Capital Market Providers Collapse Under The Burden Of CDS Derivatives
Thursday, 20. March 2008, 14:25:07
Stock Market Report For Wednesday March 19, 2008
Capital Market Providers Collapsed Under The Burden of CDS Default
Alistair Barr of MarketWatch reports that brokerage stocks -- investment bankers dropped on Wednesday as concerns about mortgage exposures in the business reemerged after the sector's strong rally Tuesday.
Morgan Stanley, MS, managed to eek out a 1.4% gain after a better than expected earnings report. But rival firms fell, with Merrill Lynch, MER, fell 11%, Lehman Brothers fell 9%, and Goldman Sachs fell 5%.
The Investment Banking ETF, KCE, fell 4.5%.
These firms are highly leveraged which makes them awesomely vunerable to continued falling.
The Risk To Investment Capital As Well As The Risk Of Just Simply Having A Cash Position Is Unparalled In History
As stated in a recent article, capitalism is dead, dead and dead: it cannot exist without functional capital market providers: The risk of loss of cash as well as investment capital is unparalleled in history.
Capitalism was wiped out today by the capital market providers 4.5% fall in value. The United States has been a capitalistic society, and the world for a large part has been one also; a capitalistic society cannot exist without functional capital market providers.
Thomas Homer-Dixon writes in ReportOnBusiness in his article Global Capitalism Teeters On The Brink that the rules of the game have now changed. Our global financial system has become so complex and opaque that we've moved from a world of risk to a world of uncertainty. Surprises keep coming out of the blue. Commentators and policy-makers are still talking in terms of risk. Markets, they say, need to reassess and reassign risk across securities and companies. But, in reality, markets are now operating under uncertainty. No one really knows where the boundaries of the problem lie, what surprises are in store, or what measures will be adequate to stop the bleeding. And the U.S. Federal Reserve is making policy on the fly. We do know, however, that we're not dealing with a liquidity problem. We face a massive solvency problem: Banks and investment firms aren't so much worried about financing their next investment; instead, they fear for their survival, because core assets - particularly loans on their books - have been suddenly and dramatically devalued. In this environment, the tools available to central bankers may not work. You can encourage people to borrow by pumping money into the economy, but you can't force people to lend.
Jim Willie CB writes in his 321gold.com article that the US banks are insolvent as home loan defaults have combined with falling home collateral valuation to destroy mortgage bonds and related securities to the extent that banks have lost their entire capital. The only way to recover from this situation is for banks to find a way to make a lot of money really fast. The time has grown urgent to inflate rapidly, or else face an unstoppable chain reaction of bond failures followed by bank failures. Big banks do not have adequate loan loss reserves set aside. Money and wealth will be destroyed either from falling home portfolios and mortgage bond values, from reckless lending and much fraud at all levels.
And he developes the idea that bank capital is largely illusionary as so much of it is illiquid overvalued bonds; and to compound problems the trend is for homeowners simply to walk away in direct response to running under-water with home equity gone, perhaps negative. People are choosing not to service debt on a deflating failed asset.
Elaine Meinel Supkis in Money Matters draws out the concept of state corporate rule of financial markets has resplace capitalism, that is there is a new cohesive integration between banks, investment bankers and the government via JP Morgan, JPM, acting with support from the Federal Reserve to acquire Bear Stearns. This replacement for capitalism being engineered Monday March 17, 2007 at the White House at 2PM when President Bush convened the Working Group on Financial Markets, also known as the Plunge Protection Team, PPT, to develop and announe their framework agreement for dealing with deteriorating conditions in the financial markets.
The announcement of the Federal Reserve's framework agreement to provide financial backing of JP Morgan, JPM, for the acquisition of Bear Stears, BSC, is a landmark, in Public Private Partnerships, which has the effect of nationalization of investment banking, similar to the nationalization of investment banking by the Bank of England acquisition of Northern Rock.
While Ben Bernanke believes his action to support JP Morgan acquire Bear Stears was necessary to calm the markets; for emphasis I state that we no longer have capitalism: we have crony capitalism , other wise known as handouts to the corporations producing state corporate rule.
And Ms. Supkis quotes the Michael Hudson Counterpunch.org article relating: "This week the Fed tried to reverse the plunge in asset prices by flooding the banking system with $200 billion of credit. Banks were allowed to turn their bad mortgage loans and other loans over to the Federal Reserve at par value (rather at just 20% "mark to market" prices). The Fed's cover story is that this infusion will enable the banks to resume lending to "get the economy moving again." But the banks are using the money to bet against the dollar. They are borrowing from the Fed at a low interest rate, and buying foreign euro-denominated bonds yielding a higher interest rate--and in the process, making a currency gain as the euro rises against dollar-denominated assets. The Fed thus is subsidizing capital flight, exacerbating inflation by making the price of imports (headed by oil and other raw materials) more expensive. These commodities are not more expensive to European buyers, but only to buyers paying in depreciated dollars."
The outcome of the banking insolvency for investors is going to be a new massive devaluation and deleveraging of assets continuing the Elliott Wave 3 of 3 Down destruction of wealth that commenced December 11, 2007.
A Financial Emergency Is Coming
A "financial emergency is coming" as a lightning strike: it can be the only outcome of this week's volatility in the capital providers market -- the investment banking sector.
The Leaders' Joint Statement that came forth from the March 31, 2006, Cancun Summit provides a framework agreement for North American emergency management to handle a disaster, whether natural or man-made; and most definitely an economic disaster is coming.
