brown said today at a press conference in London. ``The banking system must be sounder, and that is why we are putting the capital in.''

None of these plans/efforts is doing what it is supposed to do: calm the markets and bring a sense of confidence back to the market. The bottom line is clear: despite all of these efforts, the short-term lending markets have completely frozen because no one trusts anyone's officially stated balance sheet numbers regarding what they are worth. This is called "counter-party risk." It simply means that lenders are so concerned about a borrowers solvency even in the short-term that no one is making even the shortest loan.

We've seen a lot of one-sided action. But now the central banks are doing things together:

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

From the US perspective this is largely symbolic. US Interest rates are already 0% ofter adjusting for inflation. However, this is important for the European Central Bank, as Trichet has been very hawkish on inflation until very recently.

I say round 2 because there are now a number of coordinated policy measures various central banks could take together. For example, The ECB could create its own bail-out fund to match the US' and then coordinate the two funds actions to really start helping the battered institutions.

Either way I do think this is good news because the big policy makers realized one very important thing: we're in this thing together now.

Wednesday Commodities Round-Up

2008-10-08T05:05:00.000-07:00

On the weekly CRB chart, notice the following:

-- Prices are below all the SMAs

-- The 10 and 20 week SMA are nose-diving

-- The 10 week SMA has moved through the 50 week SMA

-- The 50 week SMA is neutral. It will turn negative soon so long as prices remain on their current trajectory

On the daily chart, notice the following:

-- Prices are below all the SMAs

-- Prices have continually moved through previously established lows to make newer, lower lows

-- The SMAs are all moving lower

-- The shorter SMAs are below the longer SMAs

-- The 20 day SMA has provided strong upside resistance for the average.

Bottom line: this chart has become extremely bearish over the last few months. There are no bullish indicators. I would expect relief rallies to occur -- rallies where traders come in because they think prices are overly cheap -- but I would not expect a sustained rally at this point.

Today's Markets

2008-10-07T14:29:00.000-07:00

On the SPYs, notice the following:

-- Prices are below the 200 day SMA

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- The SPYs have lost approximately 22% since the beginning of September

-- Prices are below the 200 day SMA

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- The QQQQ s have lost approximately 32% since the beginning of September

The SMA picture for the IWMS has been somewhat cloudy for the last few days, but a clear picture is starting to emerge. And it isn't good.

-- Prices are below the 200 day SMA

-- The shorter SMAs are all moving lower

-- The 50 day SMA is about to move below the 200 day SMA

-- Prices are below all the SMAs

Commercial Paper Primer

2008-10-07T11:00:00.000-07:00

From Bloomberg:

The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today's action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

The Fed's efforts are aimed at ``stemming the bank-run-like panic,'' said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. ``The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market.''

So -- the Fed is going to but commercial paper. So -- what does that mean exactly?

First, here is a definition of commercial paper:

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.

So -- why would a corporation need to issue this paper? There are lots of reasons. For example, a retail store (like Sears) has two big sales periods -- Christmas and back to school. So twice a year they get a big cash infusion and the rest of the time their sales are hit and miss. Let's suppose a store like Sears wants to get ready for back to school. But for whatever reason they've drained their Christmas profits. How can they buy merchandise to sell? They issue commercial paper.

This market is vital for all sorts of reasons -- inventory and payroll being two of the biggest.

Let's add another concept to the mix: time. Ever wonder why the yield curve is shaped like this?

Time. If you lend money to someone short-term there are fewer things that can go wrong that would prevent them from not paying you back. But if you lend someone money for a long time there are more things that can go wrong. To compensate you for the increased risk of lending someone money for a longer period of time, lenders demand a higher interest rate for longer loans.

So, commercial paper should carry a really low yield because it is issued for a short period of time. With me so far?

Lately, short term rates have been spiking. This seems odd, especially when short term rates are supposed to be lower that long-term rates. Why are short-term rates spiking? Lenders are concerned that borrowers won't be able to pay back a loan even in the short-term. Hence they are asking for a higher interest rate to pay them for a short-term loan. In addition, people are unwilling to buy this paper. In market terms "there is no bid." People are so concerned that even top quality credit risks will announce a writedown in their assets -- and therefore be unable to pay back a loan -- that no one is buying any commercial paper.

At the same time, commercial paper is vital to the economy; every large company depends on it for one reason or another. Therefore, this market has to work.

That is why the Fed is now buying commercial corporate paper:

Opening up another front in the battle to end the credit crunch, the Federal Reserve announced Tuesday it will buy unsecured commercial paper in an effort to restart a market that's ground to a virtual halt in recent weeks over concerns about the financial sector.

"This is a transparent step that should help to pump liquidity into a mature market that had seized alarmingly fast in just a week," according to Harm Bandholz, UniCredit economist.

Will this move work? Is it even legal? There are questions that will be answered in time. Right now the Fed is trying to do anything it can to keep the economy from slipping further into a recession.

Credit Problems -- The US' Leading Export

2008-10-07T07:16:00.000-07:00

From the NY Times:

The crisis that began as a made-in-America subprime lending problem and radiated across the world is now circling back home, where it pummeled stock and credit markets on Monday.

While the Bush administration’s bailout package offers help to foreign banks, it seems to have done little to reassure investors, particularly in Europe, where banks are failing and countries are racing to stave off panicky withdrawals after first playing down the depth of the crisis.

Far from being the cure for the world’s ills, economists said, the rescue plan might end up being a stopgap for the United States alone. With Europe showing few signs of developing a coordinated response to the crisis, there is very little on the horizon to calm rattled investors.

The vertiginous drop in stock markets on both sides of the Atlantic on Monday reflected not only those fears, experts said, but also a growing belief that the crisis could tip the world into a global recession.

Ah yes -- the gift that keeps on giving: credit problems. Last week was extraordinary. Ireland the Germany moved to guarantee bank deposits. Several other European countries nationalized various banks. The bottom line is the problems are spreading.

Sometime over the last year or so the theory of "de-coupling" was advanced. This theory said that US problems would remain contained in the US. Well, that theory went out the window last week.

Let's take a look at some stock charts from around the world.

-- Australia formed a head and shoulders top from 2007 to 2008.

-- Prices are below the 200 day SMA.

-- The 10, 20 and 50 day SMA are all moving lower.

-- The 10 week SMA is now below the 200 week SMA

-- Prices have clearly broken below the uptrend stared in 2003.

-- Germany also formed a head and shoulders pattern in 2007 and 2008.

-- Prices are below the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- The 10 week SMA is about to move through the 200 week SMA

-- Prices have clearly broken through the uptrend started in 2003

-- Hong Kong topped out in late 2007 and has been cliff diving since

-- Prices are below the 200 day SMA.

-- The 10, 20 and 50 day SMA are all moving lower.

-- The 10 week SMA is now below the 200 week SMA

-- Prices have clearly broken below the uptrend stared in 2003.

Japan is a mess. It has been falling for the last two years

-- Prices are below the 200 week SMA

-- The 10, 20 and 50 week SMA are all below the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- Prices broke the uptrend started in 2003

The UK market is clearly breaking down

-- Prices are below the 200 week SMA

-- The 10 and 20 week SMA have moved through the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- Prices have clearly broken the uptrend in 2003

Brazil is a great example of the phrase "cliff-diving"

-- Prices are below the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- Prices have clearly broken the uptrend started in 2003.

Something else I will note with extreme caution: where is the news from Asia? We're heard a scant nothing from any Asian banks on this. Were they that much smarter then the rest of us? Or is there something else we should know?

Tuesday Treasury Round-Up

2008-10-07T05:23:00.000-07:00

On the yearly chart, notice the following:

-- Prices rallied from the end of October to March of this year as a reaction to the credit crisis.

-- Treasuries sold-off from March until the end of June. This corresponds to a stock market rally that occurred after the Federal Reserve back-stopped the Bear Stearns deal

-- Treasuries started rallying again at the end of June as it became apparent that the credit crisis was deepening an spreading.

On the three month/daily chart, notice the following:

-- Prices have been in a general uptrend for the last three months

-- Prices recently bounced off the 200 day SMA

-- All the SMAs are moving up

BUT

-- They are bunched together withing 1 point of one another. This is a sign of confusion on the part of market participants.

Compare this to the SHYs (short-term paper market)

-- Prices are above the 200 day SMA

-- The 10 and 20 day SMA are above the 50 and 200 day SMA and both are moving higher

-- Prices are above all the SMAs

-- The 50 day SMA has just crossed over the 200 day SMA

This is a much more bullish chart. The main problem is yields are incredibly low -- there is only so far a fixed-income security can rise before yield starts to limit further upside potential.

Media Appearance

2008-10-06T14:34:00.000-07:00

I'll be on KTLK tonight from 9-10 CST to talk about this situation.

Today's Markets

2008-10-06T14:28:00.000-07:00

Wow. What a day. Let's look at this from the yearly chart to put it in complete perspective:

On the SPY's note the following:

-- Prices are below all the SMAs

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below the 200 day SMA

-- Prices are below all the SMAs

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below the 200 day SMA

On the IWMs, note that prices finally broke through the 64 level.

With all of the above charts note that prices gapped down today on high volume.

While I would expect a relief rally over the next few days, this is a terrible way to start the week.

If It Walks Like A Recession and Talks Like A Recession ....

2008-10-06T08:30:00.000-07:00

I've got jury duty today. I'm guessing they probably won't pick me (I'm a lawyer, I've got a masters degree and I'm extremely opinionated) but you never know. I should be back in time to do the market wrap at the end of the day.

The standard press definition of recession is two consecutive quarters of negative GDP growth. However, the National Bureau of Economic Research -- the organization that officially dates recessions -- uses a broader definition:

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

Let's look at each of these items:

Remember we're looking at the change without transfer payments. That makes the spike in May of this year meaningless. Note the year over year trend line has been dropping since July of 2007. Also note the percentage change is nearing 0% over the last few months. In other words -- personal income isn't looking that good.

Note the year over year percentage change in employment growth has been dropping since April 2006 and is now negative.

Note the unemployment rate has been increasing since January of last year.

Industrial production's year over year rate of change has been dropping all year.

Capacity Utilization has been dropping since the end of the third quarter of 2007, although the last three months have seen incremental increases.

The ISM manufacturing number has been dropping since 2004 and recently took a big drop into recessionary (below 50) territory.

The Chicago NAPM number has shown two strong months although the readings for the rest of the year have been borderline recessionary.

All of these numbers tell the story of an economy in a recession. My guess is the NBER will date it from the beginning of this year.

Monday Market Round-Up

2008-10-06T03:00:00.000-07:00

Given all of the action we've seen over the last few weeks I'm going to do a more in-depth post on the markets and cover the SPYs, the QQQQs and the IWMs.

