Banking Crisis More Dangerous Now Than Ever

No blog since Friday. Busy weekend followed by severely twisting my ankle yesterday left me in pain and unable to concentrate. A bit better today, so I will give it a go.

Cosmetic Changes Not Having the Usual Effect
You have seen the game before. A troubled company replaces the CEO or chairman (with a big fat severance deal) and pretend that things really have changed. As if ONE MAN could be responsible for the collective failure of an entire business institution. Sadly, this show is one of Wall Street's favorite plays, and usually is good for a nice stock price pop.

Today brought two such tricks, but without the pop. Wachovia Bank (WB) axed their CEO with a force out and Washington Mutual (WM) split the chairperson position from the CEO spot for their current title holder. Both stocks were flat to down today. While the financials were in the toilet for most of the day, the CEO shuffle was especially ineffective.

WB and WM are in rough shape. They are like a 3-13 NFL team, you would call them "in the rebuilding stage" as they try to regrow their operations. I think the whole "bottom is in for financial stocks" folks still do not get this fact; Even if (huge if) the worst was over as it relates to the losses and writedowns, this does not mean the stocks would then go straight back up. The financial engineering that gave us the mortgage debacle will not easily be replaced by another growth area for banks. Substantial pressure will be on the financial sector for the next 5 years easily. The bottom is in? Maybe, but if it is, it is here to stay for a long while.

Banking Crisis More Dangerous Now Than Ever
There is a general thought that the worst of the banking crisis occurred right at the BSC bailout and has improved to some degree since then. I disagree totally. Back then there was the hope that BSC was one bad apple, but the bunch was basically ok. There was optimism that the FED could save the day. There was a belief that the floor was put in for struggling banks. How is all that working out?

It seems that the entire financial industry is a mess. What is the difference between a busted BSC and Lehman Brothers right now? Nothing. No difference. If anyone wants to pull their trades and cash out of LEH it will collapse in one day.

The biggest problem was that the FED was limited in what they can do. I think the FED gambled that if they provided cash (through giving away their treasuries) that things would get better before they ran out of money. Time is almost up and nothing is any better. Market Ticker tackles this issue very well today with his parsing of a Bloomberg article. Key excerpt:

"The real nasty in that article though is here:
"The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank- lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December."
Uh, wait a second. Dr. Spinmeister, please stop and tell the truth.What truth? Try this. From $267 billion to $34.3 billion is a decrease of 88%. Yes, it was 27% of the market back then and is much less now, but the more important fact here is that The Fed has sold off 88% of its Treasury Securities and replaced them with garbage CDOs and other toilet paper from the banks! What happens when The Fed runs out of good collateral to sell?
Uh, gee, you think that day has basically arrived?"

Complete post: http://market-ticker.denninger.net/2008/06/mendacious-monday.html

The FED is about out of cash and time. By August they should be empty and will have to ask congress for more coin if they want to continue the bank giveaway. And what have they accomplished by destroying their balance sheet? Bought 6-8 months before a major market issue? Whoopity Doo!

Out of control is the phrase that comes to my mind when thinking about the last 6 months. Over reaction was followed by poor decisions, which was compounded by terrible policy. This summer is going to get right interesting by mid July into August. I can't wait!

Subprime Permeates Public Thought
The subprime debacle is fully enmeshed into the psyche of even casual observers. When the butt of jokes is about mortgage products, you know the issue is huge. Case in point, this LOL cat from today:

more cat pictures

Have a good night.

Volatility Must be Causing Sleepless Nights

Friday at last. I am officially on vacation! I leave Monday morning for Jamaica and will return next Saturday. Try not to miss this fine blog too much. I wanted to thank everyone for the active comments on last night's post. I really do like discussion and feedback.

Daily Mainstream Media Bash
While the boob from last nights post was pretty bad, today brought even more stupid magic from a Yahoo Finance story. I especially like to focus on the end of the day summaries as anyone asked to comment on the days trading tries to fit market action to some kind of smart sounding statement.

Check this one out where the guy contradicts himself in the same thought process:
AP
Stocks mostly up as investors overcome economic worries
Friday April 25, 6:16 pm ET By Eileen Aj Connelly, AP Business Writer
NEW YORK (AP) -- Wall Street ended its second straight winning week with a moderate advance Friday, overcoming concerns about consumer confidence and inflation.
--Overcame concerns? How? Why? What data or information made "investors" rethink their take on inflation and consumer confidence? Oh, you wanted real analysis? Sorry!