Given this week's failure of capitalism, the SPP, will ease the transition from capitalism to state corporate rule of the resources and people of the North American continent: the coming enforcement of the SPP places one's capital at great financial risk.
The current run on the dollar will continue: corporations and individuals should not be invested in stocks of any kind, even precious metal or natural resource stocks, as well as not having any money in any U.S. dollar cash position such as a savings account, a checking account, a money market account, a short term bond fund, a TIP bond ETF or TIP bond fund, US Treasury Bills, an ETF, a mutual fund variant thereof, or a $1 money fund; and even a dollar denominated short selling account.
Soon the US Treasury Bond Market will declare a defacto interest rate hike independent of Federal Reserve action, and government bond prices, especially the 30 Year US Treasury will fall like a rock: this will catapult gold to well over $1,000.
Lawsuits Involving CDS Derivaties Are Now Commencing
Jody Shenn of Bloomberg reports that Merrill Lynch & Co. sued XL Capital Assurance Inc. to force the bond insurer to honor $3.1 billion of guarantees on collateralized debt obligations as the securities firm attempts to avoid more writedowns of mortgage-backed debt.
``We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations,'' Mark Herr, a spokesman for New York-based Merrill, said in an e-mailed statement today.
CDOs, which repackage mortgage bonds and other assets into new securities, were the biggest source of the more than $195 billion of mortgage-related writedowns and losses reported by the world's largest banks and securities firms since the beginning of last year. Merrill's $24.5 billion top the list. Losses may rise if default protection bought from companies such as XL, a unit of Security Capital Assurance Ltd., fails to pay off.
The debt that Merrill bought protection on from XL last year includes classes of: West Trade Funding II Ltd., Silver Marlin CDO I Ltd., and Jupiter High-Grade CDO VI Ltd. The credit default swaps, CDS, offer payments if the securities aren't repaid as expected, in return for regular insurance-like premiums.
Merrill's complaint said that XL this year sought to cancel the contracts by arguing that Merrill isn't ready to exercise the ``voting rights'' as the holder of the insured CDOs classes in ways that reflect XL's written instructions, as agreed upon by Merrill in the contracts.
The complaint says that XL based the assertion on public information from Standard & Poor's that says Armonk, New York- based competitor MBIA has written protection on classes of the CDOs senior to what XL is providing protection on and is the ``sole controlling party'' for the CDOs.
Merrill responded that it hasn't entered into contracts with another party on the CDOs that would preclude it from acting in the way specified in XL's contracts, according to the complaint.
Merrill owns protection from bond insurers on $19.9 billion of asset backed securities, its mortgage backed securities, ABSwhich it's carrying on its balance sheet at $3.5 billion, according to the company's fourth-quarter report. Merrill wrote down the protection by $2.6 billion in the period to reflect the increasing risk of some bond insurers.
If banks decide to view bond insurers' creditworthiness as non-investment-grade, additions to reserves against default protection on mortgage CDOs written by them may total $26 billion, Standard & Poor's said in a March 13 report. They've risen $12 billion so far, according to the ratings firm.
Trading in contracts granting the right to sell Merrill shares for $30 through the market's close on April 18 surged to 115 times the daily average this year. The price of those contracts, known as puts, more than doubled to $2.55.
Merrill's implied volatility, a measure of how much investors are paying to insure against further stock-price losses, rose to 130.06, the highest since at least September 2000, according to Bloomberg data. The increase indicates expectations of bigger swings in the stock's price.
The case is Merrill v. XL, 08-cv-2893, U.S. District Court, Southern District of New York (Manhattan).
My take on the lawsuit is that Merrill Lynch won't be able to recover a dime; its lawsuit makes wonderfully beneficial employment of all legal staff involved.
The Yen Carry Trade Is Continued To Unwind
And unwinding of the Yen Carry Trade is seen in disinvestment and deleveraging of the emerging markets, the 100% inverse ETF, EUM rose 6%, and the 200% inverse ETF, EEV rose 12%. The chart of these inverse shows as a cup and handle pattern meaning a breakout for the bears.
The basic materials has been a popular destination for interest rate differential investing; the 200% inverse of the basic materials UYM fell 12%.
Yen Carry Trade investments made long ago in Brazil's steel and oil unwound: PRB fell 8%.
The unwinding of the Yen Carry Trade was evidence in today's fall of the EUR/JPY which is the same as FXE:FXY.
The Major Markets And Indices All Manifested Bearish Engulfing
The chart of the Dow ETF, DIA, shows a bearish engulfing candlestick. The Elliott Wave 3 of 3 Down, which began December 11, 2007, is now resuming with intensity.
Dow component, Alcoa Aluminum, AA, a basic material stock, a popular destination for recent yen carry trade dollars, fell 8%.
Industrial stalwarts IBM and Honeywell, HON, finally have started to fall.
The Mortgage Government Sponsored Enterprises, GSEs, Freddie Mac, FRE, and Fannie Mae, FNM, Reemerge As Short Selling Opportunities
Patrick Rucker of Reuter reports that the regulator of Fannie Mae (FNM) and Freddie Mac (FRE), OFHEO, eased capital requirements for the two biggest housing finance agencies, allowing them to pump up to $200 billion into the distressed U.S. mortgage market.
The extra $200 billion would allow Fannie Mae and Freddie Mac to purchase both existing mortgage backed securities, MBS, and new home loans originated by banks.
The mortgage REIT ETF, REM, which had been advancing of late fell 2% and the Real Estate ETF, RWR fell 0.5%.
