8/29T News & Notes

The noose is tightening...

RSX Russia may cut off oil flow to the West - Telegraph
The UK's Telegraph reports that fears are mounting that Russia may restrict oil deliveries to Western Europe over coming days, in response to the threat of EU sanctions and Nato naval actions in the Black Sea. Any such move would be a dramatic escalation of the Georgia crisis and play havoc with the oil markets. Reports have begun to circulate in Moscow that Russian oil companies are under orders from the Kremlin to prepare for a supply cut to Germany and Poland through the Druzhba (Friendship) pipeline. It is believed that executives from lead-producer LUKoil have been put on weekend alert. "They have been told to be ready to cut off supplies as soon as Monday," claimed a high-level business source, speaking to The Daily Telegraph. Any move would be timed to coincide with an emergency EU summit in Brussels, where possible sanctions against Russia are on the agenda... A supply cut at this delicate juncture could drive crude prices much higher, possibly to record levels of $150 or even $200 a barrel. With US and European credit spreads already trading at levels of extreme stress, a fresh oil spike would rock financial markets. The Kremlin is undoubtedly aware that it exercises extraordinary leverage, if it strikes right now.

"Israel reaches strategic decision not to let Iran go nuclear" - Jerusalem Post
The Jerusalem Post reports that Israel will not agree to allow Iran to achieve nuclear weapons and if the grains start running out in the proverbial egg timer, Jerusalem will not hesitate to take whatever means necessary to prevent Iran from achieving its nuclear goals, the government has recently decided in a special discussion. According to the Israeli daily Ma'ariv, whether the United States and Western countries will succeed in toppling the ayatollah regime diplomatically, through sanctions, or whether an American strike on Iran will eventually be decided upon, Jerusalem has put preparations for a separate, independent military strike by Israel in high gear.

Bank of China flees Fannie-Freddie - FT
FT reports Bank of China has cut its portfolio of securities issued or guaranteed by troubled US mortgage financiers Fannie Mae (FNM) and Freddie Mac (FRE) by a quarter since the end of June. The sale by China's fourth largest commercial bank, which reduced its holdings of so-called agency debt by $4.6 bln, is a sign of nervousness among foreign buyers of Fannie and Freddie's bonds and guaranteed securities. Foreign investors have been a mainstay of the market for such debt, but uncertainty over the mortgage financiers' capital positions and the timing and structure of a potential government rescue has made some investors reassess their exposures. Asian investors in particular have become net sellers of agency debt, said analysts.

8/27T12:30 Notes from the Edge

This week in the GMT:

Global Money Trends (GMT), one of our most respected partners in our fight to see through the smoke and mirrors and reveal the truth, highlights the correlation between the presidential race and the Dow Jones average. After doing extensive work, GMT states that even small moves in the polls can have real effects on the markets. Generally speaking a move in favor of the democratic candidate results in a sell off in the Dow and vice verse. This knowledge may help us understand day to day volatility from here to Nov. 4th.

GMT also confirms our belief from three weeks ago that the current counter trend rally(CTR) should last 9 weeks. As discussed, the prior two counter trend moves during this bear market have lasted about 9 weeks and this third move should be no exception. So, if we are keep score, the markets are in the 7th week of the CTR. We should expect one more move higher on lighter volume before the bear market long term trend resumes in Sept..

RCM Comment:

Market manipulation or coincidence; you be the judge. A major hurricane is headed into the Gulf of Mexico and another is close on its heals, yet oil prices drop 2% today led by an 8+% decline in Natural gas prices. The Nat. gas market is notoriously thin and therefore easy to manipulate. Pundits will tell you on TV today that the energy complex is down because inventories were higher than expected in the Nat. gas market. However, I will offer another reason for the sell off. The powers that be want to mute the obvious rally in the energy sector that will take place next week do to the hurricane and they used the inventory number today to hammer a thin market before a long weekend to create a cushion. Am I right? Let's see where the energy complex is trading this time next week.

John Malden comments: "Dead man Walking"

In John's recent missive he analyzed the demise of companies like Bear Sterns, Fannie Mae, Freddie Mac etc. and came up with a list of developments common to all that were red flags. Using these flags he then searched the financial space for other companies that were exhibiting the same flags but have not yet totally collapsed. Here are both lists:

Red Flags:

Common stock too low to issue new shares.*
Preferred stock yield too high to issue new shares economically.*
Issuing debt is uneconomic.*
More write-offs coming in days to come.*
Business trends are awful.*
Denial and announcements that seem bullish to prop up the stock eg. large share buy backs authorized but never completed.

