Imminent and severe market correction

[IFocus]

Hi,

Thanks for the explanation TH, but I hope you can see my point that the money is not destroyed in your example, it has just been spent elsewhere. It is also a contract, not a derivative.

This confuses me as I cannot think of any derivatives traded through any exchange that are not contracts....

Also cannot see your point re money, if you are talking perceived value that would make sense at least to me

At some estimations the world GDP is around $55 trillion give or take a few 't'. If the derivative exposure is the $500 trillion claimed by some, where is the money?
Simple answer is it does not exist in the first place, therefore it is very hard to 'lose'.

Again surely this is perceived valuation not hard currency? Until the position is closed its an open contract so you are talking about valuation there is no "money" it hasn't gone any where, if the position is closed then you are talking about money and its when money flows.

Let's look at a simple futures contract $A/$US. With my margin I buy $100,000 at 91cents. Someone (say a bank) takes up the other side with their margin.

This is a new $100,000 derivative. $100,000 has not been created. If the other side goes bust, what they lose is not $100,000 but the difference in value between their sell price and their buy price. If they or their liquidator has to buy back at 92 cents, they only lose $1,000.

I only gain $1000. The clearing house gives me my margin back and my $1000 out of the other sides margin. I have not lost anything.

I remember an interview with Linda Linda Bradford Raschke where she was down $100K as she traded the 87 crash but was confident she was on the right side of the market which she was and made profits in the end.

At the time she was married to a market maker who later explained to Linda the enormous risk she took as as it was likely she could have done the lot due to counter party risk......I do not know the details but believe its not all so secure as you believe.

You also give an example on what appears to be a low volatility event

Looking at bigger derivatives contracts outside of the markets, say between 2 banks, for $100 billion (say a currency swap), there is no difference, except that there is no clearing house, therefore when one bank goes bust, there is no profit for the other side to collect, but they don't lose.

There is a definate lack of understanding both in this forum and by journalists as to what derivatives are. They seem to be bundled together with/as bad debts, when they are totally separate.

bye

brty

Now I am really confused as I haven't seen this

I use MF to if they fall over then there would be chaos world wide......

 

[Whiskers]

Yes I know what you said and it was wrong. It might pay to look beyond the media headlines and go straight to the source - The Institute of Supply Management.

Yes dhukka I'm aware of the ISM site. I don't want to get into a nit-picking arguement. What you say is right to a point (technically), but the most important aspect of the survey which is most widely followed is as I posted and as explained by the reference in both bloomberg and (below) from Econoday.

The ISM non-manufacturing survey does not compile a composite index like its manufacturing cousin. The business activity index, which is actually akin to the production index in the manufacturing survey, is widely followed as the key figure from this survey.

Misnomer maybe, but that's just how it is. The business activity index 52.2 has become the main number from the survey that the market is looking for and the ISM Non-Mfg Survey is known for.

 

[Uncle Festivus]

I see your concern sassa. But I do believe that the articles author's assumption that a fall in house prices is virtually a bottomless pit is excessive and a bit far outside the range of probabilities for my estimation.

Plumeting house values are not nation wide. I believe California and Florida are the worst affected. Parts of the NE are not near as bad and some, I think Manhatten was one that has been reported rising.

For me the steps taken to stabalise the markets will pay dividends in returning stocks and commodities to growth and provide some degree of cash flow and asset protection against CDS's. In the main the concern for CDS defaults are contingent on house prices continuing to fall and high/increasing rates of mortgage defaults. There is no doubt a risk, but as I said for me the probabilities of catastrophic CDS failures is becoming less likely.

A point re apparent higher savings to meet mortgage commitments I made in the gold thread recently...

PS. Probably a lot has to do with what people see in the numbers. As an example, recently US personal income rose a healthy bit but consumer spending didn't rise in proportion. The headlines were doom amd gloom that consumers weren't spending and the economy will get worse because they aren't spending. For me it was a good sign that people were starting to save a bit more which would give them the ability to service their existing debts better and lessen the amount of foreclosures, bankruptcies etc... which would have far stronger positive impact on the direction of the economy/markets than a bit less consumer spending would have a negative effect.