After the announcement, shares of Fannie Mae and Freddie Mac rose sharply for a second day. Fannie Mae stock rose 10.5 percent to $31.17, a five-week high, while Freddie Mac jumped 8.3 percent to $28.18, the highest since February 20, 2008: these have now reset in value as a great short selling opportunity.
The Age of Successful Natural Resource Investing Is Over
A lot of hedge funds that used 0.25% loans obtained from the Bank of Japan, (BOJ) sold their natural resource investments to cover portfolio losses stemming from deleveraging surety, financial, mortgage and real estate investments.
The chart of the oil service sector, OIH shows a massive fall from support.
The chart of the HUI indexed precious metal shares, the gold mining stocks, HUI shows a fall from support as well.
The chart of the gold mining stocks relative to the gold stocks, GDX:GLD shows gold stocks contintinuing to detach from the price of gold.
The individual investor is no longer supported by the institutional and hedge fund investor in the natural resource sector: the lucrative five year investment bubble that has accompanied the war on terror has been pricked.
The Investment Application
Having a dollar denominated investment portfolio, even a short selling one, or a money fund, or a short term bond fund, is like going into an Ebola infected hospital ward with a medical team: one eventually gets contaminated and dies a horrific death.
A corporation's resources, and an individual's retirement wealth will preserved by investing in the gold ETF, GLD, and by investing in the currency Euro ETF, FXE, and the Yen ETF, FXY; and with these margin credit obtained for short selling:
1) to sell the emerging markets; as now the Yen Carry Trades will finally start to unwind as there will be disinvestment from the BRICS, Brazil, Russia, India and China as well as the US Stock Market; we will soon see EUR/JPY that is FXE:FXY, fall from it's recent sky high 160 level.
buy EEV and EUM.
2) to sell the reits and real estate sector
sell REM, RWR and URE.
3) to sell the banking sector and insurance
sell KCE and KBE and AIG.
4) to sell municipal bonds and closed end municipal bond funds
sell BTA, VGM and CXE.
5) and at some future point in time to sell the 30 Year US Treasury Bond,
buy RYJUX.
Individual Stocks Worthy Of Short Selling Include The Following
Companies Worthy Of Short Selling Because Of Their Huge Derivatives Positions
JPM,C,BAC,
Companies Worthy Of Short Selling Because Of Their Mortgage Exposure
FRE,FNM,
Insurance Companies Worthy of Short Selling Because Of The Credit Default Swap, CDS Positions
AIG,SEAB
Investment Bankers Worthy Of Short Selling Because Of Their Illiquid Level 3 Assets Which Are Marked To Fantasy Rather Than Marked To Market
JPM,GS,MER,LEH,MS,FCSX,JMP,LAB,KBW
Mortgage Companies
FRE,FNM,CMO,NLY,CBF,CFC,CBF,ANH,MFA,DRL
Banks
WB,CS,HBC,C,FBTX,BK,WFC,WM,WB,UBS,HDB,CM.TO,BK,BAC
Surety
ABK,MBI,RDN,PRS
Closed End Municipal Bond Funds
BTA, VGM and CXE
Basic Materials
AA
Homebuilders
XHB,HOV,SPF,LEN,PHM,RYL,BZH,CTX
Railroads
UNP,GWR,CSX,BNI,NSC
Trucking
ABFS
Mortgag REITS
REM,NLY,ANH,CT,MFA,NCT
Real Estate and REITS
ELS,NCT,ACC,PSA,AVP,AVB,CPT,VTR,SPG,RSO,BXP,SSS
Real Estate Developers
JOE,STRS
Steel
SLX,X,STLD,CLF,NUE,HSVLY,SID
Lumber and Building Materials
AMN,KOP,DEL,GWW
Chemicals
PX
MEOH
Industrial
WHR,IBM,KEX,AIRM,TYC,HON,SSD
Consumer Discretionary
HD,LOW,NKE,PNRA,YUM,PERY,GIL,ANF,GPS,CMG,NILE,GYMB
Healthcare
ISRG,EXAC
Semiconductor
AMAT
Credit Services
CIT,AGM,MA,COF,ADS,ADVNB,WRLD
Eggs
CALM
Communications
TCL
Water
CWCO,AWR,CWT
Services
ASGN
Entertainment
CEC,CCL
Emerging Markets
EEM,EWZ
Those who have gold based portfolios used for short selling should be aware that gold could easily fall to its 50 day moving average at $920 as is seen in this chart provided courtesy of Mike Mish Sheldon who relates: "Lehman may not be Bear Stearns but it is still leveraged 30.7 to 1. Citigroup and many financials are hugely leveraged as well. Eventually the market will have to face a deleveraging of those assets. Huge additional writeoffs are coming. Furthermore, many homebuilders are going to go bankrupt and today does not change that. But that is not today's business."
Related Reading
You Owe The Money, No You Do
The Credit Crunch Hits Jefferson County Alabama
The credit crisis triggered by the subprime mortgage meltdown has claimed its latest victim: Jefferson County, Alabama and investors in the county’s municipal bonds and auction-rate securities.
Jefferson County’s troubles began in 1996 when a federal court action resulted in the county agreeing to update its aging and polluting waste water facilities. The county used interest rate swaps to borrow $3.2 billion to pay for its new sewage system. About $2.2 million of the sewer debt consists of auction-rate securities. At this time, the county has experienced failed auctions on $869.45 million of the debt and is underwater in its swap transactions by some $360 million. This makes the viability of Jefferson County questionable and investors in Jefferson County’s debt may sustain significant losses.