List of stocks symbols:

WM, WB, GM, F, NCC, RF, C, WABC, ZION, KEY

8/27T8:07 News...

New credit hurdle looms for banks - WSJ
WSJ reports U.S. and European banks, already burdened by losses and concerns about their financial health, face a new challenge: paying off hundreds of billions of dollars of debt coming due. At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt. The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months.



August 26, 2008 -- Big, Big Picture -- The world is now going through the deleveraging of the greatest credit mountain in human history (the credit build-up started right after World War II). What are the implications?The first -- there's a dash for cash throughout the world. Big, sophisticated money sees what's going on, and they want cash, all the cash they can a accumulate.Second -- Today, all cash is fiat junk currency. When this realization hits, the next big move will be into the only reliable cash outside the central bank system. That move will be to -- gold. There will be a rush for gold somewhere ahead. Even now, I suspect gold is in a bottoming process (but not the gold shares).That's the BIG picture. Now for the secondary picture. On January 22, 1134 individual stocks broke to new lows on the NYSE. On that day 3209 stocks were traded, -- which means that 33.8% of all the stocks traded on the NYSE on that day hit new lows. This ghastly performance was so bad that I immediately labeled January 22 as the "internal low" for the market. The Dow closed that day at 11971. Later on July 15 with the Dow higher at 10962, an incredible 1304 stocks on the NYSE closed at new lows. On that day 3209 stocks were traded on the NYSE. This means that an amazing 40.6% of all the stocks traded on the NYSE closed at new lows. July 15 was arguably the single worst technical day of any day in NYSE history.I took July 15 as a second critically important "internal low" day. Conclusion -- the Dow MUST remain above 10961 on a closing basis. Breaking the Dow level set on July 15 would be catastrophic

8/26T3:00 FDIC notes...

A Problem (List) in Perspective
Last Update: 26-Aug-08 14:45 ET
With the Apollo 13 mission, the world knew Houston had a problem. By the same token, the world over knows the banking industry has some big problems these days as it grapples with the fallout from a depressed real estate market.

How bad is the problem? The latest data provided by Bloomberg shows credit losses driven by the housing depression are just over $500 billion worldwide. Increasingly, pundits are estimating credit losses will top $1 trillion before it is all said and done.
By region, the Americas accounts for half of the credit losses reported thus far, the lion's share of which have been made in the U.S.A.
A Depressed State
It's no surprise that the housing meltdown has been referred to as the worst crisis since the Great Depression. Of course, when one looks at the complete economic picture, the U.S. economy is nowhere close to that epic period when GDP fell 30%, unemployment exceeded 20%, wholesale prices declined 33% and industrial production plummeted close to 50% (source: FDIC).
One of the hallmarks of the Depression era was the large number of bank failures.
According to the FDIC, which was born out of that troubled era and which began insuring deposits in 1934, just over 4,000 commercial banks failed in 1933. Fortunately, that proved to be the peak for the period. Unfortunately, it wasn't the end of bank failures altogether.
Through the years, a multitude of banks have failed, yet the FDIC backstop has succeeded in preventing a repeat of the run-on-the-bank craze that precipitated so many bank failures during the Depression.
Fear Not
Bank failures nowadays have their roots in bad business decisions. The S&L crisis of the 1980s and early 1990s made that circumstance abundantly clear. In that pernicious period, there were 1600 bank failures and 1300 S&L failures.
Bad decision making, in turn, is coming home to roost now (no pun intended) as banks reap the risks of advocating some of the most lax mortgage underwriting guidelines imaginable and/or leveraging up to buy collateralized debt obligations backed by those mortgages.
To be sure, more than a few articles have been written chronicling this banking crisis. Read them long enough and you're at risk of getting the impression that the U.S. banking system is on the cusp of experiencing another massive wave of failures.
You'd do well to ignore such fear mongering.
Boo!
Every quarter the FDIC provides an update on the number of institutions that have hit its "Problem List." The latest report showed that number reached 117, having increased from 90 in the first quarter and marking the seventh consecutive quarter the number of institutions on the "Problem List" has increased.
That's not a favorable trend, but it isn't apocalyptic by any means either.
In 1991, with the S&L crisis in full bloom, the number of institutions on the Problem List hit 1,430 and accounted for $837 billion in industry assets. The 117 institutions currently on the list account for $78 billion in assets. That was up from $26 billion at the end of the first quarter, but $32 billion of the increase came from IndyMac Bank, which closed (i.e., failed) July 11.
For some perspective, consider that Citigroup alone reported $2.1 trillion in total assets at the end of the second quarter.
Year-to-date there have been 9 (not 90, but 9) actual bank failures. In fact, since 2000 there have been only 37 failures of FDIC-insured institutions.
Stronger regulatory oversight has played an important part in keeping that number down. The irony here, of course, is that regulators have been lambasted for sleeping on the job and allowing the recent mortgage crisis to balloon like it did.
Say what you will about the regulators, but know in the face of some scary-sounding reporting that the banking industry has an extremely long way to go before the number of failures in this trying episode rivals previous periods of great financial distress.