On the 10 year chart notice the following:

-- The SPYs have clearly formed a multi-year double top. This corresponds to the end of the internet bubble in 2000 and the end of the housing bubble last year.

-- Also note the latest sell-off is not approaching the 61.8% Fibonacci retracement level. That means we have at least a point and a half more to go, assuming the market is targeting Fib levels.

Regardless of the trend line you use, the SPYs have clearly broken the upward sloping trend line supporting the market for the last 5+ years.

On the 1 year chart, notice the SPYs are in a clear pattern of lower lows and lower highs. This is a classic bear market formation. Also note:

-- The market has lost almost 30% since its high in October of last year

-- Prices are below the 200 day SMA by almost 16%

-- All the SMAs are moving lower

-- The lower SMAs are below the longer SMAs

-- Prices are below the longer SMAs

Bottom line: this is a bearish chart, plain and simple.

On the multi-year QQQQ chart, notice the current price level has broken all three important uptrends that supported the latest, multi-year rally. In other words, the rally is over.

On the one year chart, notice that prices have consolidated in two triangle. The first lasted two months and occurred at the end of 2007. The second lasted for most of 2008 but prices broke through the lower support line at the beginning of September. Prices have fallen almost 32% from their high at the end of the summer in 2007. Finally, note that prices are at their lowest point of the last year.

On the three month chart, notice the following:

-- Prices are 19% below the 200 day SMA

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

Bottom line: This is a bearish chart.

On the multi-year IWM chart, notice that prices have broken the uptrend the supporter the multi-year rally. Since breaking the rally, the IWMs have moved in a roughly 10 point range between 64 and 74 (with a few spikes up to 76).

On the yearly chart we can better see the trading range that has occurred. 64 has provided incredibly important technical support.

On the three month chart, notice the following:

-- Prices are below the 200 day SMA

BUT

-- All the SMAs are bunched up within a very narrow range. This indicates a lack of direction.

BUT

-- Prices have dropped below the key 64 level.

Bottom line: bearish when considered in line with the other charts.

Weekend Weimer and Beagle

2008-10-03T13:00:00.000-07:00

Earlier this week, Mr$s. Bonndad and I went out to dinner. She asked me if there was anything on the counter that would be attractive to Sarge the Weimer. I said no. So we left.

When we came back we found a chewed can on the floor that use to be a can of Bush's baked beans.

Sarge is fine.

Have a good weekend.

This Week's Economic News Stinks

2008-10-03T08:00:00.000-07:00

From the BLS:

Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs.

With the exception of education and health care and government employees, every other job sector was down. If we take out this months total birth/death model adjustments we get a total job loss of 201,000 (yes, the birth/death model is still adding jobs to the total number of jobs created).

This report represents an acceleration of the trend we have been seeing -- job losses are getting worse. We see that in the new jobless claims:

The number of U.S. workers filing new claims for jobless benefits rose to their highest in seven years due to the impact of hurricanes Ike and Gustav, the government said in a report on Thursday.

The number of initial jobless claims was 497,000 in the week ended September 27, the highest since 517,000 in the week ended September 29, 2001 and above Wall Street economists' forecasts of 475,000.

"It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 45,000 claims to the total," the Labor Department said in its weekly report.

While the numbers from the hurricanes may seem to be distorting the totals, this chart from Calculated Risk says otherwise (click on the chart for a larger image):

As a result of the weak employment situation car sales are tanking:

Toyota, Chrysler, Ford and Nissan Motor Co. reported U.S. sales declines of more than 30% for the month compared with September 2007, while Honda Motor Co. and General Motors Corp. showed sharp downturns as well.

Overall, the industry sold only 964,873 vehicles -- a 26.6% slide from a year earlier and its biggest percentage drop in 17 years, Autodata Corp. said Wednesday.

Industry executives blamed public unwillingness to make purchases amid the nation's financial troubles, as well as a lack of credit from lenders.

"It's tantamount, really, to a natural disaster," said George Pipas, chief sales analyst at Ford. Showroom traffic, he added, was at levels associated with "a large storm or the aftermath of 9/11."

According to CNW Marketing Research, visits to auto dealerships in the last 10 days of September declined 51% compared with the same period last year, the largest slide in at least 22 years.

Toyota's U.S. sales last month were down 32.3% from the year-earlier period, while Ford declined 33.7%, Nissan slipped 36.8% and Honda fell 24%. Since January, Toyota's sales are down 10.4%, while Ford's have fallen 17.1%. Maserati and Bentley were the only makers to post gains in September.

Until last month, Honda had been one of the few carmakers to show a net gain on the year, but declines in August and September have now sucked it down to an overall 1.1% downturn through the first three quarters. Truck- and SUV-heavy Chrysler saw a 32.8% decline for the period, and is off 25% on the year.

GM had a relatively modest 15.5% decline, provoking a near celebratory response from the nation's largest automaker.

While I would blame the credit crunch for some of this, I also think there is a huge drop in consumer confidence right now. With an important election a little more than a month away, constant negative economic news and a financial system that is literally in a meltdown there is no inventive to purchase a car (or any other durable good) right now.

Also note this is an across the board hit. The Japanese and US makers are dropping equally. It's not a change of preference from one brand to another. Instead it's a complete boycott.

On Wednesday we learned that the US manufacturing sector is not doing very well:

The nation's manufacturing firms were contracting at a much faster pace than expected in September, one of the clearest signs to date that the economy has entered recession territory, according to a closely watched survey of top executives released Wednesday.

The Institute for Supply Management index fell to 43.5% from 49.9% in August, much lower than the 49.6% expected by economists surveyed by MarketWatch. See Economic Calendar.

This marked the sharpest one-month drop in the index since 1984. The index is now at its lowest level since October 2001. Read full survey.

Prior to September, the ISM has been treading water, hovering around 50. This seen as a signal the economy was muddling along. But now economists said there is little chance that months of negative growth can be avoided.

This shouldn't be surprising either. Not only is domestic demand dropping, but Europe and Asia are also slowing down. Therefore the export story is going away.

And finally, confirming the obvious slowdown in purchases is the drop in consumer spending is this report of, well, consumer spending from Monday:

Hard-pressed U.S. consumers curbed their spending during August despite an unexpected jump in incomes, according to a government report on Monday that implied worry about the economy's direction was deepening.

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain. Incomes had been boosted early in the year by payments made under an economic stimulus program but that has largely worn off.

So -- people are spending less as evidenced in the macro spending numbers and auto sales numbers. The reason is the continued weakness in the job markets. And it's only going to get worse.

Friday Forex Round-Up

2008-10-03T03:00:00.000-07:00

On the weekly dollar chart, notice the following:

-- The dollar is clearly in a rally

-- The 10 and 20 week SMA are both advancing

-- The 50 week SMA is turning positive

-- Prices are above all the SMAs

-- Prices have broken through more resistance levels established last year

On the daily chart, notice the following:

-- All the SMAs are moving higher

-- The 10 day SMA is between the 20 and 50 day SMA. Aside from that, the SMAs are in a very bullish alignment

-- Prices are above all the SMAs

-- Prices are about to cross over a very important technical level.

Bottom line: these are bullish charts. Both indicate further advances are coming down the pike.

Today's Markets

2008-10-02T14:20:00.000-07:00

On the weekly chart notice that prices are in a clear pattern of lower lows and lower highs. This indicates we're in a bear market. Also note:

-- Prices are below all the weekly SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

This is as bearish as you can get.

On the daily chart, notice the following:

-- Prices are below all the SMAa

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

Both charts are extremely bearish.

We're Nowhere Near A Bottom in Housing

2008-10-02T11:00:00.000-07:00

From Bloomberg:

Home prices dropped in 24 of 25 U.S. metropolitan areas in July from a year earlier, led by declines in Las Vegas and the coastal cities of California, as foreclosures depressed property prices.

Las Vegas had the biggest drop on a per-square foot basis, falling 33 percent, New York-based real estate data company Radar Logic Inc. said in a report today. Los Angeles, Phoenix, Sacramento and San Francisco each dropped about 28 percent. Three of the five worst-performing markets were in California.

``Buyers are increasingly reluctant,'' Radar Logic Chief Executive Officer Michael Feder said in an interview. ``There has been an awful lot of talk about the declining of the housing markets.''

U.S. foreclosures rose to a record 2.75 percent of all mortgages in the second quarter, according to the Washington- based Mortgage Bankers Association. Foreclosed houses tend to sell at a discount of about 20 percent, according to research by Lehman Brothers Holdings Inc. Those discounts are weighing on prices throughout the country, Radar Logic said.

This confirms the information from the latest Case Shiller news release:

Data through July 2008, released today by Standard & Poor's for its S&P/Case-Shiller(1) Home Price Indices, the leading measure of U.S. home prices, shows continued record declines and a continuation in the trend of double digit declines across many cities in the prices of existing single family homes across the United States.

The 10-City Composite and the 20-City Composite Home Price Indices reached new record annual declines of 17.5% and 16.3%, respectively. The 10-City level marked its 10th consecutive monthly report of a record decline, beginning with data reported for October 2007. As depicted on the chart above, during the 1990-92 cycle the record low was -6.3%. While the annual returns of the two indices continue to reach record lows, the pace of the decline has slowed, particularly over the last three months. For the three months of May thru July, home prices cumulatively fell about 2.2%; whereas for the three months of February thru April, and November 2007 thru January, the cumulative rates of decline were closer to 6.0-6.5%.

This is the central problem with the bail-out proposal. At the heart of the economy's problems lie housing prices. As prices drop in value more and more loans wind-up "underwater", meaning the mortgage is worth more than the property. This encourages people to stop paying their mortgage, leading to an increase in foreclosures (which the first article notes are at a record). Banks take these houses and either put them on their balance sheet or sell them at a discount. Either way, the underlying mortgage is not completely paid off, causing the mortgage holder to lose money. Simply put, the only way to stop this problem is to stop home prices from declining. And that's not going to happen anytime soon.

Fed Considers Rate Cut

2008-10-02T08:00:00.000-07:00

From the WSJ:

Federal Reserve officials are weighing further interest-rate cuts, even if Congress passes a $700 billion rescue plan, in the face of a deteriorating economic outlook and severely strained financial conditions.

The Fed's willingness to consider additional cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks. At a regular September meeting, after oil prices had receded, officials still declined to move the central bank's federal-funds target rate from 2%.

A reduction in rates is still far from certain, in part because of inflation worries. But in just the past few weeks, as the credit crisis pummeled the financial system, economic data have become steadily worse, raising fears of a recession.