In addition, Jefferson County’s bond insurers, Financial Guaranty Insurance Co. and XL Capital Assurance Inc. were hit with credit downgrades recently. These downgrades affected the market for short-term municipal bond debt, including auction-rate securities and variable-rate demand notes. As a result, the county’s interest costs on their debts rose from 3%-4% to as high as 6%-10%. Following this increase, the credit-rating agencies began cutting ratings. On February 27, 2008 Moody’s downgraded the county to B3 from A3.
Auction-rate securities have been popular with issuers like state and local governments, colleges, universities, hospitals, charitable organizations, cultural institutions and other non-profit entities because financing costs are low, no third-party bank support is required and there are usually fewer parties involved in the financing process.
Until recently, auction-bond failures were a relatively rare occurrence.
Unfortunately, this is no longer the case.
As Martin Braun reported in a February 13, 2008 article on Bloomberg.com, during the past few weeks, investor demand for the securities has declined precipitously as a result of increasing skepticism regarding the credit strength of insurers backing the underlying debt obligations, and the reluctance of banks like UBS, Citigroup and Goldman Sachs to submit bids and risk holding too many bonds.
Indeed, nearly half of the $20 billion in securities put up for auction on February 12 failed to generate sufficient interest among bidders and none were sold.
Merrill Lynch, MER, recently announced that it is reducing purchases of auction-rate securities that fail to attract enough bids from investors, and UBS has decided that it simply will not buy such securities at all.
Investors' concerns about the credit ratings of the bond insurers backing the securities essentially caused the failure of these auctions.
For Jefferson County, all these factors have caused its lenders, Bank of America, Bear Stearns Cos., J.P. Morgan Chase and Lehman Brothers, to demand $200 million for additional collateral to support obligations the county owes them.
To date, Jefferson County has refused to meet the banks’ demands or to produce additional collateral as margin calls. The county now faces tough choices on how to raise additional money to cover the debt or face default.
It is not just the county experiencing pain. Investors in auction-rate securities have also been hurt. Many investors — individuals and institutions alike — who purchased the bonds believing that they were safe, low-risk securities equivalent to cash, now find themselves holding an investment for which there is no market.
Several investors have already taken legal action against the brokers who sold the securities. Merrill Lynch, for example, is a defendant in a Texas action in which Metro PCS alleges that the firm misrepresented the risks involved and the suitability of the securities under the company's guidelines.
Lehman Brothers is the respondent in a FINRA arbitration complaint filed by two wealthy New Jersey brothers, alleging that the firm's investment of $286 million in auction rate securities was inconsistent with the claimants' stated investment objectives. Additional investor suits against other firms are likely to follow.
We Made National News Again snips as follows:
Jefferson County, Alabama, had $3.2 billion of bonds slashed to below investment grade by Standard & Poor's, putting it at the center of turmoil in the U.S. municipal bond market that has driven up borrowing costs (reports Bloomberg's Martin Z. Braun)
The downgrade, made after the markets closed on Feb. 29, came after the county, which includes the state's biggest city of Birmingham, said it may be unable to pay banks holding floating-rate debt for its sewer system or make payments on related interest-rate swaps. Jefferson County, with $193 million in sewer reserves, faces the prospect of having to pay more than $1 billion to banks to buy back debt and unwind the swaps.
The county, on the advice of JPMorgan Chase & Co., refinanced about $3 billion of sewer debt in 2002 and 2003 using floating-rate debt, including bonds with rates set at periodic auctions, mostly insured by FGIC Corp. and XL Capital Assurance.
After the insurers' ratings were cut from AAA in January, rates on the county's debt soared to as high as 10 percent when dealers failed to find buyers for the debt or use their own capital to purchase the securities. The county said it paid $6 million more in interest on its sewer debt in the four months ended in January.
Compounding the problem, interest-rate swaps the county bought to shield it against rising borrowing costs have backfired. The floating rates it pays on its bonds have climbed while the variable rate banks pay the county under the agreements have declined, pushing interest costs higher.
The county, in a notice to investors on Feb. 28, said it could ``provide no assurance'' that revenue from the sewer system would be sufficient to pay its increasing debt costs. The disclosure prompted S&P to lower the county's sewer debt by six levels to B, five steps below investment grade, and keep the bonds under review for possible further downgrade.
The county may be forced to terminate its $5.4 billion of swaps at a cost it estimated at $184 million because its bond rating has dropped so low.
Bloomberg News reported in August 2005 that the county paid fees of $100 million on 11 of its 17 swap contracts, about twice what banks collected for similar deals.
About $2.2 billion of the county's sewer debt consists of auction-rate securities. The county has experienced failed auctions on $869.45 million of the debt, causing rates to rise to as high as 6.25 percent, up from 4.7 percent.
Dealers that run the bidding to set yields on auction bonds aren't buying unwanted securities as they once did, triggering thousands of failures since last month. Bankers who help to find buyers for so-called variable-rate demand obligations are also declining to hold the debt when they can't attract investors.
Jefferson County has $847 million of variable-rate sewer debt insured by FGIC and XL Capital. The insurers' downgrades may cause Birmingham-based Regions Bank and Paris-based Societe Generale, who agreed at the time of the initial bond sale to repurchase unwanted county floating-rate debt, to terminate their agreements. That would force the county to buy back the bonds.
``It is unclear how the county would be able to meet this obligation,'' Moody's Investors Service said on Feb. 27, when it cut its rating on the debt to its lowest investment grade of Baa3. As of Jan. 31, the county's sewer fund had $193 million, Moody's said.