8/26T8:28 News

Regulators step up bank actions - WSJ
WSJ reports federal regulators have increased the number of struggling banks they have effectively put on probation, forcing them to fix their problems and try to avoid potentially costly failures. The Federal Reserve and the Office of the Comptroller of the Currency, two of the nation's primary bank regulators, have issued more of these so-called memorandums of understanding so far this year than they did for all of 2007, according to data obtained from regulatory agencies under Freedom of Information Act requests. These secret agreements can force banks to take steps including raising capital, cutting back on risky loans and suspending dividend payments. The depth of problems in the banking sector will become clearer Tuesday, when the FDIC updates its list of "problem" institutions. The FDIC had 90 banks on its list March 31. There have been five bank failures since July 11, and many other banks are considered at risk by regulators. Government officials have been brokering the memorandums with institutions large and small, from National City (NCC), to First Private Bank & Trust, a unit of Boston Private Financial Holdings (BPFH). "The increase in [memorandums] is not surprising given the more challenging market conditions faced by many banking organizations," said Roger Cole, the Fed's director of banking supervision and regulation. They "are useful in specifying weaknesses in risk management and other areas that need to be addressed by bank management."

BKUNA Bankunited Fin needs $400 million to satisfy regulators - Bloomberg.com (1.59 )
Bloomberg.com reports BankUnited Financial, Florida's largest bank, may lose its "well-capitalized'' status under federal rules for financial strength unless it attracts at least $400 mln of new capital. The Office of Thrift Supervision will downgrade BankUnited to "adequately capitalized'' if the company fails to raise funds, according to a regulatory filing today. More restrictions could be placed on the bank, affecting its financial position and operations, the Coral Gables, Florida-based bank said. BankUnited said in June it was seeking $400 mln to boost capital and offset losses on its $10 bln of home loans. The company has posted more than $200 mln in losses in the last three quarters because of record foreclosures.

Temasek says sees value in U.S. and UK banks - Reuters.com
Reuters.com reports Singapore sovereign fund Temasek, which spent billions of dollars on shares in Merrill Lynch, sees value in banking stocks in the United States and Britain, a senior executive said on Tuesday. "The financial service industry is one we believe in," said Manish Kejriwal, Temasek's senior managing director for investment, International and India, told journalists. "It's a proxy to the economic growth." "We recently concentrated on U.S. and UK primarily because we see value."

TALKX Floor Talk: Financials in general are seeing a moderate rebound, GSEs flying; Key banking industry report due out later today
Financials are rebounding moderately this morning following yesterday's broad sell-off. Focus continues to be centered on the GSEs, which stand out as the top performers in the market this morning (FNM +17.7%, FRE +24.6%), adding on to yesterday's gains. Both cos released their July 2008 summaries this morning, but these reports don't seem to be major drivers of the stock action. DJ reported that a Goldman Sachs note said anxiety over a possible govt bailout of FNM and FRE is unwarranted, as a GSE bailout would be entirely manageable. There has also been increased interest in which institutions have exposure to the GSEs preferred stock after JPM disclosed yesterday that their holdings (~$1.2 bln) of such preferred stocks had declined in value by approx an aggregate $600 mln in the Q3 to date. A Keefe Bruyette note that was out before the open yesterday has received some attention, as it highlighted the GSE preferred exposure since investors are increasingly concerned that the preferred stockholders at the GSEs could suffer partial or complete elimination of their interests. They believe large-cap banks have limited exposure to GSE preferred stock, however select regional banks have significant exposure. They believe regional banks with the most exposure to GSE preferreds relative to tangible capital are GBTS, MBHI, WABC, FFKT and SOV. This morning Lehman noted that with respect to preferred GSE stock, JPM ($1.2 bln), FITB ($55 mln), MTB ($162 mln), and USB ($79 mln) recently highlighted their holdings... There was also some mixed housing data out this morning, with home sales remaining depressed but inventories declining. OFHEO also released their quarterly housing price index, showing the rate of house price declines slowed in Q2... A key item of interest later today will be the FDIC's quarterly banking report, due out this afternoon (expected at 3:00 E.T.). Although the report won't comment on specific institutions, it will give an updated read on the state of the banking industry. Traders are likely to be focused on the updated bank "Problem List." Last qtr, the number of institutions on the FDIC's "Problem List" increased to 90 from 76, representing the sixth consecutive quarter that the number of problem institutions has increased, from a historic low of 47 institutions at the end of 3Q06. That level represented the largest number of institutions on the list since third quarter 2004, when there were 95 "problem" institutions... Current performance within the financial sector stands as follows: XLF (Financial Sector SPDR) +0.8%, BKX (KBW Bank Index) +0.8%; AIG +2.1%, LEH +1.5%, C +1.5%, JPM +1.2%, BAC +1.1%, WFC +1.1%, GS +0.6%, MS +0.5%, MER +0.4%

