Imminent and severe market correction

[Whiskers]

Explod, I agree with what you say.

I think the issue may be that chops isn't recognising my devils advocate inquiry approach... whereas some people are very matter-of-fact.

I just saw that Ifocus. Not quite sure what to make of it yet.

One problem I have with a lot of the commentary especialy from economists is they tend not to foresee changing dynamics in the future... ie to use a quote by Fred Rodell (Professor of Law, Yale) albeit he was referring to 'The Law' as an analogy, economists are a bit like the Killy-loo bird, a creature that insisted on flying backwards because it didn't care where it was going but was mightily interested in where it had been.

The caution being that measurement tools, standards and values from the past don't necessairly project the future. M3 is one fad that didn't last long.

 

[Kauri]

Credit markets worldwide look to be nervous with rumors rampant of imminent hedge fund collapses on inability to find funding. Spreads on the Australian money market also look to be widening considerably with one major investment bank noting that the rates market there is virtually in collapse.

Cheers
........kauri

 

[dhukka]

No doubt the extended Term Auction Facility provides extra liquidity. However there are a couple of points people should remember about them. They are NOT injections of new money. They are just temporary repos, that is, the money is drained back out again in a month or so.

Secondly, although the Fed has relaxed standards on the type of collateral that can be offered up, remember that they are still only offering this liquidity to authorised banks. That doesn't mean those banks will necessarily lend it out. Take Thornburg Mortgage (not an authorised institution) for example, which is about to go belly-up, noone is willing to extend them credit. In fact banks are making calls on hedge funds and the like to stump up more collateral because they don't want to get left holding the bag.

That leads to the most important issue which is solvency. Here the Fed can do practically nothing. They can provide all the liquidity they want but they can't prevent large scale bankrupticies.

Looking ahead I think the end game is either the Fed or some other government sponsored institution comes in and buys these bad credits at some discounted price putting a floor under some of these assets. I'm not a supporter of this idea, just that I think this is where it is headed.

Credit spreads are still widening, libor is starting to creep out again, mortgage rates are the same or higher than they were a year ago after 225 bps of Fed easing, ABX, CMBX and CDX keep plunging new lows, the percentage of home foreclosures reached an all time since 1945 and are set to go higher as the major wave of mortgage resets has just begun, employers have stopped hiring and are about to start firing in earnest, corporate bankrupticies are about to ratchet up.

To suggest that we are closer to the end than the beginning of this deleveraging process is nothing more than wishful thinking.

 

[chops_a_must]

I think the issue may be that chops isn't recognising my devils advocate inquiry approach... whereas some people are very matter-of-fact.

Hmmm.... excuse me if I've been wrong, but you genuinely seem to have been bullish this whole way down...

No doubt the extended Term Auction Facility provides extra liquidity. However there are a couple of points people should remember about them. They are NOT injections of new money. They are just temporary repos, that is, the money is drained back out again in a month or so.

Thanks for that Dhu... I was hoping you would clear it up for us plebs.

Surely then, the TAF is akin to rolling up or down on options to a later date, and just magnifying those problems anyway. Didn't know the fed was into trading. Oh that's right... all those puts!

Maybe Wayne can come in with the dangers of doing that.

What happens if the banks default to the feds on those TAFs?

 

[dhukka]

Hmmm.... excuse me if I've been wrong, but you genuinely seem to have been bullish this whole way down...



Thanks for that Dhu... I was hoping you would clear it up for us plebs.

Surely then, the TAF is akin to rolling up or down on options to a later date, and just magnifying those problems anyway. Didn't know the fed was into trading. Oh that's right... all those puts!

Maybe Wayne can come in with the dangers of doing that.

What happens if the banks default to the feds on those TAFs?

Chops,

I think the best way to think about the Fed's liquidity injections are to use the analogy of a pawnbroker. I first wrote about this back in August when everyone was getting hysterical about the Fed pumping huge amounts of cash into the banking system to supposedly 'bail out' troubled banks. That simply is not the case. Below is an excerpt of what I wroote in August but click on the link for a thorough explanation.

Central bank bailout or acting as pawnbroker?

It may be helpful to use the analogy of a pawnbroker. Let's say my monthly rent of $1,000 is due on the 20th of this month. However I only have $700 in the bank and I don't get paid until the 25th. I'm $300 short for my rental payment and I also need to eat and pay for basic living expenses until I get paid.

So I take my Rolex down to the local pawnbroker. It's worth $2,500, the pawnbroker gives me $500 for it and keeps it as collateral in case I can't pay him back. I use $300 of the pawnbrokers loan to help pay the rent and use the remaining $200 for basic living expenses.

Then on the 25th I get paid, I go down to the pawnbroker pay him his $500 back plus some interest and he gives me my watch back.

Think of the Fed as a pawnbroker to the banks and other institutions that need to fund their short term liquidity requirements. Of course the Fed's terms will be much more generous than your average pawnbroker.

