Houston, you aren’t being told about a problem

Posted by Ray on October 18, 2010 under Main | Be the First to Comment

I admit I have been delinquent on checking out the Euribor rates lately since the Federal Reserve has me scared to death about QE2, more on that later, but I do not think it will be what you believe it will be in November. However, the Euribor went ballistic thanks to the ‘perfectly safe’ Irish banks began to show that the ‘stress test’ were pure bull. How can a bank pass a stress test a couple of months ago and then do insolvent, basically? That doesn’t happen in a normal world and it proves that the ECB totally flubbed the stress test.

The fraud that the stress tests were showing up in the inter banking lending rates which went from benign to cancerous in a heartbeat.  While the Euribor first continued to climb after the stress tests it did level out later in the summer, but now it went vertical and it probably is not looking back. Considering that European banks are still holding only God knows how much US MBS’s, which our current foreclosure fraud situation may render those MBS’s worthless over time, along with how much Greek, Portugal, Italian and Spanish debt and you got serious problems. The media is not going to touch this, but the bank lending markets talks about it only if you look at them.

The 3 month Euribor rate was below .90% until a week ago when it jumped to about 1%, .993% as I write this, which isn’t much until you consider we are in a zero interest rate policy (ZIRP). Actually, we are in a negative interest rate policy right now if you count all the QE going on. When you factor that in it kind of brings to light that something is wrong in Europe, still. US treasuries for 3 months are yielding about .14% so clearly European banks are pricing in a risk premium. The question is, what is the risk premium for? Clearly default is part of it and I think you will see more issues with banks very soon.

It is impossible to have bank holdings that consist of sovereign debt that is in trouble plus MBS holdings and not have any problems. There certainly will be more insolvency issues, but even if a bank is not insolvent their balance sheets will be impaired further. It is a mess and the real problem is that it is just not European banks, but US banks as well. While US banks do not hold a lot of sovereign debt, they do own tons of MBS holdings, unless the Fed buys them from the banks, which foreclosuregate, I hate these names we have now, will make many of these securities worthless or at the very least impair them well below par.

I do not know what is going to happen, but I am convinced that the serious problems that many thought were behind us never really went away. All we ended up having done was the government and the Fed paper over the problems. This went on all over the world with the ECB following suit as well. The Eurubor is telling us something, are many listening? Nope. Stocks are moving higher on some idiotic belief that inflating our way out of this mess will work, it might in nominal terms, but not in real terms. Phony stress tests clearly are not the answer as the fraud gets uncovered when banks that passed suddenly need a bailout. How central banks and governments have any credibility is simply beyond me. When a fraud is uncovered people usually talk about it, but the news on some financial channels is mute on the issue. When lending costs climb rapidly it usually makes news, did you hear about it? Nope. It is all just one big farce out there. I personally believe that the only safe haven seems to be commodities and I believe stocks are not as safe as people believe.

It is getting ugly out there

Posted by Ray on April 22, 2010 under Main | Be the First to Comment

Earnings for 1Q10 actually look OK, depending what companies you look at, but there seems to be some weakness in top line revenue, which is what I thought would happen. Even with a few firms not reaching their revenue estimates the EPS seems to look positive. What it looks like is companies are still living off of cost cutting measures which mean that new hiring will be sparse at best. The weekly initial jobless claims still look exceptionally weak, 456K this week which was down from 480K last week, which shows firms are still laying people off, not a good sign, even though there is some stabilization in the claims data. Essentially, we have stabilized from really bad to just bad on the jobs front.

The big issue of the day is Greece, their 10 year is now at 8.7% and rising and the 3 year is at 11%, as they have been caught, again, lying about their debt to GDP. The other PIIGS are also moving into the limelight, Portugal, Italy and Ireland specifically, which is also not a good sign. Why is Greece such a big deal? It is because European banks own a ton of this debt, private banks and central banks, for instance, France holds $781B on such debt and the CDS spread on their debt is rising because of their exposure. In other words, this could be a trigger for another banking crisis and governments are low to out of bullets to fight another crisis.

Existing housing numbers just came out, for March, and the numbers are up 6.8%, but it is because of the closure of the tax credit at the end of April. However, inventories are building, again, which means there will be some downward pressure on home prices in the near future. I am afraid that we are far from a healthy housing market and in my opinion, the government needs to let prices fall in order to clear the inventory and to have real price discovery for real estate. Inventories in the existing housing market is simply too high at well over 3M which, compared to the 5.28M run rate, is terribly high getting closer to a full years worth of inventory waiting to be sold. This is not even looking at the new construction data which will add a significant amount of supply to the market. We need less housing and the only way to clear that inventory is to let prices fall, but that will never happen and look for another extension of the home buyers tax credit.