8/25T8:32 News

Uncertainty over Fannie and Freddie - NY Times
NY Times reports anxiously awaiting a move by the Treasury Department and spurned by large investment cos, Freddie Mac (FRE) and Fannie Mae (FNM) find themselves unable to raise capital and with little ability to maneuver. Treasury officials have reviewed multiple plans for intervention, according to people who have spoken to top Treasury officials. But they have not identified a set of triggers that will compel a government bailout. Nor have they indicated to Freddie Mac or Fannie Mae executives when a bailout may occur or what form it may take. As a result, investors are telling Freddie Mac and Fannie Mae that they remain unwilling to purchase new shares in the cos. "We're in a Catch 22," said an executive with one of the mortgage cos who was not authorized to speak to the media. "As long as there is uncertainty over Treasury's plan, we can't raise money, and as long as we can't raise money, there's going to be more and more speculation about Treasury's plan." In recent days, Freddie Mac has met with potential investors at the law offices of Davis, Polk & Wardwell. But the co has been told by several private equity giants that those investors are unwilling to purchase any type of new stock in the company until it is clear what steps the Treasury Department may take to assist the ailing co. "You would have to be insane to invest in these companies right now, and we've basically told them that," said an investment professional with one co that was approached by Freddie Mac, but who is not authorized to speak to the media. "When Treasury comes in, they are guaranteed to get a better deal than us, which would push down the value of our investment. So why would we ever invest before we know what Treasury is going to do?"

Stock futures suggest a slightly lower start to the trading day, but have recovered from early lows. Crude oil prices are trading up 0.5% to $115.17 per barrel following Friday's 5.4% plunge. South Korean regulators told the Korea Development Bank to take a cautious approach before making an acquisition of an overseas bank after the company expressed interest in Lehman Brothers (LEH), according to the Financial Times. In deal news, Precision Drilling Trust (PDS) is buying Grey Wolf (GW) for $2 billion in cash and stock.


Small Kansas bank is 9th failure this year - Reuters.com
Reuters.com reports bank regulators closed Columbian Bank and Trust Company on Friday, the ninth U.S. bank to fail this year as the weakening economy and falling home prices take their toll on financial institutions. Customers can access their money over the weekend by check, teller machine or debit card, the FDIC said. Citizens Bank and Trust has agreed to assume the failed bank's insured deposits. Columbian Bank and Trust's branches will reopen on Monday as branches of Citizens Bank and Trust, which is based in Chillicothe, Missouri. The FDIC said Columbian Bank and Trust of Topeka, Kansas, had $752 million in assets, $622 million in deposits, and nine branches. The failure is expected to cost the FDIC deposit insurance fund an estimated $60 million.


LEH Lehman Brothers: KDB warned against buying Lehman - FT (14.41 )
FT reports South Korea's top financial regulator on Monday warned that Korea Development Bank should take a "cautious" approach to buying an overseas bank, following the state-run group's expression of interest in Lehman Brothers . Jun Kwang-woo, chairman of the Financial Services Commission, said he was "aware" that KDB was considering the possibility of buying a global investment bank, but he stressed that such a deal should be led by private lenders. "In principle, taking over a global investment bank can become an opportunity to raise the capability of the [Korean] investment banking business," Mr Jun said. "But at the same time, as the risks are also big, KDB should take a cautious approach." "We welcome any efforts led by the private sector to go global, but it may not be proper for state-owned financial institutions to lead the role and take on excessive burdens," he added.