Whiskers, it's good to have the positive logic bias but the data coming out doesn't support the above (assumptions?). Without going over all the facts again, it's getting pretty obvious to all but the Wall St hacks that the US is in reccession.

We just got the 3rd month of job declines, so a quarterly trend is developing there. Manufacturing jobs declined by 48,000, the biggest drop since July 2003. Construction jobs fell by 51,000. These are the backbone sectors, with flow on effects for the entire economy.

Personal incomes? Up 0.5% and working longer for it. Price inflation eg food and fuel, easily exceeds wage growth, so effectively going backwards at a rate of knots, hence consumer spending subdued to put it mildly.

Be careful how you interpret housing data. "Brown Harris Stevens report: Sales volume in Manhattan… dipped 1% in Q1’08 from Q1’07. But showed a jump in median price due to a fourfold increase in the number of sales over $10M". Even the financial firms on Wall St are feeling the pinch.

Those who used their homes as ATMs, withdrawing cash via home equity loans, are now maxing out their credit cards just to make ends meet. Food stamp ques are growing.

I think the main reason why stock prices are going up is because the Fed is paying for it - both indirectly and via the extended repo's etc. The extra liquidity doesn't look like it is making it to the real world (as in lower mortgages), just getting churned back in on itself with equity money shuffling again.

And the fact that investors have developed negative news numbness - any negative news is greeted as a clearing of the decks and or ignored even. This is the denial phase? The UK is starting to look even worse, if that's possible.

The bear is still in control, as per the monthly SP500 chart. Benny Bullwinkle will have to pull more than rabbits out of his hat to get out of this one .

 

[Uncle Festivus]

And an undeniable trend emerging for Employment. Similar to that other 'R' period.

 

[dhukka]

And an undeniable trend emerging for Employment. Similar to that other 'R' period.

Certainly is and has been obvious for a while now. It will interesting to see the spin from the CNBC permabulls to these numbers.

 

[dhukka]

Fitch Ratings has decided to end its part in the ruse of the AAA ratings attached to the Monoline Insurers or at least one of them.

MBIA Loses AAA Insurer Rating From Fitch Over Capital

April 4 (Bloomberg) -- Fitch Ratings cut MBIA Inc.'s insurance unit to AA from AAA, saying the bond insurer no longer has enough capital to warrant the top ranking.

MBIA, the world's largest financial guarantor, would need as much as $3.8 billion more in capital to deserve an AAA, New York-based Fitch said today in a report. The outlook is negative, Fitch said.

Fitch issued the new, lower rating even though Armonk, New York-based MBIA asked the ratings company last month to stop assessing its credit worthiness. The two companies disagree over how much capital MBIA needs to absorb losses on the bonds it insures. Moody's Investors Service and Standard & Poor's both affirmed their AAA ratings earlier this year.

``It will be difficult for MBIA to stabilize its credit trend until the company can more effectively limit the downside risk'' from collateralized debt obligations, Fitch said.

The long-term rating of MBIA Inc. was cut to A from AA, Fitch said.

``We respectfully disagree with Fitch's conclusions,'' MBIA Chief Financial Officer Chuck Chaplin said today in a statement. ``MBIA has a balance sheet that is among the strongest in the industry with over $17 billion in claims-paying resources, and has a high quality insured portfolio.''

MBIA shares closed down 68 cents, or 4.8 percent, to $13.61 in New York Stock Exchange Composite trading. The stock has declined 27 percent this year.

Capital Raising

MBIA raised $2.6 billion in capital through a bond offering and the sale of a stake to Warburg Pincus LLC, eliminated its dividend and stopped guaranteeing asset-backed securities for six months.

Those decisions prompted Moody's and S&P to keep their top ratings for MBIA. Fitch continued its review. Fitch has rated MBIA's insurance unit since at least 2000, according to data compiled by Bloomberg. S&P and Moody's have rated the company since at least 1987, the data show.

MBIA last month asked Fitch to stop rating the company because it disagreed with the ratings company's requirement that MBIA hold more capital.