Capital Market Providers Collapsed Under The Burden of CDS Default
Alistair Barr of MarketWatch reports that brokerage stocks -- investment bankers dropped on Wednesday as concerns about mortgage exposures in the business reemerged after the sector's strong rally Tuesday.
Morgan Stanley, MS, managed to eek out a 1.4% gain after a better than expected earnings report. But rival firms fell, with Merrill Lynch, MER, fell 11%, Lehman Brothers fell 9%, and Goldman Sachs fell 5%.
The Investment Banking ETF, KCE, fell 4.5%.
These firms are highly leveraged which makes them awesomely vunerable to continued falling.
The Risk To Investment Capital As Well As The Risk Of Just Simply Having A Cash Position Is Unparalled In History
As stated in a recent article, capitalism is dead, dead and dead: it cannot exist without functional capital market providers: The risk of loss of cash as well as investment capital is unparalleled in history.
Capitalism was wiped out today by the capital market providers 4.5% fall in value. The United States has been a capitalistic society, and the world for a large part has been one also; a capitalistic society cannot exist without functional capital market providers.
Thomas Homer-Dixon writes in ReportOnBusiness in his article Global Capitalism Teeters On The Brink that the rules of the game have now changed. Our global financial system has become so complex and opaque that we've moved from a world of risk to a world of uncertainty. Surprises keep coming out of the blue. Commentators and policy-makers are still talking in terms of risk. Markets, they say, need to reassess and reassign risk across securities and companies. But, in reality, markets are now operating under uncertainty. No one really knows where the boundaries of the problem lie, what surprises are in store, or what measures will be adequate to stop the bleeding. And the U.S. Federal Reserve is making policy on the fly. We do know, however, that we're not dealing with a liquidity problem. We face a massive solvency problem: Banks and investment firms aren't so much worried about financing their next investment; instead, they fear for their survival, because core assets - particularly loans on their books - have been suddenly and dramatically devalued. In this environment, the tools available to central bankers may not work. You can encourage people to borrow by pumping money into the economy, but you can't force people to lend.
Jim Willie CB writes in his 321gold.com article that the US banks are insolvent as home loan defaults have combined with falling home collateral valuation to destroy mortgage bonds and related securities to the extent that banks have lost their entire capital. The only way to recover from this situation is for banks to find a way to make a lot of money really fast. The time has grown urgent to inflate rapidly, or else face an unstoppable chain reaction of bond failures followed by bank failures. Big banks do not have adequate loan loss reserves set aside. Money and wealth will be destroyed either from falling home portfolios and mortgage bond values, from reckless lending and much fraud at all levels.
And he developes the idea that bank capital is largely illusionary as so much of it is illiquid overvalued bonds; and to compound problems the trend is for homeowners simply to walk away in direct response to running under-water with home equity gone, perhaps negative. People are choosing not to service debt on a deflating failed asset.
Elaine Meinel Supkis in Money Matters draws out the concept of state corporate rule of financial markets has resplace capitalism, that is there is a new cohesive integration between banks, investment bankers and the government via JP Morgan, JPM, acting with support from the Federal Reserve to acquire Bear Stearns. This replacement for capitalism being engineered Monday March 17, 2007 at the White House at 2PM when President Bush convened the Working Group on Financial Markets, also known as the Plunge Protection Team, PPT, to develop and announe their framework agreement for dealing with deteriorating conditions in the financial markets.
The announcement of the Federal Reserve's framework agreement to provide financial backing of JP Morgan, JPM, for the acquisition of Bear Stears, BSC, is a landmark, in Public Private Partnerships, which has the effect of nationalization of investment banking, similar to the nationalization of investment banking by the Bank of England acquisition of Northern Rock.
While Ben Bernanke believes his action to support JP Morgan acquire Bear Stears was necessary to calm the markets; for emphasis I state that we no longer have capitalism: we have crony capitalism , other wise known as handouts to the corporations producing state corporate rule.
And Ms. Supkis quotes the Michael Hudson Counterpunch.org article relating: "This week the Fed tried to reverse the plunge in asset prices by flooding the banking system with $200 billion of credit. Banks were allowed to turn their bad mortgage loans and other loans over to the Federal Reserve at par value (rather at just 20% "mark to market" prices). The Fed's cover story is that this infusion will enable the banks to resume lending to "get the economy moving again." But the banks are using the money to bet against the dollar. They are borrowing from the Fed at a low interest rate, and buying foreign euro-denominated bonds yielding a higher interest rate--and in the process, making a currency gain as the euro rises against dollar-denominated assets. The Fed thus is subsidizing capital flight, exacerbating inflation by making the price of imports (headed by oil and other raw materials) more expensive. These commodities are not more expensive to European buyers, but only to buyers paying in depreciated dollars."
The outcome of the banking insolvency for investors is going to be a new massive devaluation and deleveraging of assets continuing the Elliott Wave 3 of 3 Down destruction of wealth that commenced December 11, 2007.
A Financial Emergency Is Coming
A "financial emergency is coming" as a lightning strike: it can be the only outcome of this week's volatility in the capital providers market -- the investment banking sector.
The Leaders' Joint Statement that came forth from the March 31, 2006, Cancun Summit provides a framework agreement for North American emergency management to handle a disaster, whether natural or man-made; and most definitely an economic disaster is coming.
Given this week's failure of capitalism, the SPP, will ease the transition from capitalism to state corporate rule of the resources and people of the North American continent: the coming enforcement of the SPP places one's capital at great financial risk.