8/22T11:22 News

Fannie, Freddie preferreds batter Sovereign, Midwest - Bloomberg.com
Bloomberg.com reports Midwest Bank Holdings (MBHI) Chief Investment Officer Don Wiest is wagering U.S. Treasury Secretary Henry Paulson will rescue him from a failing $67 mln stake in Fannie Mae (FNM) and Freddie Mac (FRE). Midwest and banks from Sovereign Bancorp (SOV) to Frontier Financial (FTBK), own preferred shares in the beleaguered mortgage-finance companies that have lost more than half their $35 billion value since June 30. Concern that Paulson may step in with a rescue plan that would wipe them out along with common stock investors has sent the securities tumbling. "I guess we are betting on Paulson,'' Wiest said. "We have to believe that his plan carries the day somehow.'' Midwest has $67.5 mln, or as much as 23% of its risk-weighted assets tied up in Fannie and Freddie. Small, regional banks may have the most to lose from the stumbles in Fannie and Freddie, and Paulson may risk bank failures unless he protects preferred stockholders, said Ira Jersey, an interest-rate strategist at Credit Suisse. The impact on the preferred holders "may be an important driver'' in Paulson's decisions, Jersey said. "Any wipeout of the preferreds could have implications for the capital of the greater financial system and these regional banks that might have reasonably precarious capital situations,'' Jersey said. "You don't want to make that worse if you're the government.'' CATY has $30 mln in Fannie and Freddie securities. SOV has a $632 mln stake while Frontier owns $5 mln in FRE and FNM securities.

Moody's cuts Fannie Mae's and Freddie Mac's preferred stock ratings; affirms Aaa senior debt
Moody's Investors Service downgraded the preferred stock ratings of the FNM and FRE to Baa3 from A1 and the Bank Financial Strength Ratings (BFSR) to D+ from B-. The preferred stock ratings and BFSRs remain on review for possible further downgrade. Fannie Mae's and Freddie Mac's Aaa senior long-term debt and Prime-1 short-term debt ratings were affirmed with stable outlooks. The cos' Aa2 subordinated debt ratings were affirmed, but the outlook was changed to negative from stable. Moody's said the downgrade of the BFSRs reflects Moody's view that Fannie Mae's and Freddie Mac's financial flexibility to manage potential volatility in its mortgage risk exposures is constricted. In particular, given recent market movement, Moody's believes these cos currently have limited access to common and preferred equity capital at economically attractive terms. Moody's added that these GSE's more limited financial flexibility also restricts their ability to pursue their public policy mission of providing liquidity, stability and affordability to the US housing market. Fannie Mae and Freddie Mac currently make up approximately 75% of the mortgage market in the US. A reduction in the capacity of these cos to support the US mortgage market could have significant repercussions for the US economy. In an effort to thwart broader negative economic effects, Moody's believes the likelihood of direct support from the United States Treasury has increased.

Analysts warn on bank exposure to Fannie, Freddie junior debt - DJ
DJ reports common shareholders of Fannie Mae (FNM) and Freddie Mac (FRE) may not be the only ones who suffer if the U.S. government has to step in to rescue the companies. Banks that hold their so-called junior debt may also take major earnings hits under a bailout, analysts say. Only a handful of banks have voluntarily disclosed how much of their exposure to the two troubled government-sponsored enterprises, or GSEs, is in preferred stock or subordinated debt. Those securities face a higher risk of being wiped out under a bailout than senior debt or mortgage-backed securities. Analysts at CreditSights estimated there was about $50 billion in vulnerable GSE junior securities outstanding, with banks likely holding a large portion of that amount. Most bank holdings of Fannie and Freddie securities are in senior debt or mortgage-backed securities, which most analysts say are virtually certain to be protected under any bailout scenario. But support for the junior securities is less certain, and they could emerge as yet another burden to an industry already saddled with problems. For example, if Sovereign Bancorp (SOV) had to write down its entire portfolio of GSE junior securities, the hit would amount to about four quarters of the bank's earnings, the CreditSights analysts said... Other banks that disclosed their GSE junior security holdings appeared to have a manageable level of exposure, CreditSights said. MTB said during its second-quarter conference call it had $190 million in exposure to Fannie and Freddie's unsecured debt, and $162 million of their preferred stock... USB had $97 million in GSE preferred stock, an exposure less than one-fourth of quarterly earnings, while FITB had $68 million in preferreds, far less than one-fourth of quarterly earnings, the analysts said. BBT specifically said it didn't hold any of the GSE's junior securities. WFC didn't directly disclose how much GSE junior securities it held, but in its second-quarter report it said it had preferred securities from financial services companies of $2.54 billion at June 30, which may include debt from the GSEs.