After slumping early in the session in response to weak consumer confidence and a spike in oil prices, investors seemed to turn their attention to broader signs, including the week's generally satisfactory earnings reports, that suggested that government efforts to steady the economy appear to be working. That shift in focus sent stocks up late in the day.
Although the Reuters/University of Michigan consumer sentiment index came in with its lowest reading since the early 1980s, Tom Lydon, president of Global Trends Investments in Newport Beach, Calif., said companies' first-quarter reports convinced investors that "overall, things aren't all that bad."
--Broader signs that show the economy is good include, um, well, I could not find one.

While consumer spending represents about 70 percent of the economy, UBS equities strategist David Bianco said "it's the wrong thing to be looking at to gauge the prospects" for the Standard & Poor's 500 companies.
"Business activity is strong in the U.S. and especially globally," he said. "That's far more important."
--And there it is. While the consumer represents 70% of the economy, it is the wrong place to be looking when thinking about business activity! That is a good one. So the 30% of business to business activity can make up for the other 70% now? Whatever Mr. Bianco. I hope AP did not have to pay for this amazing insight.

Excellent Article on the "Subprimation" of America
As they say over at Calculated Risk, "We are all subprime now"! One of my favorite writers on things economic is Charles Hugh Smith. He is able to present very good insight into many areas if interest, and usually in unique ways that really cut to the heart of the matter. Yesterday's post on his site is about as fine a take on this whole mess I have ever seen. See it here:
http://www.oftwominds.com/blogapr08/subprime-nation.html

Quick and dirty summary:
"The key take-away is how oil exporting countries' enormous profits--generated by the late-70s-early 80s spike in the dollar-denominated price of crude oil-- were recycled by U.S. banks into high-interest loans to Argentina and other risky Developing Economies. When Argentina et. al. defaulted, the losses drove Citicorp and Bank of America to the brink of insolvency.
Fast-forward to the 2000s: now this stupendous oil-revenue wealth has been supplemented by veritable mountains of dollars piling up in Asian exporters' accounts. Where to put all this cash to work in a low-interest rate world?
Answer: credit-risky mortgage borrowers in the U.S."

Read the whole thing. A very powerful piece indeed. There will be a quiz!

Volatility Must be Causing Sleepless Nights
What has been truly remarkable during the super fun period that began last August has been the wild volatility in pricing across all asset classes. As many here do, I follow gold and Silver pretty closely and the jumps up have been as great as the heart stopping drops! While the trend has been up, the vicious cutbacks are harsh.

This can apply to just about any asset. Stocks, Treasuries, you name it, have all been showing swings to the tune of over 2-5% for over 3 months now. That volatility is coming on the heels of a long term period where volatility was basically absent. What does this mean?

To me it means two things. One, traders of all sorts must be dining out on Pepto Bismal and Tums to keep their stomach intact overnight. With news breaking at all hours and usually with major ramifications, sleeping must be very hard! The second thing it means to me is that the so called "brilliant" market has no idea what anything is worth right now. This is a key point. One can argue stocks or whatever are overpriced, under priced, or about right all they want. The fact is that the prices for all assets right now is subject to severe adjustment and on a daily basis. If any of these things were valued by solid fundamentals, the prices would be much tighter bound. Keep that in mind as things go forward.

It is very clear that there is an extreme mispricing of assets across the board. The more bullish would argue that a much higher move is in the cards. The more bearish would argue for a nasty correction. Daily whipsaws show nobody really is sure. The time is coming when one or the other is going to be the clear winner. Expect a major move at that point.

My guess? After August, in late September things will resolve much lower. But that is just my take. Leave some thoughts in the comments section.

Friday Night Entertainment
It is the weekend, and a vacation weekend no less!

The great film "National Lampoon's Vacation" of course is the gold standard of vacation films. My favorite scene is the family arrival at "Wally World" in the Griswold family truckster, and the park is closed! Clark (Chevy Chase) loses his mind and punches the mascot moose:


Comic Relief
From the film "Anchorman" we are shown the cologne called "Sex Panther" which comes with the label; "60% of the time, it works every time!"


Rock Blogging Anyone?
I had not heard this Ozzy song in a while, but I always liked it very much. The song is called "Secret Loser" and it is a rocker:


One of Motley Crue's best tunes "Girls, Girls, Girls". Great drums, great guitar, and hey, the video is not bad!


Probably my favorite Guns and Roses song, "Night Train":


Have a good night.