The current run on the dollar will continue: corporations and individuals should not be invested in stocks of any kind, even precious metal or natural resource stocks, as well as not having any money in any U.S. dollar cash position such as a savings account, a checking account, a money market account, a short term bond fund, a TIP bond ETF or TIP bond fund, US Treasury Bills, an ETF, a mutual fund variant thereof, or a $1 money fund; and even a dollar denominated short selling account.
Soon the US Treasury Bond Market will declare a defacto interest rate hike independent of Federal Reserve action, and government bond prices, especially the 30 Year US Treasury will fall like a rock: this will catapult gold to well over $1,000.
Lawsuits Involving CDS Derivaties Are Now Commencing
Jody Shenn of Bloomberg reports that Merrill Lynch & Co. sued XL Capital Assurance Inc. to force the bond insurer to honor $3.1 billion of guarantees on collateralized debt obligations as the securities firm attempts to avoid more writedowns of mortgage-backed debt.
``We filed suit to make clear that XL Capital Assurance Inc. is required to meet its contractual obligations,'' Mark Herr, a spokesman for New York-based Merrill, said in an e-mailed statement today.
CDOs, which repackage mortgage bonds and other assets into new securities, were the biggest source of the more than $195 billion of mortgage-related writedowns and losses reported by the world's largest banks and securities firms since the beginning of last year. Merrill's $24.5 billion top the list. Losses may rise if default protection bought from companies such as XL, a unit of Security Capital Assurance Ltd., fails to pay off.
The debt that Merrill bought protection on from XL last year includes classes of: West Trade Funding II Ltd., Silver Marlin CDO I Ltd., and Jupiter High-Grade CDO VI Ltd. The credit default swaps, CDS, offer payments if the securities aren't repaid as expected, in return for regular insurance-like premiums.
Merrill's complaint said that XL this year sought to cancel the contracts by arguing that Merrill isn't ready to exercise the ``voting rights'' as the holder of the insured CDOs classes in ways that reflect XL's written instructions, as agreed upon by Merrill in the contracts.
The complaint says that XL based the assertion on public information from Standard & Poor's that says Armonk, New York- based competitor MBIA has written protection on classes of the CDOs senior to what XL is providing protection on and is the ``sole controlling party'' for the CDOs.
Merrill responded that it hasn't entered into contracts with another party on the CDOs that would preclude it from acting in the way specified in XL's contracts, according to the complaint.
Merrill owns protection from bond insurers on $19.9 billion of asset backed securities, its mortgage backed securities, ABSwhich it's carrying on its balance sheet at $3.5 billion, according to the company's fourth-quarter report. Merrill wrote down the protection by $2.6 billion in the period to reflect the increasing risk of some bond insurers.
If banks decide to view bond insurers' creditworthiness as non-investment-grade, additions to reserves against default protection on mortgage CDOs written by them may total $26 billion, Standard & Poor's said in a March 13 report. They've risen $12 billion so far, according to the ratings firm.
Trading in contracts granting the right to sell Merrill shares for $30 through the market's close on April 18 surged to 115 times the daily average this year. The price of those contracts, known as puts, more than doubled to $2.55.
Merrill's implied volatility, a measure of how much investors are paying to insure against further stock-price losses, rose to 130.06, the highest since at least September 2000, according to Bloomberg data. The increase indicates expectations of bigger swings in the stock's price.
The case is Merrill v. XL, 08-cv-2893, U.S. District Court, Southern District of New York (Manhattan).
My take on the lawsuit is that Merrill Lynch won't be able to recover a dime; its lawsuit makes wonderfully beneficial employment of all legal staff involved.
The Yen Carry Trade Is Continued To Unwind
And unwinding of the Yen Carry Trade is seen in disinvestment and deleveraging of the emerging markets, the 100% inverse ETF, EUM rose 6%, and the 200% inverse ETF, EEV rose 12%. The chart of these inverse shows as a cup and handle pattern meaning a breakout for the bears.
The basic materials has been a popular destination for interest rate differential investing; the 200% inverse of the basic materials UYM fell 12%.
Yen Carry Trade investments made long ago in Brazil's steel and oil unwound: PRB fell 8%.
The unwinding of the Yen Carry Trade was evidence in today's fall of the EUR/JPY which is the same as FXE:FXY.
The Major Markets And Indices All Manifested Bearish Engulfing
The chart of the Dow ETF, DIA, shows a bearish engulfing candlestick. The Elliott Wave 3 of 3 Down, which began December 11, 2007, is now resuming with intensity.
Dow component, Alcoa Aluminum, AA, a basic material stock, a popular destination for recent yen carry trade dollars, fell 8%.
Industrial stalwarts IBM and Honeywell, HON, finally have started to fall.
The Mortgage Government Sponsored Enterprises, GSEs, Freddie Mac, FRE, and Fannie Mae, FNM, Reemerge As Short Selling Opportunities
Patrick Rucker of Reuter reports that the regulator of Fannie Mae (FNM) and Freddie Mac (FRE), OFHEO, eased capital requirements for the two biggest housing finance agencies, allowing them to pump up to $200 billion into the distressed U.S. mortgage market.
The extra $200 billion would allow Fannie Mae and Freddie Mac to purchase both existing mortgage backed securities, MBS, and new home loans originated by banks.
The mortgage REIT ETF, REM, which had been advancing of late fell 2% and the Real Estate ETF, RWR fell 0.5%.
