Friday, October 5, 2007

The Future's So Bright I Gotta Wear Shades

The DOW closed up 91 points, ever so slightly below my call yesterday for a 100+ point close. Through the Force I can see the future, but its always in motion and hard to see final exact numbers, HA!

The jobs report came in pretty good looking, and the whopper (want cheese?) is that the "terrible" jobs report from August that prompted all the hand wringing was revised upward, wiping out all those job losses (4000 jobs lost is a big deal anyway?).
Thoughts on the jobs number baloney:
  • The number probably finishes the rate cut hopes going forward, or at least it should temper expectations. One of the MAJOR bullish arguments out there is that the FED will be cutting rates aggressively into the end of the year. If that argument took a kidney punch today, then shouldn't some kind of downward pressure shown up on stocks? Heck No! Goldilocks had her heart jump started by paddles at the last minute and now we have the perfecto economy we were enjoying before all this nonsense, bullish once again.
  • If the FED felt the credit crunch was severe, and that the poor August jobs number was reason to do something, they certainly look a bit misinformed as of now. If the so called genius at the FED cannot foresee the total evaporation of the credit issues and that the jobs were actually not lost, do you really have confidence in them going forward?

The second point of hilarity come from the unending earnings reports form the big financials. Today we get the scoop that Merril will lose 50 cents a share this quarter based on losses from the mortgage morass. Key data from Yahoo business: "The $5 billion writedown essentially erases more than half of Merrill Lynch's net income during the prior 12 months." WOWZA! Of course the stock rallied strongly on the info, because you know, those losses are the only losses Merril will have going forward, and the market is a forward looking indicator!

But wait, theres more! Next up was Washington Mutual. Key data from Yahoo business: "Washington Mutual Inc. said Friday that the weak housing market and the recent mortgage crunch will lead to a 75 percent drop in its third-quarter net income, making it the latest financial institution to warn investors it took a major hit over the summer." Holy toledo! The stock was up as we would expect as the losses were only for the summer, and going forward.... you get the idea. A few thoughts:

  • The current accepted wisdom is that the losses at the banks are both less than expected and over with. When its apparent that the losses are going to continue the market is going to need some kind of story to spin it positively.
  • If having massive losses causes a stock to go up, I would advise the banks to say they lost somewhere in the area of 2 TRILLION dollars, as this should rocket the stocks up by at least 200%.

The Economic Disconnect is growing at a good clip, and this week was another good one. We can have at the same time an economy that is close to collapse that needs immediate intervention from the FED and an economy that is solidly growing with wonderful job and wage growth. Any way you slice it, its a nice pie. Sadly, the wheels are going to come off pretty soon and the pie is just whip cream topping on a base of doggy poo and it wont taste good!

9 comments:

Anonymous said...

Interesting blog

Anonymous said...

Interesting blog

Anonymous said...

Great blog title, and yes, I am besides myself lately, as well, trying to conform my mind around this disconnect between the numbers and news and the Alice and Wonderland / Matrix scenario being played out on Wall Street these days. Anyway I slice it, the "pie"
picture is looking Pacaso eschewed.

russdog777 said...

getyourselfconnected:

nice work! I enjoyed hearing your take on this. But could you say / estimate more:

"The current accepted wisdom is that the losses at the banks are both less than expected and over with. When its apparent that the losses are going to continue..."

How much in losses was fessed up to by the big banks; and further, is there a reasonable estimate as to how much the total losses are based upon some estimate of hte total numbers of foreclosures or loans written in 2005-07? Some posters at housing panic seemed to estimate it was many Trillions of dollars through published #'s of foreclosures / short sales and some median foreclosure cost data / average loan losses.

If I understand- These firms have only seemed to fess up to about a few billion in losses. Maybe the rest of losses were successfully hoisted on the chinese buyers of these junk securities. I doubt it. Seems a lot could still be lurking around on those ENRON-esque off-balance sheet vehicles.

But you have to think they aren't fessing up to everything. And what of the effects on those foreign investors who will no longer be so happy to invest in Us debt securities? Those shoppers won't be returning to Kmart any time soon. They have to be pissed and planning to invest elsewhere in the future.

They are going to want lots more yield in US, in the future. The Fed can't keep rates low forever when the foreigners don't want to buy this stuff, unless they are willing to let inflation
take off (anyone see the prices of Gold, milk, corn, euros, [commodities] lately?) and the dollar devalue.