MBIA, which started as the Municipal Bond Insurance Association in 1974, and the rest of the bond insurers stumbled after expanding into CDOs that caused losses of more than $7 billion. CDOs repackage pools of assets into securities with varying degrees of risk. The company previously recorded at least 15 years of consecutive profits insuring bonds sold by schools, hospitals and municipalities.

``It's tough for a rating agency to downgrade a bond insurer, to take away the AAA rating,'' said Mark Adelson, founding member of Adelson & Jacob Consulting in Long Island City, New York.

Holding Company

The capital MBIA raised has yet to be contributed to its insurance company and could be diverted to meet obligations at the holding company, Fitch said in its report. MBIA's holding company engages in transactions that may require it to post collateral, creating a rising demand for cash, Fitch said.

MBIA's suspension of its structured finance business, which includes CDOs and asset-backed securities, may help to boost the company's rating back to AAA in the future, Fitch said today.

MBIA will have losses on CDOs backed by subprime mortgages of as much as $4.9 billion after taking into account that they will be paid over time, Fitch said.

The analysis assumes that subprime mortgages backing securities sold in 2006 will experience losses of 21 percent and those originated in 2007 will lose 26 percent, Fitch said. Subprime mortgages are given to borrowers with poor credit.

 

[reece55]

Fitch Ratings has decided to end its part in the ruse of the AAA ratings attached to the Monoline Insurers or at least one of them.

Hrmm..... well it's a about time someone finally put a pen through MBIA....

Lets see if S&P will finally submit to the pressure. By the way, their bonds are effectively pricved at junk -I still don't understand how a AAA company prices it's debt like a cash burning tech company!!!!

Cheers

 

[dhukka]

A few 'real' casualities in the last couple of weeks courtesy of MGETA

Firstly 3 Airlines

ATA seeks bankruptcy protection
Low-fare carrier ATA Airlines Inc. said Thursday it has filed for bankruptcy- court protection, grounding all flights and stranding thousands of passengers.

Indianapolis-based ATA operated 44 flights a day. The carrier stopped serving Denver International Airport in 2006, but it had a code-share agreement with Southwest Airlines that allowed Southwest customers to book flights to Hawaii and other destinations on ATA.

"We deeply regret the disruption and hardship caused by the sudden shutdown of ATA, an outcome we and our employees had worked very hard and made many sacrifices to avoid," Doug Yakola, the airline's chief operating officer, said in a statement.

ATA said it was forced to ground operations because it lost a key military charter contract. In addition to scheduled airline service, ATA also provided charter service for the Pentagon. Denver Post staff and wire reports


Skybus ceasing operations, plans to file for bankruptcy

The celebrated discount airline is ceasing all operations today and plans to file for bankruptcy protection next week, becoming the latest of the nation's airlines to fall because of rising fuel costs and a slowing economy.

The shutdown deals a major blow to the Pease Development Authority as it strives to tap the potential of Portsmouth International Airport.

"Skybus struggled to overcome the combination of rising jet fuel costs and a slowing economic environment," the Ohio-based company said in a statement on its Web site. "These two issues proved to be insurmountable for a new carrier."


Aloha Air halting passenger service

HONOLULU ”” Aloha Airlines said Sunday it will halt all passenger service after Monday, signaling the end of an airline that has served Hawaii for more than 60 years.

Aloha, which filed for bankruptcy for Chapter 11 bankruptcy protection on March 20, was a casualty of fierce competition and rising fuel prices. The airline said it will stop taking reservations for flights after Monday.

"We simply ran out of time to find a qualified buyer or secure continued financing for our passenger business," said Aloha President David Banmiller in a statement. "We had no choice but to take this action."

Aloha has suffered since Phoenix-based Mesa Air Group Inc. launched a new interisland carrier called go! airlines in 2006, triggering a local airfare war.

In January, go! reported a $20 million operating loss in its first 16 months of operations. Meanwhile, Aloha and Hawaiian Airlines ”” the other major interisland carrier ”” reported combined losses of nearly $65 million since go! began operating.

