Imminent and severe market correction

[Romeo75]

It's all so confusing. Some say that Aussie banks will be largely insulated from the crisis in the US. One prominent investor says one thing one day, another prominent investor will say another thing the very next day. I tend to think Aussie banks aren't as exposed as many of the US banks. I think profits will take a small hit next year but will recover again in subsequent years. The Aussie economy is not as aligned to the US as it once was. As long as China keeps growing we should be insulated from a US recession to a large extent...just my thoughts, but thanks for the feedback and honest opinions...

 

[explod]

Come on Explod the guy was asking for specific stock advice. Your underhandedly giving him that which is against every rule in the book. Both the forums and ASIC. My comment about rants was non biased and cuts both ways, bullish and bearish, but you have a need to give more weight to your own bearish opinion. Ones ego should be left well out of posts when someone asks for specific advice.

Hope your willing to compensate the guy if he follows your guess and is not happy with YOUR advice.

Accept your stance. However what in Sassa's post was a rant. Is the article not clear enough?

There is no doubt that the way I put some things is a bit of a stretch but most often it is to counter the opposing, good feeling stuff, which is most often a bit of a stretch as well. Between it all we have the intention of trying to provide some ballance to the extremes. Unfortunately the Sub-prime junk assets to derivatives, hedging (still measured as assets) is extreme stuff and so gloomy no one wants to know.

He was as you say asking for specific stock advice, to satisfy that is certainly something for ASIC. So where are we?

He has to use his own ruler or seek a professional. Our argument at least alerts that there are no easy answers.

 

[davo8]

Accept your stance. However what in Sassa's post was a rant. Is the article not clear enough?

The form of the article by Money Sage was a rant. The content of the article was largely factual. If anyone wants to challenge those facts I can produce references, numbers and authorities yea high to back them up.

The independent commentators, plus Soros & Buffet, say that the US is in for a long deep recession, with multiple bank failures and much wealth destruction, and quote facts to back it up. The vested interests and in particular the mass media say everything is just fine, but they avoid the facts. I have no doubt who to believe.

A severe recession in the USA will harm Australia, and probably trigger a downturn here, except perhaps for mining. The downturn plus excess capacity may well pop the housing bubble here, like everywhere else in the world. This plus the damage to credit markets will hurt the banks and the rest of the financial sector. Banks here will survive, but they may cut dividends or struggle for a while. I sold all mine, and I'm not tempted by "bargains".

The timescale is specific: July to October. If there is no US crash by then it's safe to test the water. Until then, cash at 8% is best. Personally I'm building a list of mining-related companies to buy when the price is right. Not yet...

 

[sassa]

With a part underlying message of further writedowns by financial firms,either bank or investment,I post part of an article that I hope is full of fact and no ranting(no sarcasm intended to any of the forum's contributors).

Ambrose Evans-Pritchard of the Telegraph looks at the rise of credit default swaps prices on investment banks and increasing interbank spreads, both indicators of heightened concern about counterparty and systemic risk.

No wonder Mishkin resigned. He probably doesn't want to go though another month like March. But his end-of-August departure date may not be soon enough to save him from more crisis management.

From the Telegraph:
The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."

Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.

The jump in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. The true losses are already known to specialists in the business, said Mr Sels

http://www.nakedcapitalism.com/

 

[sassa]

Still time till opening for things to swing around and of course the trading day is another matter.Futures down 75 at the moment-
http://www.bloomberg.com/markets/stocks/futures.html
-attributed to

June 2 (Bloomberg) -- U.S. stock-index futures fell on speculation a report will show manufacturing contracted for a fourth month, while a profit drop at U.K. lender Bradford & Bingley Plc reignited concern credit losses are spreading

Futures indicated the S&P 500 will fall after posting its second straight monthly advance. The benchmark for American equities has lost 11 percent from an all-time high in October on concern that $387 billion in credit-related losses and writedowns at banks, along with record oil prices, will push the world's largest economy into a recession.

 

[Whiskers]

The independent commentators, plus Soros & Buffet, say that the US is in for a long deep recession, with multiple bank failures and much wealth destruction, and quote facts to back it up. The vested interests and in particular the mass media say everything is just fine, but they avoid the facts. I have no doubt who to believe.

Soros and Buffet don't have a vested interest in talking the market down?

PS: Dow futures coming in to 69.

I think it's prudent to put some weight in the G7's desire for stability and some re-balancing of economies. I don't see them letting any stray ball past the keeper since they've gotten this far.

 

[nioka]

Soros and Buffet don't have a vested interest in talking the market down? .

Can you be sure they have no vested interest in talking the market down. Buffet in particular, I believe does have a vested interest in talking the market down. I read somewhere in the last week that he has a lot of money to invest right now. I guess he will be trying to get as much stock as he can with it. I'm trying to find where that was quoted.

 

[Whiskers]

Soros and Buffet don't have a vested interest in talking the market down?

Can you be sure they have no vested interest in talking the market down.

I did ask a sly question.

You made my point here.