Rates are currently at 2%. Rates have dropped from 5.25% to 2% and we are currently in a credit crunch. The interest rate isn't the problem. The problem is is confidence in whoever you're lending to. If you think a borrower is about to goo bankrupt -- or may be bankrupt between the time you lend him money and the time he pays it back -- you're not going to make the loan. And that is exactly what is happening right now:

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a $700 billion plan to rescue beleaguered financial institutions.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

``We still see upward pressure on maturities from one week,'' said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France's biggest bank. ``The situation is still blocked and we're unlikely to see spreads decline before confidence has been restored.''

Credit markets have frozen as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Libor, set by 16 banks in a daily survey by the British Bankers' Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.

This problem has nothing to do with interest rates. With the year over year inflation rate at 5.4% and the compound 3-month rate at 7.2%, interest rates are actually negative. In addition, the Fed has a ton of lending facilities in place that are flooding the market with money.

This is about confidence. And there is nothing the Fed can do about that.

Thursday Oil Market Round-Up

2008-10-02T04:39:00.000-07:00

Click on the chart for a larger image.

On oil's weekly chart, notice the following:

-- Oil broke the multi-year uptrend a few weeks ago

-- Prices are below all the weekly SMAs

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

-- The 10 week SMA is about to mover through the 50 week SMA

On the daily chart, notice the following:

-- Prices have been dropping for about two months

-- Prices are below all the SMAs

-- The 20 and 50 week SMA are both headed lower

-- The 10 day SMA is about to move through the 20 day SMA

-- Prices are having a difficult time getting higher than the 20 week SMA

Bottom line: this is now a bearish chart. The weekly chart has broken the mult-year uptrend and has numerous bear market indicators. The daily chart has been dropping for two months and the longer SMAs are both moving lower.

Today's Markets

2008-10-01T14:55:00.000-07:00

Note the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

Also note that since the market dropped like a stone on the failed bail-out day, the market has been treading at the low end of the week's trading range. The big issue here is the bail-out in the Senate. If we see that go through I would expect a rally. I would also expect the opposite to be true.

Read This Now

2008-10-01T09:44:00.000-07:00

Barry nails it.

Make A Crappy Product .... Get A Government Loan!!!

2008-10-01T09:30:00.000-07:00

From the WSJ:

President Bush on Tuesday signed into law a low-interest loan package to aid U.S. auto makers, but those struggling companies will still have to wait months to find out how and when they can tap the $25 billion designated to smooth their transition to building more fuel-efficient vehicles.

The loan package was approved last year as a way to help auto makers and their suppliers meet fuel-economy standards set by the federal government. But the funding for the package wasn't passed by Congress until this year. One estimate put the total cost to auto makers at $100 billion to meet stricter efficiency standards that require vehicles to reach 35 miles per gallon by 2020.

General Motors Corp., Ford Motor Co. and Chrysler LLC have argued it was essential to get the loan help as soon as possible to rejigger plants to build smaller cars and infuse money into programs for gas-electric hybrids and other vehicles relying on alternative fuels. The recent credit crunch, along with double-digit declines in U.S. auto sales, have only put additional pressure on the auto makers to gain quick access government-backed loans, according to industry analysts.

"The auto loans can't come soon enough," said Kip Penniman, automotive analyst at KDP investment Advisors. Calling the loans a "lifeline" for GM in particular, Mr. Penniman said each of the auto makers will likely need to access some of that funding next year. Detroit's Big Three, once bullish on a turnaround in the auto sector in 2009, now expect to be another challenging year for auto sales in the U.S.

This infuriates me to no end. These companies relied on the gas guzzler model of business -- build it big, powerful and without any concept of fuel efficiency. Price them at a good price point so we make good money on them. Deny the possibility of peak oil whenever possible. Rinse. Repeat.

When that stopped being effective, they started to give cars away with "employee pricing". That means the car companies started selling cars at really low levels -- just barely enough to make a profit (if that). But there was a problem with this model. Consumers are now conditioned to expect car companies to offer fire sale prices on their models. So they're going to wait until car companies offer these prices again before they buy.

And as profits circled the bowel, the car companies are coming to the US government and saying, "lend me a ton of money, or half a million people will be unemployed withing two years." That's the real leverage in this deal -- the employees.

Seriously -- would you make a low interest loan to companies with the following stock charts?

This Is a Really Stupid Idea

2008-10-01T07:00:00.000-07:00

From the WSJ:

The Securities and Exchange Commission and the U.S. accounting-standard setter issued guidance that will allow companies to use more flexibility when valuing securities in a market that has dried up, a move the banking industry hopes will relieve pressure on company balance sheets.

Tuesday, the SEC and Financial Accounting Standards Board issued "clarification" to accounting rules that require companies to value securities at the price for which they can be sold in the market, known as mark-to-market, or fair value, accounting. FASB said it is preparing additional guidance for later this week.

The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill.

Because of the credit crunch, the industry has said both the accounting treatment and how it is interpreted by auditors was too conservative and resulted in losses at financial institutions that were bigger than they should have been. They said the rules forced companies to write down assets tied to companies that had no chance of defaulting largely because there were few buyers or sellers.

The move Tuesday addressed many of their concerns. The SEC and FASB stopped short of bowing to pressure from some lawmakers and lobbyists who were seeking a complete suspension of fair-value accounting.

There is a reason these assets are valued at firesale prices: these are the only prices we can actually sell them at. That is where a "willing buyer and a willing seller -- neither being under a compulsion to sell -- would actually sell the stuff. There's a reason these assets are priced at those levels -- they're crap.

I love the model argument. "According to this model, this security is really worth x." Really? Then you buy it and put it in your personal account. I'm sure the bank would be willing to slice off a small piece for your IRA. Just let me know when you're ready.

It's amazing to me how all the "free market people" have utterly thrown their principles away during this crisis. Let's see the credibility go by the wayside.

Wednesday Commodities Round-Up

2008-10-01T04:44:00.000-07:00

On the right hand side of the blog you can see a schedule of when I write about certain topics. That schedule has been thrown out the window over the last few weeks as the markets have gone crazy. I'm going to make a concerted effort to get back to that schedule. To that end...

Click on a picture to get a bigger image.

On the weekly commodities chart (the CRB index) notice the following:

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

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

-- The 10 week SMA has crossed below the 50 week SMA

-- Prices are below all the SMAs

-- Prices have moved through important technical levels established over two years ago.

On the daily chart, notice the following:

-- Prices have been dropping for about three months

-- The 20 and 50 day SMAs are all moving lower

-- The 10 is moving sideways, but this is the most volatile SMA.

-- Prices are below all the SMAs

-- Prices have been using the 20 day SMA as technical resistance

Bottom line: both of these charts are pointing lower. This is good news for the Fed, as it gives them room to lower rates. Now the next question is would that be a good idea right now considering record low interest rates got us in this mess to start....

Today's Markets

2008-09-30T14:43:00.000-07:00

On the daily chart, notice the following:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- Today's price action stopped the bleeding, but didn't do much beyond that.

This Is a Really Stupid Idea

2008-09-30T12:51:00.000-07:00

From Bloomberg:

The U.S. Securities and Exchange Commission and the Financial Accounting Standards Board may issue additional guidance on fair-value accounting rules, people familiar with the matter said.

The SEC may say companies can rely more on assumptions such as expected cash flows in assessing how much assets are worth, said the people, who declined to be identified because the plans haven't been completed. The guidance pertains to a requirement that banks review their assets each quarter and write them down if values have declined.

That's right -- let's start making shit up. Whenever we don't like what the market says, we just make up new rules until the market is more to our liking.

We're Nowhere Near A Bottom in Housing

2008-09-30T10:30:00.000-07:00

From Bloomberg

House prices in 20 U.S. cities declined in July at the fastest pace on record, signaling the worst housing recession in a generation had yet to trough even before this month's credit crisis.

The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Note the year over year rate accelerated. While I don't expect that situation to continue, it's obvious the rate of decline is not letting up.

Over the last few months there were some commentators who noted the rate of decline in individual cities was increasing. Therefore, there were signs of a bottoming. Folks -- my hope is that at the end of this year we'll have some visibility regarding when there might be a bottom. Maybe.

Hedge Funds -- The Next Problem?

2008-09-30T07:30:00.000-07:00

From CNBC:

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

Hedge Funds utilize a securities law that basically states a money manager does not have to register with the SEC if he only sells to "accredited investors." The standard definition for this is a person with $1 million in net worth or $200,000+ year in income for two years in a row (it might be $250,00). By only selling to these people, hedge fund managers don't have to make reports to the SEC. That means we have no idea how much money is actually invested in these vehicles or what investments they own.

There are several other important points. Most hedge funds have a policy that states a person can't simply withdraw money, but can only do so after a specified period of time like 1 year. In addition, some hedge funds only allow people to withdraw at the beginning of the quarter or month etc... That means a hedge fund could experience a flood of redemptions within a short period of time.

Here's the nightmare scenario. Fund A has a poor quarter. A bunch of people redeem shares. This forces Fund A to liquidate a large position in security X, causing security X to drop in price. This leads to Fund B taking a hit and the cycle repeats itself over and over again, essentially showballing downhill.

Yesterday's Markets

2008-09-30T04:47:00.000-07:00

OK -- we're back. I hope everyone had a decent night sleep (if that was possible given the circumstances).

Let's look at the charts.

Click on them to get a bigger picture:

Notice the following:

-- The markets opened lower. This was not because of the bail-out package but because there were several other bank problems in Europe. However, the markets moved sideways until the vote. Then the markets essentially went cliff diving.

-- Notice how the markets dove 4 points on the news that the measure failed. That should tell you a great deal about what the markets want right now.

On the three month chart, notice the following:

-- First, ignore the double printing of yesterday's bar. I have no idea why that happens.

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are headed lower

-- Prices are below all the SMAs in a big way.

This is a bearish chart -- big time.

On the 7-year chart, notice we've moved through the 50% retracement level and are moving to the 61.8% level. Simply using Fib ratios we're looking at roughly the 110 area as out next level of support.

On the multi-year QQQQ chart, notice the index has broken through all important multi-year areas of support. However -- this weeks bar is only from 1-day. That bar could change by Friday, which could somehow keep this latest weekly bar above the long-term support line. However, this chart indicates that NASDAQ is about to break down as well.

On the IWMS, notice we've approached 65 several times this year but have been rebuffed. Now we're approaching that level again and we have a damn good reason to break through it. We haven't -- yet. But we could.

Bottom line: all three averages are looking to break multi-year support.

BackTomorrow

2008-09-29T14:32:00.000-07:00

OK -- take a deep breath for a moment. I know it's probably hard right now. But this is not the time to do any analysis. It is the time to walk away until tomorrow morning.

I will have a complete market analysis up by 8AM CST -- that's a half hour before the market opens. I will try to have it up sooner but that might be difficult. There is a lot of information to sort through right now.

