Thursday, March 6, 2008

UK and European Central Banks Hold Rates Steady; Retail Numbers; Thornburg Mortgage (TMA) Strikes Again

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While we continue to laugh off inflation here, central banks in the UK and Europe hold their rates steady to fight it off. Australia has been actually raising rates as have many emerging markets. Only Canada of late has tried to help us out as they are afraid the US contagion might spread up north, despite their rich natural resources. All this action across the world makes me feel like a leper, as we stand out as a complete and utter reversal to all the rest of the world. Oh well, it is working great on the Kyoto Protocal and Iraq war, so why not continue! Those are working swell.

As I've said countless times, we are lucky as inflation somehow cannot cross the Canadian or Mexican borders, nor the Atlantic or Pacific Oceans - therefore we are the one country in the world who doesn't have to worry about it. Lucky us! (sarcasm dripping). If tomorrow's unemployment numbers come in weak the drumbeat for 75 basis point cut will turn into a crescendo and we continue down this path of currency debasement, and commodities should continue to rally hard and fast. At this point the Europeans are appearing to get peeved that the dollar is weakening to such a degree with no end in sight, as it will really hurt their exports big time, on a relative currency basis. I wrote in the past few weeks when Uncle Ben was claiming inflation will abate in the 2nd half, I am hoping oil is $120 and gold $1000 at the mid March meeting to see if he can continue this path of lies with a straight face. Gold looks like it will do its part.... another of my 13 Outlier 2008 Predictions in the bag.

  • The European Central Bank and Bank of England took similar paths Thursday by leaving their benchmark interest rates unchanged -- but analysts expect cuts in the coming months.
  • The ECB's refinancing rate remained unchanged at 4 percent while the Bank of England left its key rate at 5.25 percent.
  • In London, the Bank of England's decision was expected by most economists and followed a cut last month in an attempt to shore up Britain's slowing economy. Economists expect further cuts in the coming months. However, the bank is also responsible for keeping inflation in check and economists said that soaring food costs and energy prices were likely behind this month's decision. (thankfully, not an issue in America)

A quick glance at retail sales - shows continued (as anticipated a few months back) strength in Walmart (WMT), Target (TGT) finally better than expected, the warehouse clubs did well yesterday and general weakness in everything else. Don't get fooled by the "better than expected" cheerleading... remember most of these numbers are contractions - so if your same store sales fell 5% and expectations were 6.5%, the reality is your sales are selling 5% less than last year. As for the "strength", don't forget INFLATION. (not that it exists in the US because our central bank says don't worry about it). But if you did worry about, remember GROCERIES and GASOLINE make up much of the "rise in sales" you are seeing in the big discount shops (esp. Walmart on groceries) and the warehouse clubs. In a related note, Kool Aid was the #1 seller (in bulk) at the warehouse club (Source: I can't tell you) Bottom line: the "pooring" of America continues as real wages adjusted for inflation are being demolished; and the middle class continues to disappear at an alarming rate. Retail is moving downscale big time (did you see Big Lots the other day?) And the Fed is helping the process to bail out those slimy geniuses in NYC. Remember, the ultra rich don't really care too much about 10% inflation - not much skin off their back... all this when the economy is "not even in recession" and "we're at full employment" - just imagine what would happen if we had a recession around here?

Earlier pieces [Jan 29: Fascinating Move by Walmart (WMT) - Continuing "Pooring of America" Scenario] - [Dec 26: Target (TGT) Shoppers Turning into Walmart (WMT) Shoppers]

Last, Thornburg Mortgage (TMA) is making it's weekly 50% fall, down to $1.40 today. At this point I am assuming it is going to $0. Again, if this company goes out of business, the great irony is the paradox that terrible homebuilders (3 of which mentioned here who should be bankrupt) who only exist due to generosity of their banks changing loan terms, and 2 terribly run bond insurers which should be out of business - are being propped up, and they let this company which actually has a good book of business and lower default rate (by a country mile) vs Countrywide (CFC) or Indymac (IMB) - not to mention far superior management - go out of business? It would be strange. Remember, they made money last quarter... amazing. I think at some point someone comes in and buys the assets at a huge discount ala Etrade last year, but it is a darn shame and shareholders certainly will be taking massive pain (hand raised)

  • Shares of mortgage lender and investor Thornburg Mortgage Inc. plummeted in premarket trading Thursday as analysts said the company faced bankruptcy because of defaulting financing agreements.
  • Thornburg disclosed Wednesday evening that JPMorgan Chase & Co. issued a default notice after Thornburg failed to meet a $28 million margin call. That notice triggered cross-defaults on agreements Thornburg had with other lenders.
  • Wednesday's disclosure of default notices could lead Thornburg to file for bankruptcy, RBC Capital Markets analyst Jason Arnold wrote in a research note.
  • "Thornburg now appears to be on the ropes, and barring a sizable capital injection (which is possible but seems very unlikely at this point, in our view) we see little in the form of upside," Arnold wrote in the note. Arnold cut his price target to $1, saying there was limited value remaining for shareholders.
  • Like the period in August, current margin calls and default notices against Thornburg are not because the company's debt or loans are defaulting, but instead the result of deterioration in pricing of the products. As delinquencies and defaults across certain types of mortgages have risen, investors have shied away from purchasing nearly all types of loans in the secondary market.
  • That lack of a market to sell debt backed by mortgages has caused prices to plummet. As those prices fell, companies like Thornburg have been forced to reduce the value of their holdings, regardless of actual performance. That in turn has led banks to require more collateral or cash to secure financing agreements.

We've now lost $27K or 2.4% worth of return on this 1 position in just a few weeks - definitely a body blow.

Other than that folks, with the "all important" unemployment number tomorrow, I expect today to be like days right ahead of a Fed decision - not much action as everyone decides they can't do anything until tomorrow because of course 1 number changes the course of history. We continue to watch S&P 500 level 1320, and now that Charlie Gasparino cannot bail out the market with his continued Ambac (ABK) bailout rumors I am awaiting to see how we react the next time we test it... remember we broke that level earlier this week, before we were "saved" for the 3rd time in as many weeks by Charlie G's dance party on CNBC. I can't say I see any light in the tunnel, credit markets continue to seize up, 2 year bond rates down to flipping 1.5%, we continue to debase our currency to bail out the NYC bankers, spurring inflation (in the rest of the world, not for the US because we are teflon apparently), but hey 50 basis points coming and (all together now) "Fed cuts fix everything". So raise your glasses of Kool Aid and let's all cheer the rate cuts that will solve everything.

The equity bulls continue to cling to the "2nd half recovery" thesis which I disagree with 100%. Once their back is broken I think this market tumbles. But we are still in denial stage. After all these months. If I had any trust that the unemployment figures from the government were accurate, I'd say tomorrow's report would break the camel's back, but since its a work of fiction we can't tell. Anyhow, I am positioned defensive and don't see that changing anytime soon.

Long Thornburg Mortgage in fund; no personal position


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