Stock Market Crisis

October 10, 2008

Courtesy: http://www.godlikeproductions.com – Thank you.

Whats Driving the Stock Market Chaos??

Denninger Speaks… – Thank you.

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What The Media *Didn’t* Cover

So yesterday the “news” was all about the long end of the Treasury curve rocketing higher (yield), which many people believe is about “risk acceptance” and The Fed (along with other central banks) cutting rates by 50 basis points.

Uh huh.

Let’s talk about what’s really going on.

First, our rates. The EFF (Effective Fed Funds) rate has been trading at 1.5% now for a couple of weeks. Two percent schmoo percent; a target rate only in name is no target at all. In reality the 50 bips cut, even though it resulted in an instantaneous 40 handle rocket shot in the /ES futures Wednesday morning, was entirely a CONfidence game (with the emphasis on “Con”!)

The RTS (Russian Market) is down 87% YTD, and is closed until further notice. The Nikkei is trading below the DOW – that’s not good. Indonesia’s stock market was shuttered Wednesday and remains closed after tripping “lock limits” within 90 minutes of the opening bell. As of Thursday morning the RTS was closed again after Putin allegedly strong-armed a whole bunch of Russian wealthy to “stick it in” (to the stock market); this sort of v-fib in a market does horrifyingly bad things to ordinary investors who find themselves out just before the market rockets higher without underlying economic cause.

Iceland has essentially melted down. Their currency went straight into the toilet and two of the three largest banks were nationalized – all in the space of 24 hours. The culprit? Bad loans. Where have we seen this movie before?

Mexico’s peso has fallen some 40% in days against the dollar. Great if you’re traveling there as an American. Sucks severely if you’re a Mexican. That alleged fence on our southern border is going to need reinforcements.

Wednesday morning Britain and the EU zone all announced major bank rescue operations. Same deal – “throw money at it, paper it over.”

Nowhere a mention of forcing balance sheet transparency and truth.

Except in one place – here in the US! Plans to standardize CDS contracts and force them onto an exchange are actually under way. This is a major positive move and fulfills one of the three prongs of my view of how to solve this problem, once implemented. We’ll see how much pushback we get, and whether OTC derivatives are actually banned (as they should be), or whether the big trading houses and banks insist on being able to play “pick pocket” along side the “regulated” world.

The NY Fed announced plans to extend a further $39.6 billion credit line to AIG. The tab is now almost $120 billion dollars. Where did the other $80 billion go? Has it been vaporized trying to raise capital to pay down CDS contracts that have gone the wrong way on them?

Speaking of which, Thursday is D-Day – D standing for either “derivative” or, if things go sideways on people, “detonation.”

See, this is the day that Lehman’s CDS contracts are supposed to be resolved. Since Lehman’s bonds are trading at ~20-30% recovery (horrible, on balance) the writers may have to fork up 60 to 70 cents on the dollar.

The $64,000 question is how many of those contracts net out. The real liability is what’s left once everything is “balanced” (a long and short held by the same guy net to zero, assuming that both contracts are “money good”, leaving the holder with no liability – and no asset)

This has the potential to be a big “nothingburger”, a minor tremor, or a 250′ high tsunami that washes over Lower Manhattan (and the City) tomorrow. There’s no good way to know in advance which outcome will manifest, since nobody (at present) knows what the true netted-out open interest is. This is one of the problems with not having a public exchange; lack of knowledge.

The bright light of reality will shine tomorrow……

The architects of this, by the way, are the folks who took the cuffs off the banks, going back to the Gramm-Leach-Bailey law and the repeal, piece-by-piece prior but finished by GLBA, of Glass-Steagall. GLBA, by the way, was passed in 1999 – just as the Internet bubble was in full force. Coincidence? No. The root cause of this mess? Right there. Thank Congress, and make sure you include those members who have been around for the entire thing, including John McCain.