How about a chain of jewelery stores?

Friedman's begins bankruptcy liquidation sale

Addison-based Friedman's Inc., operator of 455 jewelry stores in 23 states, begins a bankruptcy court-ordered liquidation today.

Friedman's, which also operates stores under the Crescent brand, filed for bankruptcy in January.

The 88-year-old retailer was founded in Savannah, Ga., and moved to Texas two years ago.

About $400 million in inventory in 377 stores will be liquidated while Friedman's is negotiating to sell 78 locations to an unnamed buyer.

It operates stores in 24 Texas cities.

A restaurant chain?

Bankruptcy declared for restaurants

Vicorp Restaurants Inc. has filed for Chapter 11 bankruptcy to restructure its debts and closed 56 Bakers Square restaurants, including nine in Illinois.

The Denver-based company closed Bakers Square restaurants in Lake in the Hills, St. Charles and Oswego on Wednesday. The company’s location in Crystal Lake remains open.

Vicorp spokeswoman Amy Moynihan said 1,700 of the restaurants’ 13,000 employees would be laid off as part of the cost-savings effort.

Or a bunch of nursing homes?

Marathon Healthcare files for bankruptcy

Marathon Healthcare Inc, an East Hartford-based nursing home company that operates six facilities in Connecticut, including in Waterbury, Torrington and Prospect, filed for bankruptcy protection late Thursday.

The filing comes about three months after the state Department of Social Services launched an investigation of the company over concerns that it was struggling to meet its financial obligations, and about a month after a state audit said Marathon's finances should be closely monitored.

 

[Kauri]

I just read that Barclays is considering a bid for the uberbank... thought it was in the FT but can't find it to post a link...

Cheers
.........Kauri

 

[sassa]

Posts are slowing in this thread due to -nothing to offer?can't believe what is happening in the markets with all the bad news?the bulls have finally taken over?all the bad news is out?

"U.S. benchmark indexes closed little changed on Monday, but analysts said the failure of the Dow Jones industrial average .DJI to breach the 12,700 level for the third time in two months did not bode well for further rises in the index.
"What really means something is AMD coming out and cutting yesterday and what is significant is we came off yesterday after zooming higher on all stocks and closing at the lows of the day," said City Index analyst Tom Hougaard.

"At this point, the news out there is pretty bearish across the board and (any rises) are just a question of a correction in a market that is deeply, deeply oversold," he said.
http://www.reuters.com/article/mark...408?rpc=44&pageNumber=2&virtualBrandChannel=0

 

[Whiskers]

Posts are slowing in this thread due to -nothing to offer?can't believe what is happening in the markets with all the bad news?the bulls have finally taken over?all the bad news is out?

I think you have pretty well summed it up there sassa, albeit a bit inquisitively.

There are always company collapses, restructures, employee lay-off's etc, but a point I have been trying to make is too much, in fact pretty much anything that happens has been bundled into the same 'credit crisis' 'housing crunch' 'recession' or whatever D & G basket.

Sure, the housing price bust and credit crunch has had flow on effects right across the US economy and most of the world, but to attribute that as the main cause of all the changing dynamics in the world, for me is nonsense. A lot of dynamics change over time. Certain situations may speed up the enviornment for change.

For exampe, the US airline industry is a fragile industry because of lots of players trying to carve a hole in the market where players have been cutting costs, by minimising maintaince etc. Rising costs such as a more than doubling of aviation fuel is the main cause of problems there. Higher oil prices was always going to happen regardless of the housing or credit situation.

Sure the credit crisis has an effect and the falling USD has increased oil costs a bit more, but as I said above it is not the driving factor with the problems in the airline industry and much of the US or world economy.

Whiskers, it's good to have the positive logic bias

Thanks uncle... of course it is.

but the data coming out doesn't support the above (assumptions?).

Personal incomes? Up 0.5% and working longer for it. Price inflation eg food and fuel, easily exceeds wage growth, so effectively going backwards at a rate of knots, hence consumer spending subdued to put it mildly.

