Friday, September 30, 2011

Meltdown, Part Deux

Three charts that have caught my eye in the last 24 hours:

History rhymes: world stocks are sliding...again.

[theme song: "The Tracks of My Tears" by Smokey Robinson]

And this:

Banks in trouble: Morgan Stanley default swaps are blowing out.

[theme song: "Pressure" by Billy Joel]

And it's not just Morgan Stanley [blue line, below]. Check out the 5-year CDS spreads for Citigroup, Goldman Sachs, and, my favorite, Bank of America [green], which is now kissing 400 bps:

Look out above!

[theme song: "Up, Up and Away" by Fifth Dimension]

Wednesday, September 28, 2011

Queue It Up

Dolphin Tale, the rest of the story.
Real-life clandestine op for adrenaline junkies.
You are what you eat.
Trailer here.

Sunday, September 25, 2011

Quote for the Week, Sept. 25-Oct. 1, 2011

It takes a PhD in economics not to be able to understand the obvious.
--Irving Kristol

Thursday, September 22, 2011

BAC to the Lows

BAC, 3-month chart

With yesterday's downward spike in the price of Bank of America's common stock, the "Buffett effect" of one month ago has been repealed, leaving shares near the low for the year.

Why would Warren worry? Super-gazillionaire Warren Buffett, remember, sold all of his Bank of America common in 2010 and replaced it with preferred stock purchased last month. So he would appear insulated from yesterday's slide. But check out the reason for the slide: a downgrade by Moody's Investment Service of its ratings of Bank of America bonds. While preferred shares are senior to common, they are subordinate to bonds. So if bonds are at risk, so too are dividends owed to the preferred shareholders (in Buffett's case, a fat $300 million annually).

Moody's lowered its rating of BofA's long-term senior debt from A2 to Baa1 and, what's more, warned that a further downgrade may be in the cards. From Moody's website:

"Moody's decision to assign a negative rating outlook reflects the possibility it may further reduce its systemic support assumptions in the future as a consequence of the process set in motion by the enactment of the Dodd-Frank Act. Under the rules recently finalized by the FDIC, the orderly liquidation authority included in Dodd-Frank demonstrates a clear intent to impose losses on bondholders in the event that a systemically important bank such as BAC was nearing failure. If fully implemented, the provisions of Dodd-Frank could further lower systemic risk by reducing interconnectedness among large institutions and could further strengthen regulators' abilities to resolve such firms....

if the economic environment were to deteriorate and the bank were to receive adverse legal rulings on the claims pending against it related to its mortgage business, it could have a significant impact on BAC's capital position. Moody's also believes the variability around potential negative outcomes is substantial, and their resolution is not entirely within the direct control of management. The resulting uncertainty is a constraining factor on BAC's baseline credit assessment, especially in light of the bank's still relatively modest capital position compared to its major peers."

BofA's cash flows will be further constrained by the Federal Open Market Committee's decision, announced yesterday, to begin "Operation Twist," whereby the yield curve for U.S. Treasury bonds will be effectively flattened. Banks print money on the difference between short-term rates and longer-term rates, borrowing short and lending long. The steeper the curve (the bigger the difference in rates), the more money they make. That arbitrage is now being squeezed by the Fed in a desperate attempt to goose the economy.

The cost for default insurance for BAC debt remains alarmingly high:

BAC, 5-year CDS spread

Wednesday, September 21, 2011

Monetary Heroin

via ZeroHedge [click to enlarge]

Yields on PIIGS debt are surging higher, despite the intervention of the European Central Bank to suppress them. The ECB's liquidity injections are short-term "fixes," nothing more.

As the drugs lose their effect, what happens next? Anybody? Anybody?

Sunday, September 18, 2011

Quote for the Week, Sept. 18-24, 2011

After each war there is a little less democracy to save.
--Brooks Atkinson

Monday, September 12, 2011

Double Your Money

The yield on Greek 1-year debt passed 100% this a.m.

Step right up. Getchy'ur Greek one-year bonds for half price. Double your money in just one year!

The only catch: Greece must avoid defaulting on its sovereign debt before the bonds mature. Wanna bet?

[update 09-14-11:]

The yield on the same debt touched 148% hours ago. Can you hear me NOW?

Two days later.

Sunday, September 11, 2011

Quote for the Week, Sept. 11-17, 2011

An independent is a guy who wants to take the politics out of politics.
--Adlai Stevenson

Thursday, September 8, 2011

[click to enlarge]

by Howard Simons, Minyanville


"Another indicator flashing red is the term structure of zero-coupon implied volatility. These levels have blown so far past the 2008-2009 highs that those readings look perfectly normal on the chart [above]. The two-year Schatz’ (German note) volatility has increased furthest and fastest as the market is convinced the present levels and very steep German yield curve are unstable.

Higher volatility means markets are less liquid and all parties involved have to pay higher costs to fix and hedge their credit commitments. Maybe someone, somewhere, believes paying high insurance costs on two-year money at levels considered untenably low is conducive to economic growth. I do not and have not, and the macroeconomic track record since 2008 supports my skepticism.

Most of the time entrance into a new war prompts people to ask a question along the lines of, 'Is this another Vietnam?' We have been asking whether the current markets are another 2008. No; it is different in many ways but it is worse in others. Until these eurozone credit market stresses are reduced, we are still in trouble."

Complete article viewable here.