Buffet in particular, I believe does have a vested interest in talking the market down. I read somewhere in the last week that he has a lot of money to invest right now. I guess he will be trying to get as much stock as he can with it. I'm trying to find where that was quoted.

 

[Whiskers]

The yanks must have a bad dose of mondayitis today.

The construction numbers had no bad surprises, actually better than forecast apart from domestic housing and Paulson is talking up the USD prospects, but the market is sliding.

Probably wake up in a frenzy late in the day.

 

[Uncle Festivus]

The yanks must have a bad dose of mondayitis today.

The construction numbers had no bad surprises, actually better than forecast apart from domestic housing and Paulson is talking up the USD prospects, but the market is sliding.

Probably wake up in a frenzy late in the day.

Perhaps it's time for the permabulls to start scratching their collective heads trying to fathom why the market is falling - again! Indices have failed with a lower high, remains to be seen where it bottoms this time round?

 

[sassa]

We know from centuries of evidence in countless economies, from ancient Rome to today's Zimbabwe, that running the printing press to pay off today's bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid..."

"Inflation is a sinister beast that, if uncaged, devours savings, erodes consumers' purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency."

-Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas

http://www.bigpicture.typepad.com/

 

[davo8]

Soros and Buffet don't have a vested interest in talking the market down?

So if you won't believe Soros and Buffett the will you believe Nouriel Roubini?

http://www.rgemonitor.com/roubini-monitor/252731/the-complacency-that-the-worst-was-behind-us-in-financial-markets-is-rapidly-fading-away/

The Complacency that the Worst Was Behind Us in Financial Markets is Rapidly Fading Away
Nouriel Roubini | Jun 3, 2008

The complacency that took hold of financial markets (equity and partly credit) - after the bailout of the Bear Stearns’ creditor and the extension of the lender of last resort support of the Fed to systemically important broker dealers (those that are primary dealers) – is rapidly fading away as financial markets and financial institutions are again under severe stress.

No wonder that now heads just started to roll at the top of Wachovia and WaMu; that Lehman – even with the protection of the Fed security blanket – is in trouble again; that Countrywide is on the verge on bankruptcy once BofA pulls out of a loser acquisition of the biggest and most insolvent mortgage lender; that the troubles among mortgage lenders are now spreading to the UK where the housing bubble was as big – if not bigger – than in the US; that S&P finally downgraded major financial institutions; and now that more financial trouble lurks ahead for major US banks and smaller US banks (small banks that will go into bankruptcy by the hundreds as the housing recession deepens, home prices collapse and the economic recession deepens and persist longer than expected by the market consensus).

You think he's trying to talk the markets down too?

 

[sam76]

Surely, the Democrat race being won would have a positive effect on the DOW?

yes/no?

 

[Trembling Hand]

Surely, the Democrat race being won would have a positive effect on the DOW?

yes/no?

???????

Its surprises that move markets. Is this a surprise?

 

[sassa]

And what will the Fed do if this story has substance.

The chatta--and it's just that, unconfirmed chatta--is that counter-parties are "pulling a Bear" on Lehman Brothers (LEH). In other words, the "rumor becomes reality" scenario is making it's way around the trading wires.

I have no insight to the legitimacy of these stories but I'll say the same thing I said about Bear Stearns (BSC) in March. If rumors alone can bring down a franchise, how strong can that franchise be? This speaks to the fragility of a globally interwoven banking system in a finance-based economy built on more than $500 trillion of derivatives

http://www.minyanville.com/articles/lehman-LEH-BSC-bear-Stearns-Brothers/index/a/17418

 

[Macquack]

And what will the Fed do if this story has substance.

http://www.minyanville.com/articles/lehman-LEH-BSC-bear-Stearns-Brothers/index/a/17418

The Fed might wheel out the oldest proven system of them all :- " the barter system" of exchange.

 

[dhukka]

Absolutely it's a crock, the ratings agencies have waited for two months for these companies to get their house in order to prevent downgrades. They should have been downgraded months ago.

This won't be the last we hear about the bond insurers, with anywhere from $70 - $150 billion in CDO losses (according to who you believe) $3 billion is hardly going to do the trick. Interestingly Chief Executive Officer Jay Brown said he has "questions'' about the company's 2007 preliminary results released last month and hasn't yet signed off the statements.

Also consider that the banks have NOT injected capital into AMBAC as a lot of the media has falsely reported. They are backstopping a rights issue, which means they don't have to get their hands dirty unless the rights are not taken up by existing sharehloders. This to me is a vote of no confidence on behalf of the banks.

As predicted, the sham that the ratings agencies have been running with respect to the Monoline insurers looks poised to fall apart:

MBIA, Ambac Credit Ratings Under Threat at Moody's

Moody's Investors Service placed the Aaa insurance ratings of MBIA Inc. and Ambac Financial Corp. under review for a downgrade for the second time this year after the two largest bond insurers reported wider losses from the mortgage-market slump.

MBIA shares tumbled to the lowest since June 1988, Ambac slumped to a new all-time low and credit-default swaps on their debt rose after Moody's analyst Jack Dorer said a rating cut is ``the most likely outcome'' of the reviews. Dorer cited diminished ``new business prospects and financial flexibility'' and the likelihood for bigger insurance losses.