More proof that home equity paper is worthless
The FDIC plan to modify some first lien mortgages in the IndyMac takeover will further soldify the premise that most home equity paper is worthless. As per the article, if the FDIC plan is implemented, the first lien mortgages will be reduced to an affordibility level for the borrower, and this would effectively wipe out any residual equity value that theoretically secures 2nd lien loans:
"We’re talking Alt-A here, which means we’re also talking second liens," said the source. The FDIC statement on loan modifications at IndyMac didn’t address second lien positions, which would likely be wiped out in the event of a borrower refinancing."
Interestingly, this FDIC plan is limited in scope, as it will be utilized on IndyMac's whole loan portfolio, which the bank owns. The bulk of IndyMac's loans, and for the industry as a whole, has been securitized into asset-back pools. These loans will continue to rot away as strapped borrowers either get foreclosed or turn their keys into the bank and walk away.
As for home equity paper being worthless, keep in mind that many big banks which are far larger than IndyMac, like Wamu and Wachovia and Wells Fargo, have home equity loan balances in some cases twice as large as the book

11/18T9:20 News

COF Capital One: Despite lower NCOs, credit outlook remains negative - FBR (41.78 )
Friedman Billings believes the over-extended consumer will have difficulty meeting his debt obligations. Friday morning, COF released its monthly managed statistics for July. Apart from a surprising modest improvement in loss rates on U.S. credit card managed receivables, other credit metrics deteriorated, particularly in its auto finance and international operations. Still, the market interpreted the loss levels as benign, as COF and its peers rallied during trading. Firm believes higher level of early stage delinquencies and seasonality will likely result in significantly higher loss experience in 2H08. While its deposit franchise, ample liquidity, and capital strength lend support to the operations, they expect that adverse macro-economic trends will result in increasing credit costs over the next six to nine months.

Morgan Stanley and Goldman change approach to lending - FT
FT reports MS and GS are responding to the credit crisis with systems that use the market's view of their own creditworthiness as a basis for lending decisions, according to people familiar with the matter. These arrangements for determining the size of lending commitments to hedge fund clients were being put in place before the collapse of Bear Stearns. But implementation has gathered pace as investment banks seek ways to guard against the sudden loss of confidence - and resulting withdrawal of market funding - that crippled Bear. The message is that "if our firm is in trouble, we would rather fund ourselves than fund you [hedge funds]", said a brokerage executive with knowledge of the arrangements. He added: "We would only use it if there were a real issue." Morgan Stanley is essentially tying its promise to provide financing to hedge fund clients to the prices of credit insurance on its own debt. If the cost of the protection rises to a certain level, that would trigger a reduction in Morgan Stanley commitments to hedge funds. Goldman Sachs is understood to have a similar arrangement that uses its bond prices as a reference point for credit commitments to hedge fund clients.

Bernanke tries to define what institutions Fed could let fail - Bloomberg.com
Bloomberg.com reports Ben Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes. In the year since credit markets seized up, the chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac. The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 bln portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes. The Federal Open Market Committee has ordered a formal study of the implications of the Fed's broader role in fostering financial stability, drawing on research from throughout the Fed system. Under Bernanke's predecessor Alan Greenspan, the Fed drew a clear line against using its portfolio to influence specific markets. An internal study published in 2002 warned that "the favoring of specific entities'' might "invite pressure from special-interest groups.''

LEH Lehman faces another loss, adding salt to its wounds - WSJ (16.17 )
The Wall Street Journal reports with the end of Lehman's (LEH) fiscal third quarter less than two weeks away, some analysts are girding for a loss of $1.8 bln or more, instead of the modest profit they previously expected. If the dour projections come true, Lehman's losses since the start of March would total at least $4.5 bln -- or more than the firm churned out in profit during FY07. The likelihood of back-to-back quarterly losses, fueled by widely anticipated write-downs in a portfolio saddled with more than $50 bln in risky real-estate and mortgage assets, puts even more pressure on Lehman Chairman and Chief Executive Richard S. Fuld Jr. to show that the losses won't keep piling up. If they do, Lehman could need to raise additional capital beyond the $6 bln it got in June.