 

[sassa]

Just reported on www.247wallst.com-

March 10, 2008
Corporate Earnings Growth Disappearing, Could Go Negative
A survey of analysts taken recently indicates that they believe earnings will be flat in the first and second quarters of this year when compared to the same periods in 2007. The poll, by Reuters Estimates, sees Q1 earnings for the S&P 500 moving up only .4% and Q2 by .9%. Both numbers are worse than those gathered the previous week.

Oddly enough, the same survey showed Q4 2007 earnings for the S&P 500 dropped over 20%.

The information is an example of how securities analysts will hold their estimates high as long as possible. Perhaps to keep managements happy or keep shareholders invested in equities. It is hard to stay employed as a stock-picker when everyone is in bonds or cash.

In reality, earnings are likely to fall in each of the next two quarters. Certainly the financial companies in the S&P could see more huge write-offs due to subprime and consumer credit problems combined with falling value of LBO loans. With oil prices high it is hard to imagine that the auto and airline industries will do well. Retailers are already posting drops in same-store sales. The housing and construction industries will have another bad run.

Even technology may do badly. Recent information from Taiwan Semiconductor (TSM) and Intel (INTC) show slowing in the shipments of chips used for PCs and servers.

Oil companies and consumer goods operations which sell soap, toothpaste, and razors may fair well, but they cannot offset the drops in other industries.

A doubled-digit drop in the earnings of the firms in the S&P is more likely than flat year-over-year performance.

Douglas A. McIntyre

 

[chops_a_must]

Thanks Dhu. Cash converters now lend money as well...
...

WTF?

TIPS' Yields Show Fed Has Lost Control of Inflation (Update1)

By Sandra Hernandez and Deborah Finestone

March 10 (Bloomberg) -- Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They're so convinced that they're giving up yields just to buy debt securities that protect against rising consumer prices.

The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, ending last week at minus 0.16 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second-biggest U.S. mutual fund company, say TIPS are a bargain.

For the first time in a generation, money managers must come to grips with a central bank that's more intent on spurring the economy than restraining price increases. With oil above $100 a barrel, gold approaching $1,000 an ounce and the dollar at a record low against the euro, TIPS show investors aren't convinced Fed Chairman Ben S. Bernanke will be able to tame inflation once policy makers stop cutting interest rates.

``The way TIPS are trading now, investors believe headline inflation will stay lofty and are willing to give up the real yield for that,'' said Brian Brennan, a money manager who helps oversee $11 billion in fixed-income assets at T. Rowe Price Group Inc. based in Baltimore. Prices for the securities indicate ``a real concern of a recession and high headline inflation,'' he said.

Because TIPS pay a principal amount that rises in tandem with the consumer price index, buyers accept lower yields in a bet the inflation adjustment will make up the difference.

Volcker Fed

Investors typically determine what they are willing to receive in interest by deducting the rate of inflation expected over the life of the securities from the rate on a comparable Treasury. Investors can still earn money from TIPS with sub-zero rates because the principal rises with the CPI.

Five-year TIPS yielded 2.35 percentage points less than similar-maturity Treasuries as of 2:45 p.m. in Tokyo. The so- called breakeven rate has risen from a four-and-a-half-month low of 1.89 percent on Jan. 23, the day after policy makers cut their target lending rate by three-quarters of a point to 3.50 percent in an emergency move.

The last time investors were so worried about faster inflation amid slowing growth, Paul A. Volcker presided over a Fed that would raise rates as high as 20 percent to end the stagflation crisis of the 1970s, according to Seth Plunkett, a bond fund manager at American Century Investment Management in Mountain View, California. The firm manages $20 billion.

Fed Forecast

Inflation ``is going to be higher than the Fed's targeted area,'' said Plunkett, whose fund owns a greater percentage of TIPS than contained in the index he uses to measure performance.

In forecasts released last month, the Fed said it expects inflation to accelerate 2.1 percent to 2.4 percent this year, and 1.7 percent to 2 percent in 2009.

TIPS have returned 6.2 percent this year, compared with 3.7 percent from regular Treasuries, according to indexes compiled by Merrill Lynch & Co. Mutual funds that specialize in inflation-linked debt attracted a net $2.87 billion in January, boosting their assets to $47.6 billion, according the latest data available from Financial Research Corp. in Boston. In all of 2007, the funds added a net $3.54 billion.

``TIPS are a really good buy,'' said Bill Chepolis, a money manager who helps oversee $9 billion at Deutsche Asset Management in New York. He bought five-year TIPS in the last six months. ``They're cheap with the Fed continuing to emphasize growth over inflation and inflation continuing to come in higher.''

