Monday, October 15, 2007

WARNING: Objects in Mirror are Closer Than They Appear

In an earlier blog, I wrote about how the current thinking in the financial mainstream was that the write offs and losses related to the mortgage end of business was a one month wonder, and "that the worst was over" after August and September. Markets have been in rally mode ever since. Of course, readers of this blog (and most sane people over the age of 7 years old) knew that line of thinking was critically flawed, but why spoil a great party? Along comes news on late Friday and early Saturday that Citigroup and pals are putting together a fund (see previous posts for some details)to help out the struggling SIV market. Minyanville's Kevin Depew has great coverage in his must read 5 Things You Need to Know today:

What was interesting today is that this news should have been a rocket launch for the markets, as losses could possibly be hidden for some time by this kind of manipulation. Instead, the general market was down, and Citi was beat up (down?) 3.4% today. Could it be that some recognition of the scale of the problems at the major banks is starting to sink in? In a way, the news called attention to the ongoing issues facing the big banks in regards to the commercial paper market, unwanted attention to be sure. Now one day does not make a trend, and there are few things more annoying to me than bearish type commentators breaking out the champagne when the markets drop 1% after they have gone up over 12% year to date. I do believe however that even perma bulls were caught off guard by the seemingly desperate move by Citi and pals. It's like the frosted message on your side view mirrors on the car:
WARNING: Objects in Mirror are Closer Than They Appear
And likewise, the credit crunch, commercial paper crunch, and massive loan losses that were allegedly left behind in early September may be closer to the heart of the matter than the bulls wanted to believe.

I have a geeky analogy for the proposed "Superfund" whose sole purpose is to buy time to slowly unload crap paper at later dates at better prices. In science fiction, most starships have to use a kind of light speed travel. Leave out the Star Wars and Star Trek type of drives that conveniently side step relativity laws, and what you will notice is the effects of time dilation. What this means simply is that as a ship travels faster and closer to the speed of light, the time experienced on the ship by the passengers relative to observers on a fixed earth is different. What may be only 2 weeks on a starship travelling close to the speed of light may be an elapsed time of 200 years on earth. For a wonderful read on this try Poul Anderson's book "Tau Zero".
In that vein, the banks seem to want to load their crap paper on a ship, accelerate to a high speed, and then come back and unload the paper when the market deems the prices are anywhere near what the paper is modelled at. A good plan if you can pull it off, and with the explicit help of the Treasury Department, maybe it will work.

(I have a poll up on the site, and please vote on the Treasury Departments' involvement.)

Maybe this week will be interesting after all.

In my post from Friday night, I previewed the Patriots vs. Cowboys game and called for a final score of Patriots 38 Cowboys 20 (18 point gap). Final score on Sunday was Pats 48 Boys 27 (21 point gap). Again, the Force allows me to see the future, but exact numbers are hard to see.

Have a good night.


getyourselfconnected said...

Comments are always welcome. Discuss this post, or possible topics you would be interested in a post about.

Anonymous said...


Well over the last two weeks I watched the markets act kinda strange. 1. Markets go and silver under perform...2. Markets go down gold and silver went down to.

Now this Monday markets tank while oil and gold rocket up.

I am wondering why these things look more like manipulation and less like a free market.

Why ... why....???? The more I hear about 1K+ gold prices the more I wish for just a little bit more income to get more eagles with.

russ said...

Along that same line some other tricks are being used to try and stop the sell-off or at least stop that sale at market-determined prices. This one is a play straight from ENRON where loans were sold with a repurchase agreement just to get them off of the books. It is also from naked capitalism:

“”Some financial firms have sought in recent weeks to avoid write-downs by selling mortgage positions to hedge funds, with an agreement that allows the hedge fund to sell them back after a set period. A hedge-fund trader says his firm recently bought $1 billion of risky subprime mortgage loans from Bear Stearns with a one-year pact, known as a “mandatory auction call,” under which Bear agrees to participate in an auction for the loans that will provide the hedge fund with a minimum rate of return, according to a person familiar with the situation. “They didn’t want the mortgages on their books,” the hedge-fund manager says.

Such financial arrangements typically are considered proper if there’s an economic purpose to the trade and if risk is taken on by both parties. Legal problems could arise if such trades are part of an attempt to conceal a company’s financial picture, regulators say.”"
(down teh page)

This looks crooked as hell and I wouldn’t be surprised if the Bush administration lets this happen again.

getyourselfconnected said...

I have to agree with the sentiment with the two comments above. I am not a conspiracy nut usually, but there is some very clear manipulation going on in the markets as of late. Check this post on the Yen's strange behavior over the last few months:
There are two major differences this time around when it comes to manipulation however:
1. Tons of independant media are too smart not to see whats going on and report it. (blogs, quality sites like Minyanville)
2. The FED is not even pretending that they are not involved actively propping up various sectors of the banking industry.

Should be interesting anyway you slice it.