More Signs of Credit Market Problems

From the WSJ:

The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC.

Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about $28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for $8.2 billion, issued loans now trading a 26% discount.

.....

Double-digit declines in the market value of these loans are very unusual, and a big problem for many banks, which sit on a pipeline of $152 billion in loans that they have promised to make but have yet to sell to investors.

With the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do.

Yesterday I wrote about the latest Federal Reserve loan survey, which shows the market for credit is tightening to levels not seen since the last recession (and in some cases the situation is worse than the last recession). Now we have more evidence that the credit markets are in serious trouble.

It's news like this that make the "earnings outside of financials are great" argument so incredibly dangerous. Think about the broad implications of this situation. Last spring one of the big events moving the markets was leveraged buyouts. The inability of banks to move loans off their books at a decent price makes buyouts incredibly difficult if not outright impossible. That prevents an important bullish situation -- namely M&A -- from developing. It also makes financing in general more difficult.

Standard Deviation Channel

I recently read article about, about standard deviation channel, (which as you may already know is one of my favorite indicators), and I was shocked, although author of this article explained what standard deviation channel is in mathematics but it had very little to do with Forex or any other financial market. Furthermore, I read other articles about standard deviation channels and what I found out is that they all were giving useless information to readers, so here is the right way to use standard deviation channel.

First of all, authors suggest that, when price will reach upper line, it is time to take SHORT position and vice versa, when price will reach lower line you should take LONG position because market is oversold.

This is true only if market is trending. It is quite safe to treat then lower line as support line and upper line as resistance line, and more over (depending on your standard deviation channel settings) 95% of price movement will happen between this two lines, as long as market is trending. The obvious question here is how to tell if Forex is trending, but this question is beyond the scope of this article, at least for now J.

What I like about standard deviation is that it allows to easily determine trend, you just need to draw channel over the selected period of time and that’s it, you have detected trend. However to use this indicator efficiently you need some experience, ideally you should see channel on the chart before you draw any lines on it. If you don’t see it, then do not worry it is all about experience.

How to use correctly Standard Deviation Channel

If market is in uptrend, you should take ONLY long positions, when price will reach lower line. Never take SHORT position in uptrend when the price will reach upper line, that do NOT mean that market is overbought, in uptrend price can easily go waaay over upper line and hit STOP LOSS, of trader who was stupid enough to take SHORT position in bull market.

Obviously, the opposite goes for market in downtrend, do not take long positions on lower line, NEVER.

Most importantly, this indicator is called standard deviation channel and you should use it only with CHANNELS not with any random piece of chart, below is the stock market chart with two correctly drawn channels.

This is A Great T-Shirt

This is from Mish's site. To all the perma bulls out there...

Monoline Insurer Timeline

The following time line is from the WSJ's Marketbeat blog. I've been a bit behind the curve on this issue, so this time line was great way to catch-up.

* Oct. 24-25, 2007: Ambac reports a big loss in its most recent quarter, followed a day later by the announcement of losses at MBIA.

* Nov. 1: Standard & Poor’s says it is unlikely to downgrade credit ratings on the highly-rated insurers, as a result of the big markdowns they took on their credit derivatives portfolios during the third quarter. (Note: statements from the ratings agencies in this time period prove to be variable.)

* Nov. 6: In response to a report from Morgan Stanley questioning the company’s financials and whether it will end up realizing more losses from the debts insured, Ambac says it is “confident in the quality of our internal credit ratings process,” and that “we have been very transparent to the market and our investors by disclosing significant detail on our direct mortgage and CDO exposure in our various public disclosures.”

* Nov. 7: Ambac holds a conference call to reassure investors. Robert Genader, Ambac’s chief executive officer, says on a conference call that his company is misunderstood despite its balance sheet not being hurt by the subprime-market turmoil. Mr. Genader said he hoped to “restore faith in the credit-underwriting skills…that this company has displayed for more than 35 years.”

Dec. 6: Moody’s Investors Service said that it considers MBIA “somewhat likely” to fall short of its capital requirements. Investors seize on this, since Moody’s held a different view about one month earlier.