What is interesting is that banks are reporting stellar earnings, but prices on homes are down, inventory is building and commercial real estate is, literally, blowing up. The question is, how can earnings be so good when the assets are or should be declining in value? Answer, suspension of mark-to-market. Essentially, banks are now practicing the same accounting gimmicks as Enron by using mark-to-model (make believe), but this is legal because the FASB allows it… unreal.

There is little question that the data is getting better, but when we look at why and what levels the data is getting better it is disturbing to say the least. While the numbers are better, the term “better” is a relative term in itself, and we have stabilized from horrible to just bad. In my opinion, all the elements of a double dip or even another serious banking crisis exist in the markets. If we went back to real accounting or factor in a Greece default the markets would get hammered as this would show we have climbed too fast and risk is not priced into this market at all. The longer we refuse to acknowledge the bad debts on the banks books or a default from any of the PIIGS the worse the inevitable correction will be.

While I am bearish on the overall market, mainly due to valuation, I like many sectors of the market. I am partial to biotech, high yield dividend stocks – i.e. MO, PM, VZ, T, etc. – esoteric no correlated assets – frontier markets, country specific ETF’s, precious metals, etc. – and I like bonds, deflation is here folks. I do own MO and PM, I also do not like ‘talking my book,’ but own several biotech’s and PBE, biotech ETF. In my opinion one should be very careful as we are once again looking at new ways to value stocks, this is what they did in 1999. If you cannot value stocks using older methods like P/E multiple and so forth it is not worth owning, in my opinion. I see little real value plays in this market and there is no need to jump into this market right now, your patience will be rewarded. I think one should hold core holdings, dividend paying stocks, high grade bonds and some cash. Cash may be king at the end of the day.

LIBOR Overnight Shoots Higher

Posted by Ray on March 16, 2010 under Main | Be the First to Comment

Just a week or so ago the overnight LIBOR rate, this is the rate banks loan money to each other at (such as prime plus LIBOR or similar), was a paltry .17% and today it is a whopping .22%. While this is might not seem like a huge issue, and it is not on its own, it is a signal of something. Perhaps it is signaling that the wall of liquidity is coming to an end or that there is more risk lending to institutions than originally thought. Or, perhaps, Zero Hedge’s rumor mill was right and some of the GSE’s cut off 10 European banks from lending which caused the overnight rate to shoot up, it looks like they had it nailed.

I typically do not act or comment on rumors because some 90% are not true, but this one I watched because LIBOR was one of the signals preceding the credit crisis beginning in 2007 to 2008. If this rumor ends up being true, and it looks that way, I think there will be some negative implications for the equity markets as the rally is liquidity driven. However, LIBOR at .22% is nothing to worry about, at all, and unless it climbs higher I would not be worried, but it is on my ‘watch’ screen as it has implications. Also, the LIBOR rate is outside of the Fed’s control, frankly, as they already spent all their ammo in that department.

Well, let me rephrase that, they would need to start up recently closed programs and institute new programs in order to bring down the interbank lending rate. The markets are not fully healed and credit is still tight meaning that trust is still lacking in many areas. Credit is merely trust and, frankly, would you really trust a European bank right now? Who knows how much Greek debt they hold or other PIIG debt they have on the books. If you do not know you cannot trust them. If you can’t trust them you do not extend credit to them or you charge them more for credit to cover the potential risk. It is a vicious cycle and the system cannot handle any other shock or it will be in jeopardy again.

I am not saying there is much to read into, yet, but keep an eye on it as little things like the LIBOR usually signal or are the first sign of potential larger problems. It also looks like the Zero Hedge rumor mill was on to something, I am going to email them to see if they have a follow-up on the story. In the mean time, do not look for anything exciting from the Fed meeting, nothing will happen and the language will not change, which should concern you as well. Trade carefully and the market that is in front of you, I bought August VIX calls today as volatility is way too cheap, historically the VIX is at 20, and there seems to be no one betting it will go down, look at the put action.

AIG: More Credit Default Swap Trouble

Posted by Ray on June 30, 2009 under Main | Be the First to Comment

It appears that AIG has more credit default swap, CDS, trouble ahead. According to Bloomberg the firm has exposure to $192 Billion worth of European bank CDS which may prove to be a problem. This is a material problem because, according to Bloomberg and AIG statements, the valuation declines on credit-default swaps sold to European banks could have a “material adverse effect” on the company’s results. We all know what happened last fall with these things, but it is unclear what could happen this year.

Unfortunately, this plays into our estimates of a severe downturn in equities beginning now and lasting to the end of the year. However, the firm did say that, “The insurer said it doesn’t expect it will have to make payments under contractual agreements tied to the regulatory relief swaps. Most of the swaps will be terminated over the next 12 months, AIG said.”

We will see what happens, but it is clear that there could be major problems ahead. Just imagine $192 billion or even 20% of these contracts blowing up. We saw what $80 billion in bad bets did to the firm, drove it to bankruptcy and $180 billion had to be infused through the government. This has a lot of potential to do bad things to the firm and an already fragile market.