Tuesday, September 6, 2011

Queue It Up

Shot in Maine.
Dazzling photography.
Trailer here.

Monday, September 5, 2011

A Silver Bullet for the Ailing U.S. Economy?

[click to enlarge]

Home refinancings have not responded to lower interest rates.

by Alan Boyce, Glenn Hubbard, and Chris Mayer


"[T]hese mortgage-market frictions are slowing the economic recovery by limiting the benefits of low interest rates for household spending. Unable to refinance their mortgages the way corporations have been able to refinance their debt, consumers are left with weak balance sheets and mortgage payments often above of the cost of renting, contributing to excessive delinquencies and foreclosures. These constraints on refinancing have a disproportionate impact on middle-class borrowers with origination balances under $200,000 and poorer credit and whose employment opportunities have been hit especially hard by the recession....

[Under our plan] we expect mortgage payments to fall by about $70 billion, benefitting about 25 million borrowers...This plan would function like a long-lasting tax cut for these families. Empirical evidence suggests that consumers spend a larger portion of permanent increases in income than temporary increases....

The housing market benefits in many ways. Lower mortgage payments reduce future defaults, helping to stabilize house prices for all homeowners, whether or not they have a GSE/FHA/VA mortgage. The good new about refinancing may help improve consumer confidence, further benefitting the housing market. House prices may start to go up, leaving fewer borrowers underwater, starting a virtuous cycle."

We see who will benefit, but who will pay? That would be investors in vintage residential mortgage-backed securities (RMBS), who would have to accept massive prepayments of loans made during the height of the housing bubble. But shed no tears for those investors, who, according to Boyce et al., "understood and accepted the callable nature of mortgage interest-rate risk...[and] have received an unanticipated windfall from the extremely slow refinancing the expense of existing homeowners."

Complete paper viewable here.

Sunday, September 4, 2011

Quote for the Week, Sept. 4-10, 2011

When a man's best friend is his dog, that dog has a problem.
Edward Abbey

Friday, September 2, 2011

Island in the Stream

BAC, 3-month chart

For those long Bank of America stock, today's price action was troubling. BAC gapped down without retracing to Thursday's price range, creating an ominous chart pattern known to technical traders as an "island reversal." Such a reversal typically ushers in further downside. Notice in the chart above that there is a six-bar plateau to the far right that is completely detached from prices both before and after. That is the island.

The original gap up came on the news that Warren Buffett is lending $5 billion to Bank of America. Interpreting the infusion as a signal that it was safe to get back in the pool, investors did cannonballs, bidding the common stock up by 20%. So how has the news flow on BofA been since? Funny you should ask. First, the firm continued its fire sale of non-core assets, liquidating half its stake in China Construction Bank for $8.3 billion. So much for the CEO's earlier protestations that BofA already had plenty of cash.

Then it was announced that the FDIC is objecting to the pending BNY Mellon settlement, which, if approved by the courts, would obligate BofA to disgorge $8.5 billion for toxic mortgage-backed securities sold by its Countrywide division years ago. The FDIC's intervention may delay or even scuttle the deal. Or it may raise the price tag. While the CCB sale was sized just right for now, it won't be enough to cover a more expensive settlement.

Want more bad news? You got it. U.S. Bancorp is suing BofA over $1.75 billion worth of sour Countrywide mortgages. But that's chicken feed compared to the $58 billion sought by the Federal Housing Finance Agency for mortgage securities peddled to Fannie Mae and Freddie Mac by Bank of America and its no-good stepsons, Countrywide Financial and Merrill Lynch (both taken over during the last global financial crisis). The FHFA, playing no favorites, is going after other banks as well for a total of $200 billion. Today's stunning announcement may be the two-by-four that breaks the camel's back. At the very least it caused BAC to gap down, putting the finishing touch on the "island."

Uncle Warren could care less. He will get his six percent annually as long as BofA's lawyers can drag things out. Owners of the common need to realize that his interests are not aligned with theirs. Once a common shareholder himself, Buffett sold his stake, only to come back as a vampire with first claim on the company's earnings.

Small comfort: BofA is not alone.

Jobs Initiative Coming--Just In Time!

Thanks, as always, to Calculated Risk for this one.

President Barack Obama will be speechifying before Congress next Thursday night on how to create more jobs in the United States. He had originally asked for Wednesday, but Republicans said that an intramural debate scheduled for that night was more important. Barry typically deferred. Anyway, what's the rush? Over 8 million workers have lost their jobs since the Greater Depression started in 2008. They have waited almost four years. They can wait one more day.

Data released by the Bureau of Labor Statistics this morning could hardly have been less encouraging for the disemployed. According to the Establishment Survey, zero non-farm jobs were created in August. That is bad news for Obama, who will be out of a job himself if he keeps putting up goose eggs. Moreover, 58,000 jobs thought to have been created in June and July were, oops, canceled, dropping the three-month total to +105,000. Which means few employers besides McDonalds were hiring.

Numbers, numbers, who's got the numbers? The Household Survey says that non-agricultural jobs increased by 309,000 in August. But then again, the number of part-time jobs increased by 430,000. Do the math with me: the number of FULL-time jobs decreased by 121,000. Back to the Establishment Survey. Month over month, the average work week decreased by 0.1 hour, and average hourly earnings decreased (for the first time since January 2008) by three cents. Anyone else seeing workers getting squeezed?

Whatever plan the President has for unsqueezing, why has he waited two-and-a-half years into his term to reveal it?