* Dec. 11: Private-equity firm Warburg Pincus agrees to commit as much as $1 billion to MBIA to help boost the financial guarantor’s capital level, and help head off a downgrade of its triple-A credit rating.

* Dec. 13 - Ambac is named Monoline of the year by International Securitisation Report.

* Dec. 14: Moody’s affirms the rating of MBIA at AAA, but changes the outlook to “negative.” It also affirms the AAA-rating of Ambac.

* Dec. 17: Bill Ackman of New York hedge fund Pershing Square Capital Management LLC, a long-time critic of the insurers, says Moody’s actions should be described as “creeping incrementalism.” The ratings firm doesn’t want “to be the causal factor for these companies blowing up,” he says. “They’re giving them yet another warning.”

* Dec. 19: Standard & Poor’s has another warning — cutting the ratings of rival bond insurer ACA Financial Guaranty (which only had a single-A rating to begin with) to junk status. It also puts a negative outlook on Ambac.

* Dec. 20: MBIA shares slump after the guarantor, on its Web site, discloses $8.1 billion in exposure to complex and risky securities backed by home loans.

* Dec. 21: Ambac is put on a rating watch by Fitch Ratings, a competitor to Moody’s and Standard & Poor’s.

* Jan. 9: MBIA says it plans to raise $1 billion by issuing a kind of debt known as surplus notes.

* Jan. 15: MBIA says it plans on cutting its stock dividend by 62%, which would result in $80 million in cash savings a year, and that it reinsured some of its portfolio, which would reduce its capital requirement by as much as $150 million.

* Jan. 16: Seeking to reassure investors, Michael Callen, CEO of Ambac, says the firm has “great confidence in our plan to enhance Ambac’s capital position by over $1 billion within an accelerated time frame.” In a change of heart, however, Moody’s Investor Service says it is placing Ambac on watch for possible downgrade.

* Jan. 17: “In view of the uncertainty generated by Moody’s surprising announcement,” Ambac starts to rethink its capital spending plan. Moody’s, meanwhile, puts MBIA’s credit rating under review.

* Jan. 18: MBIA says it is “surprised” by Moody’s move, saying that its capital strengthening regimen “meets or exceeds the requirements previously outlined” by credit-rating agencies, in past months. “We have developed and are implementing a comprehensive capital strengthening plan in good faith reliance on Moody’s stated requirements,” says Gary Dunton, MBIA CEO.

* Jan. 19: Two months of warnings have gone by without action, so Fitch steps in front of the brigade, lowering ratings on Ambac to double-A, after Ambac had scrapped its earlier plan to raise $1 billion in the stock market.

* Jan 22: Mr. Callen, Ambac CEO, says that “we view the current perceptions of Ambac’s business by both the market and ratings agencies as underestimating Ambac’s strengths and future potential.”

* Jan 24: Fitch strikes again, lowering the rating of SCA, another guarantor, to single-A.

* Jan. 31: MBIA reports a fourth-quarter loss of $2.3 billion, but the company sounds a positive note on its conference call. Mr. Dunton says the market “overreacted to the real and obvious problems that we’ve had.” Later in the day, S&P counters this, warning MBIA of a possible downgrade due to capital concerns and projected losses. “The magnitude of projected losses underscores our view that time is of the essence in the completion of capital-raising efforts,” S&P says.

* Feb. 1: Moody’s says it plans on finishing its review by mid-February; says “some bond insurers” are likely to be downgraded.

Today's Markets

SPY: -2.87%
QQQQ: -2.85%
IWM: -2.56%

This week isn't turning out to be a good one for the market. For the second day in a row the market experienced a big sell-off.

To place this in perspective, here is a 7-day chart in 5 minute increments.



Last week the SPYs had a huge rally, largely spurred on by the Fed's rate cuts. From bottom to top, the SPUs gained about 5.28%. However, the SPYs have dropped hard, losing 4.13% from their top on Friday.



Today, the markets gapped lower and then continued downward from there. The good news is the selling was pretty controlled -- meaning there aren't any huge downward moving bars. However, there was some volume pops at the end of trading, indicating traders didn't want to hold shares overnight. That's never a good sign.