Libor on the rise amid banking stress - FT
FT reports the key rate at which banks lend to each other in dollars hit its highest level in two months on Monday, suggesting there could be more turbulence ahead for the financial system. The three-month dollar London interbank offered rate reached 2.81%, a level not seen since mid-June. Libor remains particularly elevated when compared with the official overnight rate -- the Federal funds rate -- of 2%. The difference of 81 basis points between Libor and the Fed funds rate compares with an average spread of about 12bp that prevailed before the onset of the credit squeeze last year. "There is still stress in the system," said George Goncalves, strategist at Morgan Stanley. "Libor is creeping up, and banks are still restructuring their balance sheets."

8/8T10:24 Notes from the Edge

Everything that could go wrong is going wrong. Gold plummets, oil continues to decline, the US$ has become the darling of Wall st. and all the while we fight the trend and relinquish all of our gains for the year. The only good news is that we have done this so many times over the last 3 years that this is nothing new to us. It's old hat, albeit a wool hat in summer.

Let's try and take off the hat and focus on the saying that it is always darkest before the dawn. Wishfull thinking? Maybe, but here are some of the facts:

There is no end in sight the the housing problems
Subprime problems continue but now Alt-A and even prime are beginning to show serious cracks in the wall.
Major frauds and lawsiuts still to be forthcomming in the Banking space
Credit cards defaults on the rise

This list could go on. So, why is the US$ ralling and why are the markets going up?

Answer: the markets rally because thats what markets do. They never go in a straight line and we are only in the 4th week of the bear market rally. The previous rallies have lasted 7 - 9 weeks and have run up above the 50 day ma before reversing back to trend. So, I would expect one more attempt by the averages to breach the 50 day over the next 3 weeks and on that rally I would look to reestablish shorts.

As for the US$ and gold all I can say is that it is tough to figure a market that is manipulated by central banks. Fighting the manipulation is like banging your head against the wall. We need to remember that every time there is a crescendo of news highlighting the impending demise of the US$ there will be intervention of one kind or another. Believing in the pipedream that the world will stop buying our debt and the US$ will collapse is detrimental to managing the portfolio successfully. That dream may be reality at some unknown point in the future which does nothing for us manageing money today. We need to use the charts and identify the channels and trade based on these obvious trends.

Today I would say that the obvious trend calls for gold to find support and the US$ to find resistance. All that has occured in the last 4 weeks is a move to the extremes of the channels for both commodities and the US$. So the real question is: Can the US$ break out of the down trend it has been in for years and will Oil and Gold break down from the long term uptrends they have been in for years. What has really changed over the last 4 weeks that could have such an impact on all the current trends? I can not find any real fundamental changes.

The US$ is strong today because the EU central bank has hinted at rate cuts so the Euro has sold off hard and the US$ is strong because of the RIDICULOUS belief that the Fed will raise rates by 75 basis points this year. HOW STUPID CAN PEOPLE BE?!!? We are in the midst of a major banking crisis and a world wide ression!!! But the markets can for a short period of time be as stupid as they want to be. So we must endure, keep our eye on the ball and look for the inevitable turn in our favor. Be patient.

8/5T9:51 Notes From the Edge

Posted on August 5th, 2008 in Uncategorized
I have been preaching that the ‘Pay Option Implosion’ will make the ‘Subprime Implosion’ look like a hiccup in states in which this loan program was widely used such as CA. This is because this loan program knows no socio-economic boundaries and was very heavy used in more affluent areas because of its ultimate affordability feature, negative amortization.
The Pay Option ARM (POA) is the most toxic of all loan programs with up to 80% of borrowers making the minimum monthly payment and acruing negative. Combine that with a house price crash of 32% in the past 13 months in CA and most of these borrowers owe more than their home is worth and are at an exponentially greater risk of loan default. Remember, these were once PRIME borrowers in many cases.
In my day job I analyze banks and mortgage lenders using proprietary data and track mortgage loan defaults and REO by bank. I can see near real-time what is happening on a bank level and it is not pretty. About four months ago I noticed the subprime defaults waning, which I told all of you about. Since that time, subprime defaults in CA are down about 25% but total Notice of Defaults have remained near historic highs of 43k per month. This is because Alt-A defaults have filled the gap.
The Alt-A universe is much larger in unit count and dollar volume than subprime so even though we are just at the beginning of the ‘Alt-A Implosion’, they have already filled in the subprime default void. Scarier yet, 65% of all Alt-A defaults are POA’s. The ‘POA Implosion’ is upon us.