On the equity market side shorting is once again available, the order having expired. The lack of shorts was a definite factor in the stiff selloff that we’ve seen, and Chris Cox owes investors in America an apology – on the air. This was an objectively stupid decision, as shorts provide necessary liquidity during serious downturns. Without them you get “no bid” circumstances, and they sporadically appeared during the last few days in financials, which certainly exacerbated the selloff.

In the bond markets Treasury refunded some “off the run” bonds and got an ugly surprise – the market didn’t want them. They had to pay a 40 bips “tail” to get them to go, which may be the start of a really troublesome trend. See, Treasury is now throwing over $100 billion a week into the market, and this only works on days when the market is crashing. THEN you can get people to suck up all you puke out, but the rest of the time you’re going to have to pay up, and Treasury has had to do so – dearly.

This may be the start of the “bond market dislocation” that I have long feared. I hope and pray not, but if this trend continues Treasury is going to find that it cannot sell its debt into the market without slamming rates higher, especially on the long end of the curve, which means an instantaneous implosion of what’s left in the housing market.

The ugly is that 3-month LIBOR widened today, as did the TED Spread. Both should have come in. They did not. LIBOR is essentially unsecured lending and the bad news is that a lot of corporate (and some personal) borrowing is indexed off it. If you are, you’re screwed.

Why has LIBOR refused to come in despite these “coordinated” effort? Its simple: the underlying trust issue has not been addressed, and nobody is seriously proposing to do so.

Paulson and Bernanke now are truly caught in the box, as I have been talking about for more than a year. As they introduce and fund these silly programs like the “TARP” each new program produces more foreclosures by depressing home values and thus tightens the spiral.

See, as long rates go up house prices go down, since the value of a home for most people is Dependant on what they can finance, and that is directly related to interest rates. Get out your HP12C and run the principal value change for a fixed payment if interest rates change from 6% to 8% or 10% – that’s the impact on the value of your house from these changes that are occurring in the Treasury marketplace.

This outcome is what I warned of in “Our Mortgage Mess” back in April of this year; a potential ramping of borrowing costs for government debt, which will not only make sustaining government spending (and perhaps government operation) impossible, but in addition destroy private credit by driving costs in the private sector skyward as well.

Simply put, the “TARP” or “EESA” must be repealed here and now.

It is unacceptable to risk Treasury Funding destruction in order to bail out some bankers. And make no mistake – there is and will be no benefit to taxpayers.

We are also now entering into earnings season, and Alcoa was a warning blast. They missed badly. That won’t be the last.

This is the “value trap” problem that many investors fall into. You see the market down 30% and think its a great buying opportunity.

It is a great buying opportunity only if earnings going forward can be sustained. But in this case, they cannot. It is flatly impossible; with Treasury borrowing money like a madman, tacking on more than 20% to the national debt in the space of months, carrying costs will inevitably rise as will taxes. Both of these have a multiplier effect (in the wrong direction) on corporate profits, and in addition the “faux profits” from financial engineering have all disappeared at the same time.

The S&P 500’s profit, in terms of gross dollars, are almost certainly going to come in by 50% from the highs, and that assumes we get a garden-variety recession and not something worse. This of course puts “Fair Value” on the SPX down around 750, or another 25% down from here.

The ugly stick potential is what I discussed yesterday, and that risk is very real. Treasury borrowing cost ramps can produce a 1930s-style dislocation in credit, and if it happens then you will see mass bankruptcies not only in corporate America but among individuals as well as borrowing costs ramp to the point of shutting down the marketplace for credit.

Treasury and Bernanke claimed that “credit markets seized”; this is only half-true. Credit markets always close to those who are lying, because there is no reason to loan someone money if you’re not reasonably sure you will get paid back.

But there is a second form of seizure and this is the frying pan into which we’ve now jumped – that is a credit market that prices beyond what the market can bear at its imputed rate of return. In that market credit is available but it does not matter, as you can’t make enough profit to generate a positive carry on the borrowed money, and consumers in that environment fall into a vortex of interest payments that spiral faster than they can borrow to stay ahead of them.