Liquidity Is Still A Huge Issue

2008-09-29T10:30:00.000-07:00

From Marketwatch:

The Fed said it was boosting the size of its dollar swap arrangements to $620 billion from $290 billion previously. The agreement, with nine central banks, allows authorities to provide short-term dollar loans to commercial banks in an effort to ease short-term funding woes that have resulted from reluctance by commercial banks to lend short-term funds to each other through the interbank market.

.....

"Market participants are reluctant to engage in transactions with each other because of heightened counterparty risk and fear that they could be the next in line to experience a 'bank run' and therefore need all the liquidity they can get themselves," wrote economists at Danske Bank in Copenhagen.

Such fears left Bradford & Bingley and Fortis struggling for funding. Their subsequent collapse then contributed to further tensions in the money market.

Amid the money-market tensions, central banks have been "forced to get more and more active in providing liquidity to the market because the market isn't doing it internally," said Don Smith, an economist at brokerage firm ICAP.

Think about this. The Federal Reserve is doubling their injections into the financial system because of the current situation. And the central issue is lack of trust. Everyone is concerned that the company they lend money to won't be around in a week or even tomorrow. As a result, no one is lending any money -- even really short-term money. That tells us there is pure fear in the market right now. Until that fear subsides we've got problems. Big problems.

Citigroup Buys Wachovia

2008-09-29T09:00:00.000-07:00

From Marketwatch:

Citi will acquire "the bulk of Wachovia's assets and liabilities," the FDIC statement said. Under the agreement, Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, while the FDIC will take losses beyond that.

.....

The Wachovia deal was facilitated by the FDIC with the blessing of the Federal Reserve and the Treasury Dept.

Let's back up for a moment and look at the above information in a bit more detail.

1.) 13.46% of Wachovia's loans were bad. That should tell you how bad things are out there. This is also why I am deeply concerned about this "mark to market" study they want to include in the bail-out bill. If we start using a mark to fantasy asset valuation model we're in deep trouble.

However, consider the depth of the problem. Over 10% of the loans were in poor shape. That's a ton of loans.

The reason?

Wachovia reported $9.7 billion of losses in the first half of 2008. The slide toward collapse began when the bank paid more than $24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $122 billion of the adjustable- rate home loans. Kennedy Thompson, the chief executive officer at the time, later admitted that the purchase at the height of the real estate boom was ill-timed.

Wachovia is the largest holder of option ARMs, ahead of Washington Mutual, the Seattle-based lender that collapsed last week. The loans are prone to default because they allow borrowers to skip some interest payments and add them to the principal. The terms backfired when housing markets weakened, leaving borrowers with loans bigger than the value of their home. Prices in California during August fell 41 percent from year-earlier levels.

Gee - y'think? Someone had absolutely no idea about the problems coming down the pike when they made that purchase. That shows a completely stupid management that deserves to fail in my book.

2.) The FDIC and Federal Reserve are busy bees aren't they? They're playing deal maker for anyone, trying to avoid a ton of problems for the US taxpayer if at all possible. My guess is the bank insurance program is under serious strain right now and the FDIC and Treasury are trying to avoid another set of problems. Here's the reason I think that:

Citigroup will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said in the statement. The regulator will take on losses beyond that amount in exchange for $12 billion in preferred stock and warrants.

Citi is first in line to absorb losses. Federal authorities start to absorb losses after the $42 billion is absorbed.

And here's another set of problems for Citi:

``Of course they are going to raise capital,'' Oppenheimer & Co. analyst Meredith Whitney said in an interview on CNBC. ``I don't know how they absorb $42 billion on the income basis they have,'' Whitney said.

Who is going to provide money to Citi? Who in their right mind thinks any financial company is worth the paper they are printed on right now?

Bottom line: the Feds are trying to patch up one hole, while creating another down the line.

Why the Mark To Market Issue is So Important

2008-09-29T05:22:00.000-07:00

Consider the following from a Reuter's story on Wachovia:

Investor concern about Wachovia intensified on Friday after JPMorgan said it would take a $31 billion write-down on loans it acquired when it took over Washington Mutual Inc's banking unit on Thursday.

One of the biggest issues facing anybody with an interest in the financial sector is this: what is the actual value of the company? Mark to market forces a company to acknowledge reality by providing market determined prices for its assets. The idea that the SEC needs to study mark to market is ludicrous. What is essentially being asked is "how much can we lie to shareholders about the value of our assets?"

The Treasury Plan

2008-09-29T03:00:00.000-07:00

From the WSJ:

The bill authorizes $700 billion for the fund in installments. Treasury will first get $250 billion, with an additional $100 billion immediately accessible. Congress would have the option of blocking the final installment of $350 billion by issuing a joint resolution within 15 days of any requests.

Although I don't like the spending this is a lot more palatable. It gives the Treasury enough money to probably make a dent in the current situation while allowing Congress to use the "power of the purse" to control the situation.

Treasury plans to hire asset managers to determine how to buy bad loans and other ailing assets from financial institutions. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. The legislation requires Treasury to set guidelines within 45 days for pricing methods and setting the value of troubled assets, as well as mechanisms for purchasing assets, procedures for selecting asset managers and criteria for identifying troubled assets to buy.

The legislation requires Treasury to purchase assets at the lowest price, and allows the government to buy through auction or direct from institutions.

Treasury expects to start buying the simplest assets first -- mortgage-backed securities, for example -- followed by more complex securities. Treasury likely will publish a list of the assets it is seeking to purchase. Banks and other institutions are expected to submit bids in a competition to sell bad loans and securities.

DANGER WILL ROBINSON....DANGER WILL ROBINSON.....

This is where we had problems before and still have them. Many of the details, including pricing and purchase procedures, will be worked out between those managers and Treasury. That phrase should scare the hell out of anyone reading it -- and rightfully so. It's a terrifying phrase.

This isn't too hard people. If you're going to do this you should set a few basic guidelines. One -- those who made really stupid decisions in buying this paper without analyzing it should not be able to dump it at an above market rate. Letting them do so subsidizing that mistake on the backs of taxpayers.

I have no problem with hiring asset managers. I've worked with these type of people before and they're very capable. But with the amount of money involved -- and with tax dollars on the table -- more details need to be included here.

The legislation places restrictions on executive compensation for certain companies that sell assets to Treasury. If Treasury buys assets from a company directly -- something it would do if a firm were failing -- then no "golden parachute" exit payments could be made during the period when Treasury has an ownership stake in the firm. Companies that sell assets to Treasury through an auction process will be subject to some limits. Firms that sell more than $300 million of assets to Treasury won't be allowed to make any new golden-parachute payments to top executives. A tax-deduction limit on compensation above $500,000 also will apply.

This should be regulated by Boards of Directors. But that isn't going to happen anytime soon. So this is a good start. Paying people for failure encourages bad management decisions. Someone has to tell that to companies in the market place.

The legislation requires Treasury to receive warrants in companies that participate in the program. If a company sells its assets through an auction, Treasury will get a nominal amount of nonvoting warrants. If Treasury buys assets directly, it could get a majority equity stake.

No problems here. The bottom line is we're engaging in a partial nationalization scheme here. Might as well go full boat and actually own part of these companies.

The Troubled Asset Relief Fund will be overseen by a bipartisan congressional commission that will receive reports from Treasury every 30 days. The program will also be overseen by a board comprising the heads of Treasury, the Federal Reserve, the Securities and Exchange Commission, the Housing and Urban Development Department and the Federal Housing Finance Agency.

The office of accountability will have an inspector-general office within Treasury.

Treasury will have to submit a written report to Congress no later than April 30 on the overall financial regulatory system and "its effectiveness at overseeing the participants in the financial markets, including the over-the-counter swaps market and government-sponsored enterprises" and recommend improvements.

Not good. There are a lot of inside players here who have an interest in not performing decent oversight. I would prefer to see some outside parties from industry players who aren't participating in the program (which might be hard to find). In lieu of that, perhaps econ and finance professors who know high-finance. This looks like letting the fox guard the hen house.

If after five years the government has a net loss, the president will be required to submit a legislative proposal to seek reimbursement from the financial institutions that participated.

Good idea, but we need more meat on the bones. My guess is there isn't any meat because doing so would make this a non-starter legislatively.

Treasury will buy mortgage-backed securities, mortgages and other assets secured by residential real estate. The legislation requires Treasury to use its position as the investor in those loans and securities to "encourage the servicers of the underlying mortgages" to help minimize foreclosures.

It also calls for Treasury to "identify opportunities" to acquire "classes of troubled assets" that will improve the ability of Treasury to help modify and restructure loans. The idea is that Treasury would be more patient with homeowners who have fallen behind on their payments than commercial lenders.

There is way too much soft language in this section to make it meaningful. The Treasury will "use its position to encourage...." Simply put this is feel-ggod language that has no bite. It's a dead issue.

The bill would require Treasury to establish, alongside the asset-purchase plan, a program to insure mortgage-backed securities. Financial institutions that want to participate would essentially pay the government a fee and, in return, the government would insure their assets against any future losses.

This should have been done when times were good. This will help should there be another crisis in 10 or more years. For now, this is a good start.

The legislation would require the Securities and Exchange Commission to study so-called mark-to-market accounting standards, which require that firms reflect the market value of assets on their books. Such accounting has culminated in many financial institutions writing down big losses as the value of certain assets has fallen in price. The SEC would have to study the accounting rule's effect on balance sheets and report to Congress within 90 days of its findings.

Excuse me? How in the hell did this get in there? This looks to me like the beginning of serious trouble. First, the SEC is a neutered animal right now. It has done nothing during the current crisis to warrant any confidence in any of its abilities. Secondly, I can tell you exactly what that report will say. "Mark to market caused the problem. Let's use a new "mark to fantasy" method of accounting that will make the books look really good." That's where this one is leading folks.

Weekend Wiemar and Beagle

2008-09-26T12:45:00.000-07:00

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

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

A Closer Look At the Financial Sector

2008-09-26T11:30:00.000-07:00

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

On the yearly chart, notice the following:

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

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

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

On the three month chart, notice the following:

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

US dollar advances further to 4-day high versus Israeli shekel, Friday, September 26, 2008 1:33:16 PM

2008-09-26T10:38:00.000-07:00

Extending early European session`s uptrend, the US currency advanced to a 4-day high of 3.4438 against its Israeli counterpart at about 6:15 am ET. Thereafter, the pair ticked down slightly and as of now is worth 3.4242. The dollar-shekel pair closed yesterday`s deals at 3.4100.

Aussie recoups losses against most majors, Friday, September 26, 2008 12:37:35 PM

2008-09-26T10:37:00.002-07:00

The Australian dollar strengthened against most of its major counterparts from previous session`s downtrend in New York morning deals on Friday.