After the announcement, shares of Fannie Mae and Freddie Mac rose sharply for a second day. Fannie Mae stock rose 10.5 percent to $31.17, a five-week high, while Freddie Mac jumped 8.3 percent to $28.18, the highest since February 20, 2008: these have now reset in value as a great short selling opportunity.
The Age of Successful Natural Resource Investing Is Over
A lot of hedge funds that used 0.25% loans obtained from the Bank of Japan, (BOJ) sold their natural resource investments to cover portfolio losses stemming from deleveraging surety, financial, mortgage and real estate investments.
The chart of the oil service sector, OIH shows a massive fall from support.
The chart of the HUI indexed precious metal shares, the gold mining stocks, HUI shows a fall from support as well.
The chart of the gold mining stocks relative to the gold stocks, GDX:GLD shows gold stocks contintinuing to detach from the price of gold.
The individual investor is no longer supported by the institutional and hedge fund investor in the natural resource sector: the lucrative five year investment bubble that has accompanied the war on terror has been pricked.
The Investment Application
Having a dollar denominated investment portfolio, even a short selling one, or a money fund, or a short term bond fund, is like going into an Ebola infected hospital ward with a medical team: one eventually gets contaminated and dies a horrific death.
A corporation's resources, and an individual's retirement wealth will preserved by investing in the gold ETF, GLD, and by investing in the currency Euro ETF, FXE, and the Yen ETF, FXY; and with these margin credit obtained for short selling:
1) to sell the emerging markets; as now the Yen Carry Trades will finally start to unwind as there will be disinvestment from the BRICS, Brazil, Russia, India and China as well as the US Stock Market; we will soon see EUR/JPY that is FXE:FXY, fall from it's recent sky high 160 level.
buy EEV and EUM.
2) to sell the reits and real estate sector
sell REM, RWR and URE.
3) to sell the banking sector and insurance
sell KCE and KBE and AIG.
4) to sell municipal bonds and closed end municipal bond funds
sell BTA, VGM and CXE.
5) and at some future point in time to sell the 30 Year US Treasury Bond,
buy RYJUX.
Individual Stocks Worthy Of Short Selling Include The Following
Companies Worthy Of Short Selling Because Of Their Huge Derivatives Positions
JPM,C,BAC,
Companies Worthy Of Short Selling Because Of Their Mortgage Exposure
FRE,FNM,
Insurance Companies Worthy of Short Selling Because Of The Credit Default Swap, CDS Positions
AIG,SEAB
Investment Bankers Worthy Of Short Selling Because Of Their Illiquid Level 3 Assets Which Are Marked To Fantasy Rather Than Marked To Market
JPM,GS,MER,LEH,MS,FCSX,JMP,LAB,KBW
Mortgage Companies
FRE,FNM,CMO,NLY,CBF,CFC,CBF,ANH,MFA,DRL
Banks
WB,CS,HBC,C,FBTX,BK,WFC,WM,WB,UBS,HDB,CM.TO,BK,BAC
Surety
ABK,MBI,RDN,PRS
Closed End Municipal Bond Funds
BTA, VGM and CXE
Basic Materials
AA
Homebuilders
XHB,HOV,SPF,LEN,PHM,RYL,BZH,CTX
Railroads
UNP,GWR,CSX,BNI,NSC
Trucking
ABFS
Mortgag REITS
REM,NLY,ANH,CT,MFA,NCT
Real Estate and REITS
ELS,NCT,ACC,PSA,AVP,AVB,CPT,VTR,SPG,RSO,BXP,SSS
Real Estate Developers
JOE,STRS
Steel
SLX,X,STLD,CLF,NUE,HSVLY,SID
Lumber and Building Materials
AMN,KOP,DEL,GWW
Chemicals
PX
MEOH
Industrial
WHR,IBM,KEX,AIRM,TYC,HON,SSD
Consumer Discretionary
HD,LOW,NKE,PNRA,YUM,PERY,GIL,ANF,GPS,CMG,NILE,GYMB
Healthcare
ISRG,EXAC
Semiconductor
AMAT
Credit Services
CIT,AGM,MA,COF,ADS,ADVNB,WRLD
Eggs
CALM
Communications
TCL
Water
CWCO,AWR,CWT
Services
ASGN
Entertainment
CEC,CCL
Emerging Markets
EEM,EWZ
Those who have gold based portfolios used for short selling should be aware that gold could easily fall to its 50 day moving average at $920 as is seen in this chart provided courtesy of Mike Mish Sheldon who relates: "Lehman may not be Bear Stearns but it is still leveraged 30.7 to 1. Citigroup and many financials are hugely leveraged as well. Eventually the market will have to face a deleveraging of those assets. Huge additional writeoffs are coming. Furthermore, many homebuilders are going to go bankrupt and today does not change that. But that is not today's business."
Related Reading
You Owe The Money, No You Do
The Credit Crunch Hits Jefferson County Alabama
The credit crisis triggered by the subprime mortgage meltdown has claimed its latest victim: Jefferson County, Alabama and investors in the county’s municipal bonds and auction-rate securities.
Jefferson County’s troubles began in 1996 when a federal court action resulted in the county agreeing to update its aging and polluting waste water facilities. The county used interest rate swaps to borrow $3.2 billion to pay for its new sewage system. About $2.2 million of the sewer debt consists of auction-rate securities. At this time, the county has experienced failed auctions on $869.45 million of the debt and is underwater in its swap transactions by some $360 million. This makes the viability of Jefferson County questionable and investors in Jefferson County’s debt may sustain significant losses.