But the point I was making was that personal spending went up .5% and consumer spending only increased .1%. So even allowing for price inflation consumers saved more than the previous month. I see your point that costs are increasing and people are working longer... but in the short term for me the combination of working longer and saving more is a good sign for stabalising or reducing the rate of mortgage defaults and bankruptcies.

Isn't it probable that any recession will be short and shallow before darting into inflation before we know it? What will be the inflationary effect when the housing industry turns around?

I think the main reason why stock prices are going up is because the Fed is paying for it - both indirectly and via the extended repo's etc. The extra liquidity doesn't look like it is making it to the real world (as in lower mortgages), just getting churned back in on itself with equity money shuffling again.

I agree there, well for the most part ... and I don't think the Fed had any choice but to buy time to allow things to pan out less disruptdly.

I am currently of the view that all the problems in the US economy won't fall out in this correction. I think the markets (including the USD) will recover moderately over the coming months in the natural cycle of things because the US has made or in the process of making the most substantial overhaul of their economy and finance laws since the great depression.

Having said that, I don't doubt they will experience more economic issues in the future, but I expect they will be less of an economic force in the world economy.

 

[Kauri]

Posts are slowing in this thread due to -nothing to offer?can't believe what is happening in the markets with all the bad news?the bulls have finally taken over?all the bad news is out?

=0

Didn't thunk that bad news was welcomed.... aahh well.. heres some.. potentially.. The Euro is unlikely to be buoyed by the news another German bank may be in trouble. Speculation in the market at present suggests a smaller bank has been closed by the BAFIN. (Will post a link when.. and if... it hits the wires...)

Also I don't know how long the Eurozone is going to be propped up by Germany, without them the bottom would fall out of their pants.. I thunk..
and I still thunk German banks in general are a big risk going forrard..

Cheers
..........Kauri

 

[explod]

Didn't thunk that bad news was welcomed.... aahh well.. heres some.. potentially.. The Euro is unlikely to be buoyed by the news another German bank may be in trouble. Speculation in the market at present suggests a smaller bank has been closed by the BAFIN. (Will post a link when.. and if... it hits the wires...)

Also I don't know how long the Eurozone is going to be propped up by Germany, without them the bottom would fall out of their pants.. I thunk..
and I still thunk German banks in general are a big risk going forrard..

Cheers
..........Kauri

In fact from what is coming through in the last week, and what is being accepted as OK ( the crap) is making us so gobsmacked that we are speechless.

 

[sassa]

Didn't thunk that bad news was welcomed.... aahh
..........Kauri

Well, maybe it is time to have a bit of a laugh.
It's within the probability spectrum that we've turned the corner and the market will climb the wall of worry. To truly appreciate that potential reward, however, we must understand the magnitude of the attendant risk.
In our never-ending effort to provoke thought and provide smiles, we offer 35 reasons why the March lows were an excellent trading opportunity but not the ultimate bottom.(I have included a few-rest available at link below.)
.Maltese dogs are still favoured over Rottweilers by the elite Park Avenue crowd.
.Hank Paulson has yet to melt a reporter's face with his cold, hard stare.
.Homebuilders have yet to offer two-for-one deals.
.Alan Greenspan is still getting paid to speak.
.If the market can't rally with a weaker dollar, what's it going to do when the greenback rallies.
.Traders are buying upside calls like they're going out of style.
http://www.marketwatch.com/news/story/35-signs-market-hasnt-hit/story.

 

[dhukka]

Posts are slowing in this thread due to -nothing to offer?can't believe what is happening in the markets with all the bad news?the bulls have finally taken over?all the bad news is out?

On the contrary, the bad news is just clicking into gear. If transports are considered a good leading indicator of economic activity, what is UPS telling us?

UPS Lowers 1Q 2008 Guidance

Deteriorating U.S. Economic Conditions Restrain Domestic Volume
ATLANTA--(BUSINESS WIRE)--UPS (NYSE: UPS) today announced it had lowered its first quarter earnings expectations to $0.86 or $0.87 per diluted share from a previously anticipated range of $0.94-to-0.98.