After touching a 1-week low of 0.8243 against the US dollar and 0.8545 versus the Canadian dollar at about 3:55 am ET, the Aussie gained ground in New York morning session on Friday. As of now, the Australian currency is trading at 0.8317 against the greenback and 0.8608 versus the loonie.

The U.S. Commerce Department revealed that Gross Domestic Product grew at a rate of 2.8 percent in the April-to-June period. This was slower than the 3.3 percent pace that was reported last month.

The statistics also showed that personal spending advanced at a 1.2 percent rate during the quarter, revised down from the 1.7 percent that was previously estimated.

The Aussie ticked up to 1.7539 against the euro and 88.45 versus the yen by about 10:00 am ET from last session`s weekly lows of 1.7686 and 86.89, respectively. At present, the Aussie is worth 1.7577 against the euro and 88.26 versus the yen.

Canadian Dollar Shows Mild Strength Versus Majors, Friday, September 26, 2008 12:53:59 PM

2008-09-26T10:37:00.001-07:00

The loonie showed mild strength against its major counterparts on Friday in New York, most notably reaching a fresh weekly high against the euro.

Crude oil dropped on Friday as the ongoing problems in the U.S. financial sector could continue to cause traders to feel energy demand could be dragged lower. Light sweet crude for November delivery moved to $105.67, down $2.35 on the session. Prices hit as low as $104.25 in overnight deals.

The Canadian dollar experienced choppy trading with the U.S. dollar on Friday. The pair bounced between 1.0372 and 1.0314 throughout the day, staying just below Thursday`s multi-month high.

Investors weighed a slew of reports showing U.S. gross domestic product and personal consumption fell unexpectedly in the second quarter, while a University of Michigan survey showed consumer confidence dropped more than expected in September.

The loonie climbed to a fresh weekly high versus the euro on Friday. The Canadian dollar advanced to 1.5071 just after 6:00 am ET, up from an early morning low of 1.5164. Traders pondered a report showing French gross domestic product contracted at an expected rate in the second quarter.

Swiss Franc Lacks Direction With Majors, Friday, September 26, 2008 1:10:25 PM

2008-09-26T10:37:00.000-07:00

The Swiss franc posted lackluster performances against its major counterparts on Friday in New York. Traders weighed a report showing the Swiss leading indicator fell less than expected in September.

Indicting continued easing in Swiss economic growth, the KOF leading indicator in September declined further to 0.62 points from a revised 0.73 points in August, the KOF Economic Institute said. The August reading was upwardly revised from 0.68. Economists were looking for a reading of 0.54 for September.

According to the institute, Switzerland`s annual gross domestic product growth will slow in the months ahead. Among the three modules of the KOF indicator, the Core GDP module continued its downward trend. Meanwhile, the construction and banking modules showed a stabilizing effect.

The Swiss franc lacked direction with the dollar on Friday. The pair bounced between 1.0911 and 1.0828 throughout the day, staying below Monday`s multi-week high.

Investors pondered a slew of reports showing U.S. gross domestic product and personal consumption fell unexpectedly in the second quarter, while a University of Michigan survey showed consumer confidence dropped more than expected in September.

Versus the euro, the franc pulled back from a weekly high on Friday. After advancing to 1.5860 by 7:30 am ET, the euro fell back to 1.5909 in the afternoon. Traders digested a report showing French gross domestic product contracted at an expected rate in the second quarter.

Against the pound on Friday, the franc moved with uncertainty. The two currencies moved between 1.9941 and 2.0024, staying above last week`s monthly low.

The Bank of England said it will increase the term of its existing operations to lend US dollar funds against collateral eligible in short-term repos and US Treasuries. Alongside an operation to lend funds overnight, the central bank will lend US$30 billion of funds for one week today. The Bank of England`s overnight dollar repo operations will be US$10 billion on Friday.

Japanese yen pares gains against most majors, Friday, September 26, 2008 12:12:14 PM

2008-09-26T10:36:00.000-07:00

The Japanese currency pared early gains against most of its major counterparts during New York mid-day trading on Friday.

The Ministry of Internal Affairs and Communications said that core inflation in Japan increased 2.4 percent on year in August, in line with analyst expectations. It also held steady from the July figure, equaling an 11-year high.

Overall nationwide CPI was up an annual 2.1 percent, matching forecasts after a 2.3 percent gain on year in the previous month. Overall inflation gained 0.3 percent on month.

After hitting an 8-day high of 105.05 by about 8:35 am ET, the yen reversed its direction against the US dollar in New York mid-day deals today. Currently, the pair is worth 106.08.

The U.S. Commerce Department revealed that Gross Domestic Product grew at a rate of 2.8 percent in the April-to-June period. This was slower than the 3.3 percent pace that was reported last month.

The Japanese currency trended down against the euro and the British pound in New York morning deals from previous session`s uptrend. As of now, the yen is trading at 154.77 against the euro and 195.14 versus the pound, compared to early 1-week highs of 153.50 and 193.22, respectively.

Against the Swiss franc, the yen weakened to 97.76 by about 10:00 am ET from last session`s 4-day high of 96.63 today. Presently, the franc-yen pair is trading near 97.40.

Hong Kong Dollar Recovers Asian session Losses against US Dollar, Friday, September 26, 2008 7:37:49 AM

2008-09-26T10:35:00.001-07:00

The Hong Kong dollar recovered Friday`s Asian session losses against the US dollar during early European deals. The local dollar thus climbed from a 1-week low of 7.7840 to 7.7697 against the greenback by about 4:00 am ET. The pair that closed Thursday`s deals at 7.7785 is now worth 7.7743.

Global Central Banks Brace For Liquidity Crunch, Friday, September 26, 2008 11:10:04 AM

2008-09-26T10:35:00.000-07:00

Friday, the Federal Reserve and leading European central banks announced coordinated measures to address funding pressures. Central banks in Asia Pacific also took measures to boost liquidity.

The Fed along with the European Central Bank, the Bank of England and the Swiss National Bank provided U.S. dollar liquidity with a one-weak maturity. Reiterating that they will continue to work together, the central banks said they are ready to take additional measures as needed to deal with the ongoing pressures in the funding markets.

The latest liquidity boost from global central banks came following a breakdown of talks over a US$700 billion rescue plan for the US financial system. Sentiment in financial markets also took a hit on the news of collapse of U.S. bank Washington Mutual. Late Thursday, JPMorgan Chase & Co. said that it has agreed to acquire all deposits and assets of Washington Mutual for about $1.9 billion, after the struggling company was seized by regulators in what is considered as the largest bank failure in U.S. history.

In a statement, the Fed said the Federal Open Market Committee authorized a $10 billion increase in its temporary swap facility with the ECB and a $3 billion increase in its facility with the SNB. These expanded facilities will support the provision of U.S. dollar liquidity in amounts of up to $120 billion by the ECB and up to $30 billion by the SNB.

Together, these changes represent a $13 billion addition to the $277 billion previously authorized swap deals with other central banks. Previously, the Fed had authorized swap lines with the Bank of Japan ($60 billion), the Bank of England ($40 billion), the Reserve Bank of Australia ($10 billion), the Bank of Canada ($10 billion), the Bank of Sweden ($10 billion), the National Bank of Denmark ($5 billion), and the Bank of Norway ($5 billion). The Fed said these arrangements have been authorized through January 30, 2009.

The actions were in response to the crisis at U.S. financial firms, which took excessive bets on mortgage-backed investments resulting in the write off of billions of dollars of assets. The troubled U. S. investment bank Lehman Brothers went bankrupt, while Merrill Lynch got sold to the Bank of America in a quickly-negotiated $50-billion transaction. Meanwhile, the U.S. government stepped in to save insurer AIG from sinking. The Fed extended an $85 billion loan, essentially nationalizing the firm. Further, investment banks Goldman Sachs and Morgan Stanley converted themselves into regulated commercial banks.

In the latest move, the ECB decided to provide US dollar one-week funding over the quarter end to European banks, applying a variable rate tender procedure and with an intended volume of US$35 billion. The bank received bids worth US$82.495 billion from 52 banks. The bank offered the funds at a marginal rate of 4.5%. In its overnight operations, the ECB lent US$30 billion, reduced from an initial US$40 billion, against a bid amount of US$41.38 billion from 33 bidders at a marginal rate of 2.25%.

The SNB allotted US$4.9 billion at a marginal interest rate of 1% in its one-week repo operation, which had twelve banks participating. In its overnight operation, the central bank allotted US$7 billion against a bid amount of US$8.3 billion from 13 banks at a marginal rate of 1.82%.

The Bank of England said in a statement that it will increase the term of its existing operations to lend US dollar funds against collateral eligible in short-term repos and US Treasuries. Alongside an operation to lend funds overnight, the central bank will lend US$30 billion of funds for one week today.

The UK central bank`s overnight dollar repo operation was US$10 billion on Friday, reduced from US$40 billion earlier, against a bid amount of US$12.36 billion. The cover ratio was 1.24 and weighted average accepted rate of 2.208%. In the one-week operation, the bank received US$31.65 billion worth bids and the cover ratio was 1.06%. The weighted average accepted rate was 2.991%.

The BoE added that Bank`s long-term repo operations against extended collateral, including mortgage securities, will for a period be held weekly and enlarged. The first such operation will be held on September 29. It will be an auction for GBP40 billion, for maturity to January 15, 2009.

Meanwhile, the Danish central bank extended the banks and mortgage credit institutes lending facilities given the tight liquidity conditions. The Danmarks Nationalbank said it will introduce a facility offering banks and institutes credit on the basis of their excess capital adequacy and will increases the number of assets accepted as collateral. These measures will come into effect on September 26. The central bank received bids worth US$16.8 billion against an offered amount of US$5 billion in its US dollar auction.

Markets in Asia Pacific also received funds on Friday. Data from the Reserve Bank of Australia offered A$816 million today in repo. Further, the Australian central bank reportedly said it offered US$10 billion in its first US dollar repurchase operation. Further, the Australian government announced that it will invest A$4 billion in two tranches in the domestic residential mortgage-backed securities to boost home lending.

Elsewhere in the region, the Bank of Japan injected 1.5 trillion yen or US$14billion into its money markets.

The South Korean Finance Ministry announced that it would supply at least US$10 billion into the swap market in the coming weeks in order to provide more liquidity. Choi Jong-ku, head of the ministry`s international financial bureau said the central bank would continue to supply dollars whenever necessary.

European currency falls to 1-week low against Japanese yen, Friday, September 26, 2008 6:09:45 AM

2008-09-26T10:34:00.001-07:00

Extending Asian session downtrend, the European currency declined to 1-week low against the Japanese yen and a 3-day low versus the Swiss franc during early European deals on Friday. The euro also remained down against the currencies of US and UK.