8/4T3:21

CNQR:
Concur Tech: American Express partnership a solid win - McAdams Wright Ragen (42.20 +6.15) -Update : McAdams Wright Ragen notes that CNQR announced a strategic partnership with American Express (AXP) under which AXP will exclusively promote CNQR's expense management solution and will invest $251 mlnfor a 13% stake. Considering AMEX's 60%+ market share of the corporate credit card market, the firm believes this partnership to be a solid win for CNQR as it dramatically boosts the co's distribution footprint and bolsters its market position by eliminating competitive threats investors believed AMEX to pose. The firm also notes that the co reports Q1 results on July 30 after the close, and they are expecting another beat-and-raise qtr.

8/4T10:15 Co. in the News

Housing lenders fear bigger wave of loan defaults - NY Times
NY Times reports the first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building. Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12% in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7% in that time... Defaults are likely to accelerate because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are "alt-A" loans, many of which were made to people with good credit scores without proof of their income or assets. "Subprime was the tip of the iceberg," said Thomas Atteberry, president of First Pacific Advisors. "Prime will be far bigger in its impact."

PCLN priceline.com: Stifel previews 2Q08 earnings (114.95 )
Stifel notes PCLN is scheduled to report 2Q08 earnings on Tuesday, Aug 5. Firm ests that PCLN will report 2Q08 gross bookings of $2.127 bln (+72.3 y/y), rev of $498.2 mln(+40.0% y/y), adjusted EBITDA of $90.0 mln (+54.8 y/y, 18.1% margin), and cash EPS of $1.36. Firm believes PCLN will report solid financial performance in 2Q08 fueled by 90% growth in international gross bookings. The European economy and travel industry have held up well, they believe, compared to the domestic travel industry which firm believes has experienced more stress. They note that their 90% growth est for 2Q08 international bookings compares to actual growth of 99.7% in 1Q08, and they believe this deceleration is comparable to that of the European operations of other similar online travel companies.

Small Florida bank is 8th U.S. failure this year - Reuters.com
Reuters.com bank regulators closed a small Florida-based bank on Friday, the eighth U.S. bank to fail this year under pressure from a weak economy and a credit crisis precipitated by falling home prices. The FDIC said First Priority Bank had $259 mln in assets and $227 mln in deposits and its failure will cost the federal fund that insures deposits an estimated $72 mln. STI has agreed to assume the insured deposits of First Priority, whose six branches will reopen Monday as branches of SunTrust Bank.

ICE IntercontinentalExchange reports EPS in-line, revs in-line; announces $500 mln buyback (96.20 )
Reports Q2 (Jun) earnings of $1.19 per share, excluding non-recurring items, in-line with the First Call consensus of $1.19; revenues rose 44.3% year/year to $197.2 mln vs the $195.8 mln consensus. ICE also announced that its Board of Directors has authorized a share buyback program of up to $500 mln. "We've continued to grow our business substantially while generating synergies in our U.S. futures business and producing operating margins that reflect our disciplined approach to growth. This consistently strong performance provides us with the balance sheet and cash flows necessary to execute the share repurchase program recently authorized by our Board of Directors, even as we continue to invest for future growth. This program reflects our belief that the current share price does not appropriately reflect the strong underlying fundamentals of our global business. In compliance with SEC rules, we will begin the repurchase of shares after the Creditex acquisition closes." ICE Clear Europe is expected to commence operations on September 15, 2008. Updated guidance includes 2008 revenues in the range of $20-25 mln.

SEC risks confusion in switch to match overseas accounting - WSJ
The Wall Street Journal reports the SEC is preparing changes to the financial-reporting system that could cause confusion and ultimately benefit hedge funds. it could prove an unintended consequence of the commission's expected plan to join U.S. companies with international peers in a common financial language. The SEC is expected to soon unveil proposals to put U.S. companies on track to adopt international accounting standards, eventually replacing U.S. rules. The swearing-in last week of the final two of the SEC's three new commissioners paves the way for Chairman Christopher Cox to move ahead with this long-awaited project. The commission Monday also plans to hold a round table on issues related to U.S. and international accounting systems and the subprime-mortgage crunch. The idea behind the effort is laudable: A single, global accounting system should make it easier for investors everywhere to understand co accounts. That, in turn, should spur global investment and lower companies' cost of capital. But based on public comments from commission staff in recent months, the SEC isn't expected to mandate that all U.S. public companies switch on a set date, which is the approach Europe took in 2005. Instead, companies that meet certain market-value or revenue criteria are likely to be able to choose between the two systems for a few years. That could lead to companies within the same sector reporting results differently, making comparisons difficult for all but the most sophisticated investors. Hedge funds are likely beneficiaries but average investors could suffer. The SEC is expected to say that all U.S. companies should switch to international rules, possibly as soon as 2013.