The QQQQs have given up all of their gains made last week. So much for that rally.

Over the last two days, notice the severity of the downward sloping angle -- that's some heavy selling.



Here's a closer look at the last two days. Near the close today, the sellers were out in force, indicating there was some pretty strong concern.



The good news with the IWMs is they haven't sold off as hard as you would think, given this index has more risk. But the reason for that may be it has sold off far harder over the last 6 months or so.



Yesterday I commented that the IWM sell-off wasn't as bad as the other indexes. However, today's action made up for that in spades. Note the sharpness of the sell-off and the heavy selling at the end.

Over the last two days I've taken an in-depth look at all three of the above indexes. In all three analysis I noted the market was in the middle of a bear market rally. Below are the daily charts with the Fibonacci numbers that shows the markets have reached their respective Fibonacci levels and are now headed back down.

A Completely Bogus Way to Look At Earnings

From IBD:

With 58% of the S&P 500 reporting results as of Monday morning, fourth-quarter earnings are on track to dive 20.7% from a year earlier, according to Thomson Financial. It would be the worst showing since the fourth quarter of 2001.

But that's mainly due to massive write-downs and other losses by banks. When all results are in, the sector will likely show a net loss.

"It's awful when you aggregate everything. But strip out financials, it's phenomenal," said David Dropsey, senior research analyst at Thomson Financial.

S&P 500 earnings excluding financials look set for an 11% gain.

This is nothing more than pure bull market spin and it is complete and total garbage, plain and simple. "One of the most important sectors in the economy is really sick right now. But if we don't look at that sector then everything is just hunky dory." I hope to God one of the idiots who is talking like this gets extremely sick, but the Doctor says to them, "outside of that cyst on your brain that may kill you within six months and cause you unbearable pain in the meantime, you're really quite healthy."

For those of you people who are peddling this crap, let's review econ 101.



Above is a poorly drawn chart of the US economy. Does anybody notice where the financial industry sits? At the middle of the economy. They are sometimes called "financial intermediaries" because they intermediate between lenders and borrowers. The financial sector takes individual investors money, aggregates it and then makes bigger loans to large companies.

But that sector -- the sector that provides financing for the whole damn economy -- is going through it's worst period since the S&L debacle right now. Read the post below on the tightening of lending standards. Why do you think that is happening right now? Because business is booming and earnings are increasing? Or because there are serious problems?

If instead of the financial sector we were talking about the water buffalo castration business I wouldn't have this issue. That is obviously a very small section of the market and pretty meaningless.

But when one of the largest sectors of the economy and the stock market is having major problems -- and that sector just happens to provide the lubricant for the whole economy -- then the fact that that sector's earnings are in the toilet is more than a statistical inconvenience.

Pick the Smart Money Manager

From the WSJ:

Financial stocks have languished for months amid revelations of bad mortgage bets and concern about recession. Money managers increasingly disagree about whether the sector remains too risky for investors to wade into, or has become ripe with cheap names poised for a rebound.

"The financials really aren't a big area for us. A lot of the stocks we're looking at are still in pretty defensive sectors," like healthcare and consumer staples, said Bob Millen, chairman of Jensen Investment Management in Portland, Ore. He says the firm lately has stayed away from downtrodden financial names like Dow component Citigroup despite the fact that they fit certain data-based criteria that Jensen uses to do its initial screening of potential names to buy.

"We just feel like we can't understand the business well enough," in part because of complicated mortgage investments Citigroup holds, said Mr. Millen.

Randy Bateman, chief investment officer at Huntington Asset Advisors in Columbus, Ohio, is more bullish on the sector, which he believes investors have discounted too deeply.

"Everyone got punished in the initial wave of concern about what's on these companies' balance sheets," said Mr. Bateman. "But as the details emerge, if some of these guys haven't had write-downs yet, you start to think it's not going to happen."

225 mortgage lenders have imploded.

$100 billion has been written off on balance sheets

At some point the financials will be ripe for bottom fishing. But it isn't now.