In economic news, Germany`s import price inflation remained stable in August at its highest level in nearly eight years on higher energy prices.

The Federal Statistical Office said today that the import price index rose 9.3% year-on-year in August, marking the same pace as in July, while quicker than the 8.9% increase in June. Meanwhile, economists had forecast the rate to ease to 9.1%. The August rate was the highest since November 2000. In the same period last year, prices were down 0.6%.

The French economy contracted 0.3% quarter-on-quarter in the second quarter, confirmed the initial estimate, a final report from the statistical office INSEE revealed today. The economy had expanded 0.4% in the first quarter.

The Federal Reserve, the Bank of England, the European Central Bank, or ECB and the Swiss National Bank or SNB revealed today that they are introducing operations to provide U.S. dollar liquidity with a one-week maturity using their reciprocal currency arrangements or swap lines.

The Federal Open Market Committee authorized a $10 billion increase in its temporary swap facility with the ECB and a $3 billion increase in its facility with the SNB. According to the Fed, these expanded facilities will now support the provision of U.S. dollar liquidity in amounts of up to $120 billion by the ECB and up to $30 billion by the SNB.

Against the US dollar, the European currency showed weakness during early deals on Friday. At 3:55 am ET, the euro-dollar pair touched a low of 1.4568, compared to 1.4610 hit late New York Thursday. The pair is now worth 1.4578.

The European currency that closed Thursday`s North American session at 0.7954 against the British pound edged down to 0.7940 at 5:05 am ET Friday.

The Bank of England said today that it will increase the term of its existing operations to lend US dollar funds against collateral eligible in short-term repos and US Treasuries.

Alongside an operation to lend funds overnight, the central bank will lend US$30 billion of funds for one week today. The Bank of England`s overnight dollar repo operations will be US$10 billion on Friday.

Against the Swiss franc, the single currency edged lower during Friday`s early deals. At 3:30 am ET the euro-franc pair slipped to a 3-day low of 1.5880, compared to 1.5937 hit late New York Thursday. The pair is currently quoted at 1.5891.

The Swiss leading indicator in September declined further to 0.62 points from a revised 0.73 points in August, the KOF Economic Institute said today. August`s reading was upwardly revised from 0.68. Economists were looking for a reading of 0.54 for September.

The euro that closed Thursday`s New York deals at 155.70 against the Japanese yen declined to a 1-week low of 153.50 at 3:55 am ET Friday. The euro-yen pair is currently trading at 153.86.

Core inflation in Japan rose 2.4 percent on year in August, in line with analyst expectations, the Ministry of Internal Affairs and Communications said today. It also held steady from the July figure, equaling an 11-year high. Overall nationwide CPI was up an annual 2.1 percent, matching forecasts after a 2.3 percent gain on year in the previous month. Overall inflation gained o.3 percent on month.

Across the Atlantic, the US final second quarter GDP, personal consumption expenditure and the University of Michigan`s confidence survey are scheduled for release later in the New York session.

Russian ruble slips to 2-day low against US dollar, Friday, September 26, 2008 6:37:48 AM

2008-09-26T10:34:00.000-07:00

Against the US dollar, the Russian ruble edged down to a 2-day low of 25.0850 at about 6:25 am ET Friday. If the Russian currency weakens further, it may likely target the 25.3 level. The dollar-ruble pair closed Thursday`s North American session at 25.0275.

Employment Picture is Deteriorating Badly

2008-09-26T06:53:00.000-07:00

Click on the images below for a larger image

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

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

Friday Forex Round-Up

2008-09-26T03:00:00.000-07:00

On the weekly chart, notice the following:

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

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

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

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

On the daily chart notice the following:

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

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

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

-- The 20 day SMA is turning lower

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

We're Nowhere Near A Bottom In Housing

2008-09-25T15:08:00.000-07:00

Read this. Now.

Dollar weakens versus major Latin American currencies, Thursday, September 25, 2008 4:49:55 PM

2008-09-25T14:21:00.000-07:00

The US currency weakened against its major Latin American counterparts during New York trading on Thursday after some significant economic reports were released during morning session turned out to be disappointing.

According to a report released today by the US Department of Commerce that new home sales fell 11.5% to a seasonally adjusted annual rate of 460,000 units in August from the upwardly revised July rate of 520,000. The Commerce Department also said that durable goods orders fell 4.5% in August following a downwardly revised 0.8% increase in July.

The Department of Labor released that jobless claims unexpectedly jumped to 493,000 from the previous week`s revised figure of 461,000.

The US dollar dropped against the Brazilian real during New York trading on Thursday. The greenback fell to a 2-day low of 1.8145 versus the real by about 3:25 pm ET from today`s high of 1.8655. The pair that closed yesterday`s deals at 1.8645 is now worth 1.8210.

The Brazilian Census Bureau (IBGE) reported Thursday that unemployment declined to 7.6 percent in August, compared to 8.1 percent in July.

After hitting a 1-week high of 10.8615 by about 8:00 am ET, the US currency lost ground against its Mexican counterpart in New York afternoon deals on Thursday. At about 3:25 pm ET, the pair slipped to 10.6975, compared to Wednesday`s closing value of 10.8500.Currently, the greenback is trading at 10.72 versus the Mexican peso.

During New York trading on Thursday, the US dollar weakened against the Chilean peso. The pair dropped to 537.05 by about 1:15 pm ET from early high of 541.50. Presently, the pair is trading at 537.28 from yesterday`s New York session close of 541.38. The pair had hit a multi-day high of 545.15 yesterday.

The dollar, which closed yesterday`s New York session at 2158.00 against the Colombian peso, dropped to 2077.50 in New York afternoon session today.

Dollar weakens versus Chilean peso, Thursday, September 25, 2008 3:37:41 PM

2008-09-25T14:20:00.001-07:00

During New York trading on Thursday, the US dollar weakened against the Chilean peso. The pair dropped to 537.05 by about 1:15 pm ET from early high of 541.50. Presently, the pair is trading at 537.28 from yesterday`s New York session close of 541.38. The pair had hit a multi-day high of 545.15 yesterday.

US dollar pares recent gains against most majors, Thursday, September 25, 2008 4:12:35 PM

2008-09-25T14:20:00.000-07:00

The US currency pared recent gains against most of its major counterparts during New York afternoon deals on Thursday. As of now, the greenback is trading near 1.4627 against the euro, 1.0898 versus the Swiss franc, 106.39 versus the Japanese yen, 1.8393 against the British pound and 0.8363 versus the Aussie.

US dollar eases from 1-week high against Mexican peso, Thursday, September 25, 2008 3:26:12 PM

2008-09-25T14:19:00.000-07:00

After hitting a 1-week high of 10.8615 by about 8:00 am ET, the US currency lost ground against its Mexican counterpart in New York afternoon deals on Thursday. Currently, the greenback is trading at 10.70 versus the Mexican peso, compared to Wednesday`s closing value of 10.8500.

Kiwi declines against US dollar, Thursday, September 25, 2008 2:54:07 PM

2008-09-25T14:18:00.000-07:00

Extending European deal`s downtrend, the New Zealand dollar declined against the US dollar during New York trading on Thursday. As of 2:45 pm ET, the kiwi dropped to 0.6798 versus the greenback, compared to early high of 0.6908. Presently, the kiwi-buck pair is worth 0.6817.Currently, the kiwi is trading near 22.62 versus the yen and 1.2248 against the Aussie.

Greenback drops to 2-day low versus Brazilian real, Thursday, September 25, 2008 2:44:27 PM

2008-09-25T14:17:00.000-07:00

The US dollar dropped against the Brazilian real during New York trading on Thursday. The greenback fell to a 2-day low of 1.8170 versus the real by about 2:30 pm ET from today`s high of 1.8655. The pair that closed yesterday`s deals at 1.8645 is now worth 1.8220.

The Brazilian Census Bureau (IBGE) reported Thursday that unemployment declined to 7.6 percent in August, compared to 8.1 percent in July.

Dollar Moves Higher Against Major Rivals, Thursday, September 25, 2008 1:58:46 PM

2008-09-25T14:16:00.000-07:00

The U.S. dollar gained on other majors as the U.S. government`s bailout plan may be nearing a solution. The greenback moved away from monthly lows against the euro and sterling and also gained on the yen and franc.

The dollar surged in afternoon trading and hit a three-day high before easing back. The greenback touched as high as 1.4559 giving back some of the gains and moving to 1.4588. The GfK consumer climate survey found that the German consumer sentiment index for October increased to 1.8 points from September`s revised 1.6 points.

The greenback gained sharply against the sterling, hitting as high as 1.8304 in the mid-afternoon. The gain took the greenback away from the five-week low of 1.8668 it reached earlier in the morning.

The dollar gained on the yen, reaching 106.71 in the mid-afternoon, and also climbed to 1.0917 against the Swiss franc. The greenback was mildly lower at 1.0341 against the Canadian loonie.

US dollar eases from 2-day high versus South African rand, Thursday, September 25, 2008 1:56:26 PM

2008-09-25T14:15:00.000-07:00

After hitting a 2-day high of 8.2153 by about 7:50 am ET, the US currency declined against the South African rand in New York deals on Thursday. The dollar-rand pair dropped to 8.0825 at about 10:35 am ET from Wednesday`s New York session close of 8.1733. As of now, the pair is trading at 8.1200.

The Statistics South Africa reported on Thursday that producer price index rose 19.1% in August, faster than the 18.9% increase in July, but slower than the 19.3% rise expected by analysts. Export prices rose 7.8%, while import prices increased 23%.

US dollar weakens against Romanian Leu, Thursday, September 25, 2008 1:34:13 PM

2008-09-25T14:14:00.000-07:00

The US currency weakened against its Romanian counterpart in late European deals on Thursday. The dollar-Leu pair declined to 2.5001 by about 7:05 am ET, compared to yesterday`s closing value of 2.5029.

Thursday, the Board of the National Bank of Romania decided to maintain its monetary policy rate unchanged at 10.25% per annum. The decision matched economists` expectations.

Today's Markets

2008-09-25T14:05:00.000-07:00

(Click on the image for a larger image.)

On the daily chart, notice the following:

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

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

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

We're Nowhere Near A Bottom In Housing

2008-09-25T11:30:00.000-07:00

From Reuters:

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

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

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

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

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

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

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

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

That problem is increasing in the new homes market:

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

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

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

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

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

The President's Speech

2008-09-25T09:00:00.000-07:00

Here is a link to the text:

First, how did our economy reach this point?

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

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

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

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

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

There are a few points I would add.