At UPS’s investor conference on March 12, Chief Financial Officer Kurt Kuehn stated that UPS’s earnings guidance for the quarter would be difficult to achieve if lower volume trends experienced in February continued through March. The U.S. economy has continued to weaken, causing a reduction in domestic package volume and a shift away from premium products. Significantly increased fuel costs in the quarter also contributed to the lower-than-expected results.

On April 23, the company will discuss first quarter results and its outlook for the year.

 

[Whiskers]

Bold Headlines Rates on 30-, 15-year mortgages rise.

By a miniscule, but they are still lower than a year ago.

However, rates on shorter term mortgages dipped this week

For five-year adjustable-rate mortgages, rates dropped to 5.59% this week, from 5.67% last week. And, rates on one-year, adjustable-rate mortgages averaged 5.19% this week, down from 5.24% in the prior week.

The mortgage rates do not include add-on fees known as points. For 30-year and 15-year mortgages as well as one-year adjustable-rate mortgages the nationwide average fee was 0.5 point. Five-year mortgages carried a 0.6 point average fee.

A year ago: A year ago, rates on 30-year mortgages stood at 6.17%, 15-year mortgage rates averaged 5.87%, five-year adjustable-rate mortgages were 5.92% and one-year adjustable-rate mortgages were at 5.44%.

http://money.cnn.com/2008/04/03/real_estate/Mortgage_rates.ap/index.htm?postversion=2008040316

So where are the massive interest rate rises that were supposed to happen!

Is this a sign of mortgage rate rises running out of puff... demand dropping, holding back and consumers telling banks where to stick their rate rises?

A point I made earlier, Banks should soon wake up that forgoing interest rate rises to recoup their losses will be a better proposition than raising rates aggressively, forcing forclosures and having to write down their balance sheets agressively.

I wonder how many are thinking lower profits will be less disasterous than massive continuing write downs.

 

[Kauri]

Bold Headlines Rates on 30-, 15-year mortgages rise.

By a miniscule, but they are still lower than a year ago.



So where are the massive interest rate rises that were supposed to happen!

Is this a sign of mortgage rate rises running out of puff... demand dropping, holding back and consumers telling banks where to stick their rate rises?

.

In the US... probably...
Cheers
.........Kauri

 

[dhukka]

Bold Headlines Rates on 30-, 15-year mortgages rise.

By a miniscule, but they are still lower than a year ago.

So where are the massive interest rate rises that were supposed to happen!
Is this a sign of mortgage rate rises running out of puff... demand dropping, holding back and consumers telling banks where to stick their rate rises?

A point I made earlier, Banks should soon wake up that forgoing interest rate rises to recoup their losses will be a better proposition than raising rates aggressively, forcing forclosures and having to write down their balance sheets agressively.

I wonder how many are thinking lower profits will be less disasterous than massive continuing write downs.

Who was expecting massive interest rate rises? Creating straw men again Whiskers? Are you suggesting that because the interest rate on a 30 year mortgage is 50 bps lower than a year ago, after the Fed has cut 300 bps that that is a positive? Or that the rate on a 30 year mortgage is 50bps higher than it was just 3 months ago despite 225 bps of cuts over the same period?

 

[sassa]

On the contrary, the bad news is just clicking into gear.

News on MarketWatch suggests that Citi is close to selling $12b.worth of bad debt to private equity firms for less than 90c in the dollar.IF the report is correct,it should be kind to the financials.Another rumour propagated by..????
http://www.marketwatch.com/news/sto...?guid={9FEC1075-89D6-4B1B-A672-A60A89EF2C09%7

 

[Whiskers]

Who was expecting massive interest rate rises? Creating straw men again Whiskers? Are you suggesting that because the interest rate on a 30 year mortgage is 50 bps lower than a year ago, after the Fed has cut 300 bps that that is a positive? Or that the rate on a 30 year mortgage is 50bps higher than it was just 3 months ago despite 225 bps of cuts over the same period?

Certainly better than the rate rises that some headlines and people were speculating would/might happen when mortgages reset in the first qtr.

I mean we all know how greedy those bludy banks are.