MBIA Chief Executive Officer Jay Brown rebuked Moody's and said the review is ``unnecessary.'' Ambac CEO Michael Callen said the timing was ``unfortunate'' because the company's problems are temporary. Armonk, New York-based MBIA and Ambac of New York sold a combined $4.1 billion in shares, bonds and convertible debt to bolster capital and save their ratings. With the shares down more than 90 percent in the past year and their debt under review, raising more money may not be possible, analysts said.

``These companies are getting hit from all sides,'' said Robert Haines, an analyst with CreditSights Inc., a bond research firm in New York. They ``aren't writing new business, they're going to have more losses and they can't access the market to replenish capital. How can they be triple-A rated?''

MBIA Insurance Corp.'s insurance financial strength rating likely will fall to the Aa range, and a drop to the A category is possible, Moody's said today in a statement. Ambac Assurance Corp.'s ranking will probably be lowered to Aa, Moody's said in a separate statement.

Shares Drop

MBIA, which had plunged 90 percent in the past year, dropped $1.06, or 16 percent, to $5.63 today in New York Stock Exchange composite trading. Ambac, down 97 percent in the past year, fell 51 cents, or 17 percent, to $2.49.

Credit-default swaps tied to MBIA's insurance unit rose to a record as investors hedged against the risk the company's guarantees will sour. Sellers of five-year contracts demanded 23.5 percent upfront and 5 percent a year, according to CMA Datavision. That's up from 18.5 percent initially and 5 percent a year yesterday.

The upfront cost to protect Ambac guarantees jumped to 25.5 percent from 21.5 percent, CMA prices show.

The contracts pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements or if it can't make good on its guarantees.

No Changes

Moody's and Standard & Poor's put the ratings of Ambac and MBIA under review for the first time in January. The prospect of downgrades earlier this year roiled world capital markets on concern that guarantees for more than $1 trillion of debt may be worthless. Moody's affirmed the Aaa ratings on the insurance units of MBIA in February and Ambac in March.

Fitch Ratings cut Ambac to AA in January and MBIA to AA in April.

``We disagree with Moody's decision,'' MBIA's Brown, said in a statement today. Moody's had given MBIA the impression in February that it had 6 to 12 months before the ratings may come under scrutiny. ``Since then, there have been no material adverse changes in the environment, and we believe our capital position has improved,'' Brown said. ``Thus we are surprised by both the timing and direction of this action and can only conclude that the requirements for a Triple-A rating continue to change.''

Moody's flip-flop on its rating has driven down new business ``precipitously'' in the past month, he said.

`Meaningful Uncertainty'

Ambac's Callen said the uncertainty surrounding the company is temporary. ``Outside the mortgage-related exposures, the remainder of our portfolio is performing well, and in line with our expectations,'' Callen said in a statement. The company has no plans to raise capital, he said.

Ambac reported a $1.66 billion net loss in the first quarter after $3.1 billion in charges for subprime-mortgage securities that it insured. MBIA had a loss of $2.4 billion as the value of derivatives it sells to guarantee debt tumbled $3.58 billion.

Dorer cited ``meaningful uncertainty'' surrounding Ambac's ability to regain market share since the first reviews. Callen yesterday said Ambac is writing minimal new business because potential customers lack confidence in the company's top ratings.

MBIA's results have shown ``continued deterioration within the guarantor's insured portfolio,'' Dorer said.

 

[Whiskers]

So if you won't believe Soros and Buffett the will you believe Nouriel Roubini?

http://www.rgemonitor.com/roubini-monitor/252731/the-complacency-that-the-worst-was-behind-us-in-financial-markets-is-rapidly-fading-away/



You think he's trying to talk the markets down too?

Aaah... just another accedemic, philosophing. :

All, good theoritical stuff and idealisticly correct davo, but as we know political adgendas corrupt idealism.

I just get the feeling that there is too much political will now amoung a lot of nations to stabalise the markets, particularly the USD, from any further economic impacts and avoid any sudden 'bloodbath'... to increase regulation to prevent preditory lending and the shady sorts of business practices that caused the problem from occurring again and try to let the system sort itself out more orderly.

As I've mentioned on the gold thread, the fundamental indicators coming out of the US are OK now and starting to come in more on the better side of forecasts. While sentiment is still a bit shakey, as demonstrated by the what I think is a bit of an excessive correction this week driven by a degree of fear in re-rating headlines and the higher oil price.

Ironically, the price of everything has been falling the last few days. That no doubt causes uncertainty in some peoples minds for awhile too.

 

[acouch]

some lunchtime reading
ac

http://www.apfn.org/APFN/reserve2.htm

 

[Broadway]

Just to play devil's advocate, the XLF has stopped falling with a fairly decent amount of volume in the last 48 hours.

Maybe we are in a bull market since mid-march, with 3-5 day retracements.

There will always be major corrections every 6 months or so, but things look bright to me.

Maybe I need to find a bullish article to link.