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

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

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

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

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

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

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

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

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

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

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

Thursday Oil Market Round-Up

2008-09-25T06:40:00.000-07:00

On the weekly chart, note the following:

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

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

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

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

-- Prices are below all the SMAs

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

On the daily chart notice the following:

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

-- The shorter SMAs are below the longer SMAs

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

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

Bottom line: these are still bearish charts.

Wednesday Commodities Round-UP

2008-09-24T14:21:00.000-07:00

OK -- back to the charts....

On the weekly CRB chart, notice the following:

-- Prices are below the all the SMAs

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

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

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

Bottom line: the weekly chart is bearish.

On the daily chart, notice the following:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

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

-- Prices have been dropping for three months.

Bottom line: this is a bearish chart as well

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

2008-09-24T09:00:00.000-07:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Contact Information For Senate Banking Committee

2008-09-24T06:55:00.000-07:00

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

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

Dollar Advances Against Most East European Currencies, Wednesday, September 24, 2008 7:35:36 AM

2008-09-24T04:41:00.000-07:00

The dollar advanced against the Czech koruna, Slovakian koruna and Polish Zloty during early deals on Wednesday. But the dollar weakened against the Turkish lira and the Hungarian forint, but moved range-bound versus the Estonian kroon

From US, the existing home sales report is scheduled at 10:00 am ET today. The US Federal Reserve Chairman Ben Bernanke`s testimony at Congress`s Joint Economic Committee is also scheduled at 10:00 am ET.

The dollar climbed to a 2-day high of 16.5750 against the Czech koruna by about 7:00 am ET Wednesday. The pair was worth 16.4800 at Tuesday`s close.

Against its Turkish counterpart, the dollar showed weakness during Wednesday`s early deals. At about 3:10 am ET, the dollar-lira weakened to 1.2374, compared to Tuesday`s closing value of 1.2453. Thereafter, the dollar has gained slightly and is presently trading at 1.2423.

The Turkish statistical office, Turkstat said the Production Workers Index rose 0.6% year-on-year and stood at 85.8 in the second quarter from 86.2 recorded in the first quarter. In the first quarter, the number of production workers was up 1.7%. A year-ago, the index was up 2%.

Against the Hungarian forint, the dollar fell after rising to a 2-day high of 164.64 by about 4:05 am ET. Presently the pair is trading at 164.07, compared to Tuesday`s closing value of 164.76.

In economic news, the volume of retail sales in Hungary declined year-on-year in July, a report by the Hungarian Statistical Office said today.

Retail sales volume fell a calendar-adjusted 1.8% in July compared with a 1.9% decline in June. The sales volume at current prices increased to HUF 556.7 billion from HUF 535 billion in the previous month. On a monthly basis, retail sales declined a seasonally and calendar adjusted 0.1% in July compared with a 0.3% fall in the previous month.

The US currency that was worth 20.6720 against the Slovakian koruna at yesterday`s close, hit as high as 20.6850 by about 7:00 am ET Wednesday.

The US dollar started ticking up against the Polish Zloty by about 2:45 am ET Wednesday. The dollar climbed from 2.2430 to 2.2697 by about 7:20 am ET. The pair was worth at 2.2607 Tuesday`s close.

The greenback largely moved sideways against the Estonian kroon during Wednesday`s early trading. The greenback largely bounced between 10.6850 and 10.6420, compared to 10.6470 hit late yesterday in New York. As of now, the pair is trading at 10.66.

US dollar hits 5-day high against Icelandic krona, Wednesday, September 24, 2008 7:22:11 AM

2008-09-24T04:40:00.000-07:00

During early European deals on Tuesday, the US dollar climbed to a 5-day high against the Icelandic krona. The dollar also showed strength against its Scandinavian counterparts.

Against the Swedish krona, the US dollar traded higher during early deals on Wednesday. At 5:30 am ET, the dollar-krona pair reached a high of 6.5855, compared to 6.5766 hit late New York Tuesday. The pair is currently trading at 6.5774.

The Swedish central bank and the Federal Reserve agreed today on a US$10 billion swap facility in order to improve liquidity conditions in global financial markets. The swap facility will expire on January 30, 2009.

Sweden`s economic tendency indicator, which measures business and consumer confidence in the economy, rose marginally to 86.0 in September from 85.6 in August, results of the latest economic tendency survey released by the National Institute of Economic Research, or NIER, showed today.

Further, the survey found that confidence in the Swedish manufacturing sector continued to decrease in September. The corresponding indicator fell to minus 14 from minus 12 in August. In July, the indicator logged minus 11. The September reading was in line with the consensus forecast.

The confidence indicator for the Swedish industry as a whole declined to minus 2 from minus 1 in August and plus 4 in July. On the other hand, the consumer confidence index rose to minus 14.4 from minus 16.5, while economists were expecting the index to fell to minus 17.

The US currency that closed Tuesday`s North American session at 5.6157 against the Norwegian krone edged higher to 5.6239 at 3:55 am ET Wednesday. The dollar-krone is now worth 5.6115.

Against its Danish counterpart, the greenback showed strength during Wednesday`s early deals. At about 4:05 am ET, the pair reached 5.0972, compared to Tuesday`s closing value of 5.0938. The pair is currently quoted at 5.0850.

Denmark`s national statistics office said today that the consumer confidence index rose to minus 11.1 in September from minus 12.2 in August.

The US dollar traded higher against the Icelandic krona during today`s early deals. At 5:35 am ET, the dollar-krona pair hit a 5-day high of 95.49, compared to Tuesday`s North American session close of 94.67.

The Statistics Iceland announced that the Consumer Price Index or CPI rose 14% year-on-year in September, smaller than the 14.5% rise recorded in August, which was its fastest pace since June 1990. Economists had expected for an increase of 14.2%. This was the first decline in the annual inflation rate since January.

The greenback that closed yesterday`s New York deals at 3.4201 touched a low of 3.4083 against the Israeli shekel at 5:45 am ET Wednesday. The dollar-shekel pair is currently trading at 3.4143.

The US dollar largely bounced between 8.17 and 8.10 against the South African rand during Wednesday`s early deals. The dollar-rand pair that closed Tuesday`s deals at 8.2037 is now worth 8.1525.

In central bank action, the Norges Bank is expected to announce its latest interest rate decision at 8am Eastern Time.
The economic reports scheduled for release in the U.S. include existing home sales for August and MBA mortgage applications for September. Additionally, investors may focus on Fed Chairman Ben Bernanke`s testimony at Congress` joint economic committee.

Icelandic krona slides to 5-day low against US dollar, Wednesday, September 24, 2008 5:47:03 AM

2008-09-24T04:39:00.001-07:00

Against the US dollar, the Icelandic krona traded lower during early deals on Wednesday. At about 5:25 am ET, the krona declined to a 5-day low of 95.26 per dollar, compared to 94.67 hit late New York Tuesday. If the krona drops further, 95.7 is seen as the next target level.

A report released by the Statistics Iceland showed that CPI rose 14 % on year in September compared to 14.5% rise in August.

US dollar hits 2-day high against Czech Koruna, Wednesday, September 24, 2008 6:22:37 AM

2008-09-24T04:39:00.000-07:00

Against the Czech Koruna, the US dollar edged higher during early deals on Wednesday. At 6:10 am ET, the dollar-koruna pair reached a 2-day high of 16.5480, compared to 16.48 hit late New York Tuesday. If the pair gains further, 16.60 is seen as the next target level.

Euro extends gains against most majors, hits 2-day high against franc, Wednesday, September 24, 2008 3:29:33 AM

2008-09-24T04:38:00.001-07:00

The European currency extended its Asian session gains against the US dollar, the Swiss franc and the Japanese yen. The euro thus reached a 2-day high against the franc. On the other hand, the euro showed choppy trading against the British pound.

The industrial economic situation in France deteriorated further, a monthly business survey published by the statistical office INSEE showed today. The business confidence index eased to 92 in September from 97 in July. The indicator stands eight points below its long-term average and the expected level of 97 in September.

Against the US dollar, the European currency edged higher to 1.4710 during early Asian deals on Wednesday. Thereafter, the euro slipped slightly but rebounded after hitting a low of 1.4648 at 2:05 am ET. The euro-dollar pair is currently trading at 1.4688, compared to 1.4652 hit late New York Tuesday.

The European currency largely bounced between 0.7925 and 0.7909 against the British pound during today`s early deals. The pair is currently trading at 0.7915, compared to 0.7912 hit late New York yesterday.

Against the Swiss franc, the European currency traded higher during early deals on Wednesday. At 3:00 am Eastern Time, the euro-franc pair reached a 2-day high of 1.5971. This may be compared to Tuesday`s closing value of 1.5917.

The euro extended its Asian session gains against the Japanese yen during early European deals on Wednesday. The euro-yen pair is currently trading at 156.18, compared to Tuesday`s closing value of 154.66.

An index that measures Japanese all-industry business conditions in Q3 was down 10.2 percent compared to the previous quarter, the Ministry of Finance said today in its business survey index. That was higher than the -15.2 percent quarterly decline in Q2.

At 4:00 am Eastern Time, the German research institute Ifo is expected to release results of its business climate survey for September. The expectations index is forecast to climb to 87.3 from 87 recorded in August. The business climate index is expected to log 94.1,down from 94.8 in the previous month. At the same time, the current assessment index is predicted to decline to 101.9 from August`s 103.2.

Elsewhere, the European Central Bank is slated to release the Eurozone current account data for July. In June, the seasonally adjusted current account balance had recorded a deficit of EUR8.2 billion. Meanwhile, the unadjusted current account balance was a deficit of EUR1 billion.

The Italian statistical office ISTAT is also expected to release its report on July retail sales at 4.00am ET. Retail sales are expected to increase 0.1% on a monthly basis, reversing a 0.1% rise seen in June. Year-on-year, retail sales are forecast to decline 0.8%, after recording a much bigger fall of 3.4% in June.

The economic reports scheduled for release in the U.S. include existing home sales for August and MBA mortgage applications for September. Additionally, investors may focus on Fed Chairman Ben Bernanke`s testimony at Congress` joint economic committee.

British pound rises to new multi-week high against yen, Wednesday, September 24, 2008 5:21:02 AM

2008-09-24T04:38:00.000-07:00

Wednesday morning, the British pound reached a new week high against the Japanese yen and 2-day highs against the currencies of Europe and Switzerland. The pound also showed strength against the US dollar.

Against the US dollar, the British pound gained ground after hitting a low of 1.8507 at 1:35 am ET Wednesday. The pound-dollar pair is currently quoted at 1.8604, compared to 1.8525 hit late New York Tuesday.

The British currency edged down to 0.7928 against the European currency before reversing direction during early European deals on Wednesday. At 4:00 am ET, the pound reached a 2-day high of 0.7892 against the euro, compared to yesterday`s closing value of 0.7912.