So what's an informed guess of the total size of the losses? And who/where holds what amounts?

Anonymous said...

this is gonna make ENRON look like chump change when everyone realizes the wheels have already come off.

Red Pill said...

enjoying your posts, and glad to know I'm not the only one walking around thinking WTF?!

Mentalic said...

Nice blog...started reading this a few days back...and I find it quite interesting...
Good job!!

getyourselfconnected said...

Thanks for all the comments! I hope people keep checking back from time to time.
Russdog777; in response to your question, I really wish I had an answer. This is a hobby of mine, and pouring over balance sheets and digging through financials that are designed to be confusing would eat up too much time and the wife would get mad! I suggest you check out Mr. Practical at Minyanville and Mish's site for number breakdowns. That said, if you add up all the announced losses by the banks so fay, it is around 20 Billion dollars. If you assume 10:1 leverage through derivatives and the like, 200 Billion is probably closer to the truth at this point. The main problem is that alot of the crap is held in "off-balance" black holes by the banks so its hard to know for sure. Sorry, I know this is not much of an answer.

russdog777 said...

Thanks man what you think of this: No real digging or poring required:

Today's WSJ front page has the writedowns. Those are admitted losses of ~20 bilion from several us/ european financial firms/banks.

Bloomberg article about subprime bonds in money market accounts:
============= (1)
Until recently, CDOs had been the fasted-growing debt market -- outpacing corporate and municipal bond sales by dollar total -- with about $500 billion sold in 2006, up from $99 billion in 2003, according to Morgan Stanley.

About a quarter of the content of all CDOs sold last year in the U.S. was made up of securitized subprime mortgage loans. CDO sales slumped to $11.9 billion in July from $36.9 billion in June, according to JPMorgan Chase & Co.

...Money market funds with total assets of $300 billion have invested in subprime debt this year.
...Fidelity Investments, the world's biggest mutual fund company, owned $2.3 billion in CDO-issued commercial paper in two money market funds....The biggest money market fund in the U.S., Fidelity Cash Reserves Fund, had 1.5 percent of its $98.2 billion assets invested in CDO commercial paper backed by subprime debt.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aEUtlgwzL_qc&refer=home
================ (2)
"This will go down as one of the biggest financial illusions the world has EVER seen"

- Randall W. Forsyth, writing in Barron's - Aug 2007
It was all a big scam to unload garbage loans on stupid foreigners.

"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."

http://wcvarones.blogspot.com/2007/08/barrons-on-mortgage-mess.html
http://housingpanic.blogspot.com/2007/08/housingpanic-quote-of-day.html
===================== (3)

"...But changes in ratings will force a re-pricing of the roughly $800 billion in subprime-mortgage bonds sitting in investment portfolios across the globe."

Will subprime woes spill over to stocks?
Fears rise that rating-agency reviews could be a catalyst
http://www.marketwatch.com/news/story/stocks-feel-subprime-sting-debt/story.aspx?guid=%7B7B5B1C8B%2D5E0D%2D4C11%2D890E%2D96DA77B7C562%7D
==============

So this suggests that the total outstanding CDO market from recent years stands at about roughly 1 Trillion or more (interpolating from 500B in 2006 to 100 B in 2003). Of that 1/4 of the content is securitized subprime mortgage loans. ~ 250 B. marketwatch says there id 800 billion of it.

Now if you'll permit an indulgence... Recent experience with the Bear Sterns hedge funds (Structured enhanced strategies or some such inane name) showed that when these investments were owned in a leveraged scheme, they essentially became worthless. The Bear Sterns funds lost on the order of a 1-2 billion each.

So that means that only ~20 Billion of ~250-800+ billion has been fessed up so far. The article suggests that some of this trash is hidden in money market funds, where at least it isn't leveraged an makes up < 10% of he value of MMF assets. And we know from 2 that the securitization scheme was intended to unload the risk onto foreign banks / the chinese. How much did they buy?

IT's tough to know where the off-balance sheet debt is, but records are kept as to the origination of this debt. Its apparent that there are lots more losses out there. Lots more. Do the asian banks hold all the loses as planned? Or are there further losses from US money market funds? That was the question I wondered about. but someone is taking more losses. these writedowns may only be the first 10-20%.