In addition, Jefferson County’s bond insurers, Financial Guaranty Insurance Co. and XL Capital Assurance Inc. were hit with credit downgrades recently. These downgrades affected the market for short-term municipal bond debt, including auction-rate securities and variable-rate demand notes. As a result, the county’s interest costs on their debts rose from 3%-4% to as high as 6%-10%. Following this increase, the credit-rating agencies began cutting ratings. On February 27, 2008 Moody’s downgraded the county to B3 from A3.
Auction-rate securities have been popular with issuers like state and local governments, colleges, universities, hospitals, charitable organizations, cultural institutions and other non-profit entities because financing costs are low, no third-party bank support is required and there are usually fewer parties involved in the financing process.
Until recently, auction-bond failures were a relatively rare occurrence.
Unfortunately, this is no longer the case.
As Martin Braun reported in a February 13, 2008 article on Bloomberg.com, during the past few weeks, investor demand for the securities has declined precipitously as a result of increasing skepticism regarding the credit strength of insurers backing the underlying debt obligations, and the reluctance of banks like UBS, Citigroup and Goldman Sachs to submit bids and risk holding too many bonds.
Indeed, nearly half of the $20 billion in securities put up for auction on February 12 failed to generate sufficient interest among bidders and none were sold.
Merrill Lynch, MER, recently announced that it is reducing purchases of auction-rate securities that fail to attract enough bids from investors, and UBS has decided that it simply will not buy such securities at all.
Investors' concerns about the credit ratings of the bond insurers backing the securities essentially caused the failure of these auctions.
For Jefferson County, all these factors have caused its lenders, Bank of America, Bear Stearns Cos., J.P. Morgan Chase and Lehman Brothers, to demand $200 million for additional collateral to support obligations the county owes them.
To date, Jefferson County has refused to meet the banks’ demands or to produce additional collateral as margin calls. The county now faces tough choices on how to raise additional money to cover the debt or face default.
It is not just the county experiencing pain. Investors in auction-rate securities have also been hurt. Many investors — individuals and institutions alike — who purchased the bonds believing that they were safe, low-risk securities equivalent to cash, now find themselves holding an investment for which there is no market.
Several investors have already taken legal action against the brokers who sold the securities. Merrill Lynch, for example, is a defendant in a Texas action in which Metro PCS alleges that the firm misrepresented the risks involved and the suitability of the securities under the company's guidelines.
Lehman Brothers is the respondent in a FINRA arbitration complaint filed by two wealthy New Jersey brothers, alleging that the firm's investment of $286 million in auction rate securities was inconsistent with the claimants' stated investment objectives. Additional investor suits against other firms are likely to follow.
We Made National News Again snips as follows:
Jefferson County, Alabama, had $3.2 billion of bonds slashed to below investment grade by Standard & Poor's, putting it at the center of turmoil in the U.S. municipal bond market that has driven up borrowing costs (reports Bloomberg's Martin Z. Braun)
The downgrade, made after the markets closed on Feb. 29, came after the county, which includes the state's biggest city of Birmingham, said it may be unable to pay banks holding floating-rate debt for its sewer system or make payments on related interest-rate swaps. Jefferson County, with $193 million in sewer reserves, faces the prospect of having to pay more than $1 billion to banks to buy back debt and unwind the swaps.
The county, on the advice of JPMorgan Chase & Co., refinanced about $3 billion of sewer debt in 2002 and 2003 using floating-rate debt, including bonds with rates set at periodic auctions, mostly insured by FGIC Corp. and XL Capital Assurance.
After the insurers' ratings were cut from AAA in January, rates on the county's debt soared to as high as 10 percent when dealers failed to find buyers for the debt or use their own capital to purchase the securities. The county said it paid $6 million more in interest on its sewer debt in the four months ended in January.
Compounding the problem, interest-rate swaps the county bought to shield it against rising borrowing costs have backfired. The floating rates it pays on its bonds have climbed while the variable rate banks pay the county under the agreements have declined, pushing interest costs higher.
The county, in a notice to investors on Feb. 28, said it could ``provide no assurance'' that revenue from the sewer system would be sufficient to pay its increasing debt costs. The disclosure prompted S&P to lower the county's sewer debt by six levels to B, five steps below investment grade, and keep the bonds under review for possible further downgrade.
The county may be forced to terminate its $5.4 billion of swaps at a cost it estimated at $184 million because its bond rating has dropped so low.
Bloomberg News reported in August 2005 that the county paid fees of $100 million on 11 of its 17 swap contracts, about twice what banks collected for similar deals.
About $2.2 billion of the county's sewer debt consists of auction-rate securities. The county has experienced failed auctions on $869.45 million of the debt, causing rates to rise to as high as 6.25 percent, up from 4.7 percent.
Dealers that run the bidding to set yields on auction bonds aren't buying unwanted securities as they once did, triggering thousands of failures since last month. Bankers who help to find buyers for so-called variable-rate demand obligations are also declining to hold the debt when they can't attract investors.
Jefferson County has $847 million of variable-rate sewer debt insured by FGIC and XL Capital. The insurers' downgrades may cause Birmingham-based Regions Bank and Paris-based Societe Generale, who agreed at the time of the initial bond sale to repurchase unwanted county floating-rate debt, to terminate their agreements. That would force the county to buy back the bonds.
``It is unclear how the county would be able to meet this obligation,'' Moody's Investors Service said on Feb. 27, when it cut its rating on the debt to its lowest investment grade of Baa3. As of Jan. 31, the county's sewer fund had $193 million, Moody's said.
WIDGETIZE