The German IFO business conditions survey report for September, the Euro-Zone current account balance data for July and the Italian retail sales report for July released today, likely influenced deals in the euro-pound pair.

The Eurozone current account deficit narrowed to EUR1.7 billion in July on working day and seasonally adjusted basis, the European Central Bank said in a report today. The deficit for June was revised to EUR6.1 billion.

Results of the business confidence survey carried out by the Italian research institute, ISAE showed today that the nation`s business confidence indicator fell to 82.7 in September from 83.3 in August. Economists had expected the index to log a reading of 83.3. The September reading is the lowest October 2001.

German business sentiment fell to 92.9 in September from 94.8 in August, reports said citing a monthly survey from the Munich-based Ifo research institute today. The indicator stood below the expected reading of 94.1.

Against the Swiss franc, the sterling traded higher during early deals on Wednesday. The pound-franc pair that closed Tuesday`s North American session at 2.0127 is currently trading at a 2-day high of 2.0227.

The British currency extended its Asian session gains against the Japanese yen during early European deals on Wednesday. At 3:15 am ET, the sterling-yen pair reached a new multi-week high of 197.48, compared to Tuesday`s close of 195.55. The pair is now worth 197.17.

An index that measures Japanese all-industry business conditions in Q3 was down 10.2 percent compared to the previous quarter, the Ministry of Finance said today in its business survey index. That was higher than the -15.2 percent quarterly decline in Q2.

At 6.00am ET, the Confederation of British Industry is scheduled to release report on distributive trade for September.

The economic reports scheduled for release in the U.S. include existing home sales for August and MBA mortgage applications for September. Additionally, investors may focus on Fed Chairman Ben Bernanke`s testimony at Congress` joint economic committee.

Kenyan shilling falls to 6-day low against US dollar, Wednesday, September 24, 2008 2:37:43 AM

2008-09-24T04:37:00.000-07:00

At 2:20 am ET Wednesday, the Kenyan shilling declined to a 6-day low of 73.50 against the US dollar. If the shilling drops further, 73.6 per dollar is seen as the next target level. The dollar-shilling pair closed Tuesday`s New York deals at 73.15.

US dollar reverses early Asian session losses against majors, Wednesday, September 24, 2008 1:13:14 AM

2008-09-24T04:36:00.000-07:00

During early deals on Wednesday, the US dollar reversed its early Asian session losses against its major counterparts.

Against the European currency, the US dollar gained ground after hitting a low of 1.4710 at 8:10 pm Eastern Time Tuesday. The dollar is currently trading at 1.4668 against the euro, compared to 1.4652 hit late New York yesterday.

The US dollar touched a low of 1.8589 against the British pound at 8:10 pm ET Tuesday. Thereafter, the dollar reversed its direction and is currently trading at 1.8533, compared to yesterday`s close of 1.8525.

The US currency that closed Tuesday`s North American session at 1.0865 against the Swiss franc edged down to 1.0834 during early Asian deals on Wednesday. Thereafter, the dollar-franc pair gained ground and reached 1.0882 at 12:45 am ET.

Against the Japanese yen, the US dollar slipped to 105.37 before gaining ground at 9:00 pm ET Tuesday. The dollar-yen pair that closed yesterday`s New York deals at 105.56 is now worth 105.80.

An index that measures Japanese all-industry business conditions in Q3 was down 10.2 percent compared to the previous quarter, the Ministry of Finance said today in its business survey index. That was higher than the -15.2 percent quarterly decline in Q2.

Traders in Europe await the release of the German IFO business conditions survey report for September, the Euro-Zone current account balance data for July and the Italian retail sales report for July.

The economic reports scheduled for release in the U.S. include existing home sales for August and MBA mortgage applications for September. Additionally, investors may focus on Fed Chairman Ben Bernanke`s testimony at Congress` joint economic committee.

Why Congress Should Oppose the Bail-Out Package

2008-09-24T03:00:00.000-07:00

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

Let's start with the text of the deal:

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

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

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

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

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

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

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

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

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

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

Sec. 6. Maximum Amount of Authorized Purchases.

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

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

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

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

Folks, this is a boondoggle for several reasons.

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

2.) Why this huge dollar figure?

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

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

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

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

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

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

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

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

Bernanke to Congress: Please Use Fantasy Prices

2008-09-23T13:43:00.000-07:00

From Bloomberg:

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

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

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

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

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

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

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

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

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

This plan is pure bullshit. Plain and simple.

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

Who's To Blame?

2008-09-23T09:30:00.000-07:00

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

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

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

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

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

Here's a great summation:

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

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

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

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

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

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

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

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

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

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

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

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

Add these three together and you get serious trouble.

Greenback gains versus majors following Richmond Fed`s manufacturing survey, Tuesday, September 23, 2008 10:14:05 AM

2008-09-23T08:56:00.000-07:00

Manufacturing activity in the central Atlantic region weakened further in September, according to the Richmond Fed`s latest survey. The seasonally adjusted manufacturing index decreased to -18 in September from August`s reading of -16, the report said.

The US dollar gained some ground against the rest of majors following the report. As of 10:10 am ET, the dollar was quoted at 1.4747 against the euro, 1.8533 against the pound and 1.0825 against the Swiss franc.

Greenback slips to new 7-week low versus Canadian dollar, Tuesday, September 23, 2008 9:46:11 AM

2008-09-23T08:55:00.001-07:00

The US dollar plummeted against its Canadian counterpart on Tuesday morning in New York, setting a new 7-week low of 1.0315 by 9:30 am ET. This came after the report showed that Canadian consumer price inflation accelerated to its fastest annual rate of growth in over five years in August. As of 9:40 am ET, the dollar-loonie pair was quoted at 1.0319.

According to a report released by Statistics Canada today, consumer prices in August grew 3.5% compared to the same month last year, reflecting the fastest pace of growth since March of 2003, when prices rose at an annual rate of 4.2%.

Greenback steady versus majors ahead of Sept. Richmond Fed manufacturing index report, Tuesday, September 23, 2008 9:59:26 AM

2008-09-23T08:55:00.000-07:00

The US Richmond Fed manufacturing index for September and the house price report for July have been slated for release at 10:00 am ET. A testimony by the Fed Chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson at the Senate Banking Committee are also expected during this time period. The US dollar held steady against other major currencies ahead of key reports and testimonies. As of 9:55 am ET, the dollar was quoted at 1.0806 against the franc, 1.4762 versus the euro and 105.71 against the yen

Israeli shekel sets fresh multi-month high against dollar, Tuesday, September 23, 2008 9:21:13 AM

2008-09-23T08:54:00.000-07:00

The Israeli shekel jumped to a fresh multi-month high against the US dollar on Tuesday morning in early New York trading. By 9:10 am ET, the shekel set 3.3965 against the dollar, the highest level since July 18 of this year. The dollar-shekel pair that closed yesterday`s trading at 3.4054 is currently worth 3.4030.

Traders continued to mull the Bank of Israel`s decision yesterday to leave its short-term borrowing costs unchanged. The central bank`s decision to retain its key lending rate at 4.25% was widely expected.

Euro weakens against Swiss franc, Tuesday, September 23, 2008 8:30:41 AM

2008-09-23T08:53:00.000-07:00

Extending today`s early European session downtrend, the euro dropped to 1.5920 against its Swiss counterpart by 8:20 am ET Tuesday from 1.5959 hit around 4:05 am ET. Currently, the euro-franc pair is trading at 1.5926.

Canadian dollar rises following August CPI Report, Tuesday, September 23, 2008 7:03:18 AM

2008-09-23T08:52:00.001-07:00

Following the release of the Canadian August CPI Report, the Canadian dollar rose against its major counterparts. As of now, the loonie is trading at 1.0317 against the US dollar, 0.8710 against the Aussie, 102.20 against the yen and 1.5252 against the euro.

South African rand falls to 5-day low against US dollar, Tuesday, September 23, 2008 7:30:38 AM

2008-09-23T08:52:00.000-07:00

Against the US dollar, the South African rand declined to a 5-day low of 8.2150 at 7:05 am ET Tuesday. If the South African currency drops further, 8.22 is seen as the next target level. The dollar-rand pair closed Monday`s New York deals at 7.9894.

The South Africa`s rand weakened after a government report showed that the nation`s retail sales dropped for a fifth month in July, falling an annual 4.6 percent, after declining a revised 1.5 percent in June.

The CPIX inflation rate rose to 13.6 percent in August from 13 percent in July. Analysts expected inflation of 13.3 percent. Prices rose 0.9 percent in the month.

Why Paulson's Plan Could Lead To More Trouble

2008-09-23T07:30:00.000-07:00

From Bloomberg:

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

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

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

.....

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

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

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

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

Bad-Debt Purchases

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

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

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

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

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

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

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

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

So let's review:

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

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

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

A Big, Inter-Market Post

2008-09-23T04:21:00.000-07:00

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

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

Let's start with the SPYs

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

-- The SMAs are bunched together in a close range

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

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

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

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

Note the following:

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

-- Prices broke through all the SMAs

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

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

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

-- The dollar broke through all the SMAs

-- Right now the 50 day SMA is providing support

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

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

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

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

-- The shorter SMAs are still below the longer SMAs

-- Prices moved through the 10 and 20 day SMA

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

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

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

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

Bonddad vs. ATT Internet Access

2008-09-22T09:02:00.000-07:00

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

The 1.8 Trillion Bailout

2008-09-22T06:01:00.000-07:00

From CNBC.

Here is a list of all the proposed programs proposed.

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

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

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

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

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

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

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

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

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

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

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

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

~~Pretty~~ really scary.

Paulson Plan Part II

2008-09-22T05:39:00.000-07:00

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

From the WSJ:

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

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

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

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

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

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

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

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

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

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

This situation is approaching the unreal.

Hank Paulson to the US -- Grab Your Ankles

2008-09-22T05:03:00.000-07:00

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

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

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

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

Let's look at some other glaring problems:

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

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

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

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

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

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

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

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

Federal Government Will Take Bad Assets

2008-09-19T06:21:00.005-07:00

From the WSJ:

The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.

Paulson has a press conference at 10AM EST that will explain what is going on. Here are my issues on the surface:

1.) "Regulations are toooooooo complicated! Please stop!"

2.) The Federal government stops.

3.) "We made a lot of bad decisions. Please take these assets from us so the financial system doesn't fall apart!"

4.) Define "bad asset".

5.) What's the total amount the federal government is willing to commit?

Here are some conditions:

1.) Executives at any company that sells an asset can only take home 10 times what the lowest paid person in the company takes home.

2.) They have to buy their own health insurance

3.) The company cannot engage in any lobbying for the next 25 years.