Thursday, March 13, 2008

Where to Even Start Today

So much bad news, so little time...

1) Carlyle Capital (a very well politically connected company by the way - think papa Bush) is having its assets seized, due to what are effectively (in layman's terms) margin calls. What's important for us to note is (a) this is happening due to lenders not wanting to extend terms (b) crisis of confidence and (c) they were leveraged 32:1. Point (c) sounds ridiculous... until you realize much of the credit market players are leveraged from 10:1 to 20:1. We had an era of easy money, and people who didn't know what risk meant, so they pressed their bets. And that is what makes this credit unwind so darn frightful... so many leverged hedge funds, private equity firms, and even financial institutions.

  • Carlyle Capital Corp. said it expects creditors to seize all of the fund's remaining assets after unsuccessful negotiations to prevent its liquidation, sending its shares plunging.
  • The Amsterdam-listed fund shook financial markets last week after missing margin calls from banks on its $21.7 billion portfolio of residential-mortgage-backed bonds. Carlyle's troubles have amplified fears that billions of dollars of depressed mortgage-backed securities will flood the market, reducing their value even further.

  • More than $5 billion of Carlyle's securities have already been sold, but the fund tried to negotiate with the banks to prevent the liquidation of the remaining $16 billion.

  • More than a year ago, the fund leveraged its $670 million equity 32 times to finance a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. It borrowed money from at least a dozen banks and firms, including Bank of America Corp., Citigroup Inc. and Merrill Lynch & Co.

  • Carlyle posted the securities as collateral under repurchase agreements, so if the value of the securities fall, the lender has the right to ask for more collateral -- a margin call -- to secure the loan. If the borrower does not meet the margin call, the lender may sell the security.

2) Retail Sales (via government report) stunk. This was the report Kool Aid Bulls clung to a month ago [Feb 13: A Couple of Notes from Surfing the Web Today for You Economic Geeks] , as proof the US consumer is doing fine, thank you very much. As I said then, #1 this report does not take into account inflation so a 0.2% rise in sales is simply inflation - nothing more - in fact with inflation so rampant 0.2% means negative real sales... and #2 ex gasoline the report stunk. Well now the numbers are turning NEGATIVE... and again those numbers do not take into account inflation. So the real numbers are much more negative. So if a number prints at -0.3%, considering inflation is probably running 0.4-0.8% a month (depending on who you believe) that means it's really falling at -0.7-1.1%. Either way there is no Kool Aid spin to this number; and remember it's a government report so it will not reflect reality most of the time (but at least it is directionally correct). Just look at the charts of the retail stocks since last summer for "reality". Auto sales are falling off a cliff as I predicted early in the blog's life last summer. Folks, what matters here is we are just getting started - we have not even entered a "recession" by most NYC views, and the job market is "holding up". What happens as we move into a recession (regional mind you), and job losses start piling up. Again I say this every week - we have a levered US consumer, who used his house ATM to offset the lose of real wage the past half decade, who is now facing drops in wealth through house (and stock market), and worst - devastating inflation that the government is glossing over and in fact helping to prompt with continued Fed cuts.

  • Consumers, battered by plunging home prices and a credit crunch, stayed away from the malls in February, pushing retail sales down by a larger-than-expected amount. It was another worrisome sign that the country could be falling into a recession. The Commerce Department reported Thursday that retail sales fell by 0.6 percent last month, far worse than the 0.2 percent increase that analysts had been expecting. The weakness was widespread with sales of autos, furniture and appliances all down.
  • It marked the second time in the past three months that retail sales have taken a tumble. Sales had fallen by an even bigger 0.7 percent in December, the largest drop in six months, as the nation's retailers suffered through a dismal holiday shopping season. Sales posted a modest 0.4 percent gain in January. (<---haha)
  • Consumer spending is closely watched because it accounts for two-thirds of total economic activity. Many economists believe that the country will suffer a mild recession in the first half of this year as the economy is unable to withstand the blows from a prolonged slump in housing, record-high energy prices and a severe credit crisis brought on by soaring mortgage defaults.

3) A number I've been watching like a hawk has been import prices [Feb 15: Today's Import Report Continues to Support my Stagflation Thesis] - they show me our true inflation in "goods", as we import almost everything into this country - this number has been printing in the 12-13% range for months (year over year) - it continues that trend. Kool Aid bulls have been trying to blame it all on petroleum of course. And another thing I've been constantly harping on is the coming imported inflation from China, a trend that only begun in the past quarter - it is up 0.1% again (again this has been a negative number for many years).