...

http://www.bloomberg.com/apps/news?pid=20601087&sid=aE3uq61ajc.4&refer=home

 

[Kauri]

JP Morgan warns that banks face up to $325 bln in "systemic margin calls". The UK Times warns today that the Fed"s TAF moves on Friday were due to fears of systemic risk. Margin calls against Carlyle and Thornburg are still headlines today and bond traders are eyeing the Bloomberg article that hedge funds are reeling from margin calls.

Sorry, no links... too busy trading...
Cheers
..........Kauri

 

[Kauri]

One of the key arguments for AUD bulls, supporting their optimistic view for the currency, and theXAO, has been expectations that Chinese growth will underpin Australian resource demand and the AUD. But, cracks in that view emerged overnight with a sharp slump in China"s trade surplus reported last night at $8.6 bln and well under the $22.2b bln expected. China Feb imports of copper were down 5%, which is partly blamed on the Chinese New Year though some still see waning demand as well. China"s stock index fell to a seven-month low last night, adding to the more negative outlook for China with the Nikkei reporting today that some Japanese companies are already rethinking China strategies and looking to shift production elsewhere to cheaper places like Vietnam and India. The Nikkei also reports that half of Japanese manufacturers see a sharper slowdown in China after the Olympics.
Cheers
...........Kauri

 

[Kauri]

Michael West in the Age even talks about rumours of large margin calls due on McQuarie Bank which McQuarie denied overnight but highlights the current local market concerns.
Cheers
...........Kauri

 

[wayneL]

Cognitive dissonance from The Times LOL :

 

[Kauri]

Numerous news services reporting Lehman will lay off 5% of its staff which is seen underpinning US recession fears and highlighting the financial market woes.

 

[Kauri]

at last... the US reacts to the batch of bad news coming out ... risk control to the fore###

 

[Kauri]

if a US investment bank was caught sniffing glue would it qualify to be called in-solvent??
Cheers
............Kauri

 

[chops_a_must]

if a US investment bank was caught sniffing glue would it qualify to be called in-solvent??
Cheers
............Kauri

Lol!

And even with that amount of protection, the US is still infected seven ways from Sunday.

But the markets aren't coming off nearly enough for my greedy liking atm. Want to see 11,000 on the dow at least by the end of the week...

As for the fed having this anywhere near control:

Bear Stearns Shares Fall on Liquidity Speculation (Update1)

By Jeff Kearns

March 10 (Bloomberg) -- Bears Stearns Cos. fell 13 percent in New York trading, the most since the 1987 stock market crash, on speculation the company lacks sufficient access to capital.

Bear Stearns, the second-biggest underwriter of mortgage- backed bonds, declined $8.53 to $61.55 in composite trading on the New York Stock Exchange at 11:55 a.m., the lowest level since March 2003. Earlier today it traded as low as $60.26.

``There's an insolvency rumor and concerns on liquidity, that they just have no cash,'' said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York. ``There's been rumors of this for the past week or two.''

Russell Sherman, a spokesman for New York-based Bear Stearns, didn't immediately return a call for comment.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

As I was saying on another thread today, you're going to have to expect to see some of these majors go under...

 

[Kauri]

Lol!

And even with that amount of protection, the US is still infected seven ways from Sunday.

But the markets aren't coming off nearly enough for my greedy liking atm. Want to see 11,000 on the dow at least by the end of the week...

As for the fed having this anywhere near control:



As I was saying on another thread today, you're going to have to expect to see some of these majors go under...

what sparked the ... ahhh... rumours..

Moody"s has downgraded a number of ratings on 163 tranches of Bear Stearns Alt-A deals.

I don't think there is anything to it... the liquidity that is.. I hear its a spray can...

on another tack...

for whom the bell TOLLS!!

of course there is another mob who are Lehing men off... about 5% I think..
Cheers
.........Kauri

 

[skating101]

this entire discussion reminds me of the january doom and gloom phase just before the big bounce the dead cat is looking a little twitchy again

out of interest who actually feels that a recession in the US could already be priced into the market?

 

[explod]

this entire discussion reminds me of the january doom and gloom phase just before the big bounce the dead cat is looking a little twitchy again

out of interest who actually feels that a recession in the US could already be priced into the market?

Not me, the US market is still over inflated, held up by the Wall Street spin doctors. Do the numbers. Read back over this thread on the businesses going to the Wall in the US over the last few weeks.

The doom and gloom analysts of 4 or 5 years ago have turned out to be spot on. Maybe they are worth following so that you can approach the market with optimism.

Food, oil, gold

 

[brty]

At some point, probably soon, there will be a large correction to this move down. It has been one way traffic since November. Whether or not it is the ultimate market bottom is a moot point.

We should be very close to a tradeable rally, especially given the D+G in some of these threads.

bye

brty

 

[Trembling Hand]

At some point, probably soon, there will be a large correction to this move down. It has been one way traffic since November. Whether or not it is the ultimate market bottom is a moot point.

Thanks for that. I am sure that's a fresh view that no one has thought about. That one day soon we may rally and it may or may not be the bottom.