  • A third report Thursday showed that U.S. import prices rose last month by 0.2 percent after jumping an even larger 1.6 percent in January. Compared to a year ago, import prices are up a sharp 13.6 percent, reflecting the fact that petroleum prices are up 60.9 percent over the past year.

4) Oil cracks through $110, as the dollar continues to crater. I truly think people are beginning to use oil much like gold... as a store of value. The paper money our government prints hand over fist to save the banking system is simply a joke at this point. The "fundamentals" (as pointed out below) don't account for all of this rise; so I think oil is joining gold in this function (inflation hedge/store of value)

  • Oil prices on Thursday hit a record high above $110 a barrel as investors fled the tumbling dollar that fell to new lows against the euro and a 12-year low versus the yen. "Oil and other commodities have an intrinsic value so that to the extent that the U.S. dollar depreciates, (oil) becomes relatively cheaper in terms of other currencies, such as the euro," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "So you get an adjustment to compensate for that effect."
  • Many analysts argue that current oil prices can't be justified by the market's underlying supply and demand fundamentals. Yet evidence of weak demand amid growing supplies has not stopped oil prices from rising in the past, particularly when the dollar is falling. "Some investors are apparently viewing oil and other commodities as providing something of a hedge against U.S. dollar weakness and possibly inflation concerns as well," Moore said.

5) Speaking of gold, it hit $1000, and another of my 13 Outlier 2008 Predictions comes true

6) Last, the Republicans (folks I'm agnostic towards political parties so no hate mail - they both stink) are trying to kill our economy. Why do I say that? All I've heard for YEARS is how bad regulation is... how more regulation equals stifling of business. We've been brainwashed into this nonsense for years on end. Well now our buddy Hank Paulson says we need more regulation in the mortgage industry! Obviously these Republicans want to put a stake into the heart of the American economy - don't they listen to their own rhetoric? More regulation is awful! Let these folks self regulate themselves; I mean it's worked like a charm so far! And par for the course in this country we are once again reactive after a disaster hits, not prevenative. Because special interests have far too much money to make, when times are good. I don't see any of these NYC bankers giving back years of earnings and bonuses they made during the good times - when they took outsizes risks, in a nearly non regulated system. So now the entire government is riding to their rescue... must be a good life. But anyhow, I urge you to write your Republican congressman or senator and let him know your disgust at the White House now trying to finish off the US economy with the worst of all things ... regulation!

  • Treasury Secretary Henry Paulson on Thursday issued a call for U.S. financial institutions to raise capital quickly so they can keep lending, and pledged tougher rules for the mortgage industry. "We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said in a speech at the National Press Club.
  • Paulson said the focus of the Presidential Working Group's work since the current bout of market turmoil began last summer was to reduce the chance of repeating past mistakes. (... and trying to prop up the stock market...)
  • Among recommendations from a top-level Presidential Working Group that he heads, Paulson said he wanted "strong nationwide licensing standards" for mortgage brokers as part of a bid to ward off future housing crises and reassure investors. Paulson said state and local regulators need to toughen oversight of all mortgage originators. Sloppy lending practices including loans made to homeowners with no requirement of proof of income are widely blamed for a soaring tide of foreclosures, especially among so-called subprime mortgages held by people with the shakiest personal credit. (wow where was this in 2002? Oh wait, there was tons of money to be made in the entire food chain, so we can't worry about regulation in good times - sort of like the stock market in 98-00, right? We didn't need regulation then either as long as a bubble was in effect)

  • "Regulations needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson said. (gasp, that's not what Fox News has been telling me for years)

  • He said credit rating agencies need to make sure that securitized credit issuers -- like those who issue mortgage-backed securities -- "perform robust due diligence of originators of assets that are securitized or used as collateral for structured credit products." (wow, so credit rating agencies need to actually do their homework? And a "AAA" rating should mean something? Earth breaking stuff here)

Great stuff folks. But don't you worry, Fed cuts coming next week and one thing we've learned is "Fed cuts fix everything". (Kool Aid) And don't worry about the inflation ... CPI report tomorrow will understate it by 1/3rd. And anyhow, as Ben says, inflation will go away in the 2nd half of the year like magic. Readers, I cannot wait for July 1, 2008. Apparently our entire economic system will turn on a dime - no inflation, booming growth, it's going to be nirvana.

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