That rabbit hole is how we got the 1930s, and it is the danger we now face. Congress was in fact conned by Treasury, George W. Bush and the banking industry (including Ben Bernanke), who instead of forcing the malefactors into the open and exposing those who were bankrupt (or just plain corrupt – notice the common stem on both words?) threw them a line – unfortunately, the line is cleated to the entire economy of the United States, and they have enough negative buoyancy to drag us all under the waves.

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Analysis: This is one of many opinions floating around all over the cyberspace regarding the latest downward spiral in the stock market. The consensus is clear; a few operatives with a major stake in the gamut of the financial world are driving the mania for their profiteering with utter disregard for the rest of the population around the world.

It is time for the people of the United States and around the world to rise to the occasion and intervene as the snowballing of losses in market shares is not a natural event. Clearly, this kind of manufactured, well-orchestrated and premeditated mechanism is the result of greed, corruption and cronyism that is rampant and has now come to surface.

Not surprisingly, there is no investigation or reports by the media as the Corporations, the de facto beneficiaries own them. The world must awaken now and deal with the reality to bring all of these entities to justice. It is time to make every one of them accountable for their actions and inaction as well as make them absorb all of the losses generated by their devious “modus operandi”.

The current situation is not an isolated occurrence. The cause and effect factor is evident in the existing stock market turmoil. As suggested earlier, the unethical practices resulting from the lack of accountability and oversight is contributing to the pandemonium in the market worldwide with the infusion of the “survival of the fittest” theory.

The world is shocked and in despair, seeing no end to the plundering of wealth that rightfully belongs to the righteous and not the self-righteous. However, it is presumptuous of those involved in this mass abduction of world treasury that they will not be exposed and brought to spotlight.

Perhaps, Armageddon is the only alternative now to restore morality and world order. The degradation of principles, ethics and democratic values by the ruling power will not escape the judicial verdict.

Therefore, it is in the best interest of all those involved in the conspiracy to come forward and demonstrate figment of integrity by stabilizing the stock market decline or be prepared to deal with the wrath of natural phenomenon.

Further, to those entities responsible for the current economic disaster, “the end justifies the means”.
Any attempt to ignore the warning will be an invitation to their peril.

If the authorities in power fail to exercise diligence, proper management, and immediate interventional policies to stabilize the market, they will share similar destiny as the recently convicted O.J. Simpson.

The judicial mantle seized by the power is in denial and defiance of the existence of force that will deliver justice.

The mortals brought nothing upon their birth hence; take nothing upon death.

Thank you.

Padmini Arhant

Written by Padmini Arhant · Filed Under Business | Leave a Comment 

Investment Prospects

October 8, 2008

Existing and potential investors should view the current stock market situation as an excellent opportunity for investments in different sectors. They range from blue chips to housing and manufacturing industry. All sectors are bound to get a major boost from innovative technology and major breakthroughs in science this year alone.

With the energy crisis, there is great enthusiasm and capital infusion into manufacturing clean and green energy products. The automotive and energy companies are involved in research and development in deriving energy independent solutions to the global problem.

The recent legislation of the “rescue” plan involving tax credits for solar and wind based manufacturing companies is a window to promote renewable energy products and services. This is one of the best measures by Congress and deserves praise for the action. It must also ensure that the tax credit benefit trickles down to retail consumers as well. More is required in addressing serious environmental issues at both national and global front.

Despite the doom and gloom in the housing sector, all those investors with surplus cash have enormous opportunity to invest in real estate for long-term gains and perhaps contribute to the revival of the housing market. The energy sector is involved in alternative energy programs to combat the global energy crisis. Therefore, there are opportunities in this industry as well.

The technology sector is robust with a wide range of activities throughout the industry. The high tech companies are competing with one another in the innovative technology areas such as high -end microprocessors other hardware and software products challenging the technological pace more than ever.

There is never a dull moment in the biotech industry with major breakthroughs in modern medicine like “sequencing DNA and Human Genome Project”. The stem cell research is another area drawing deserving attention and investments. The pharmaceutical companies’ progress in research and development of new drugs is in synchronization with the biotech advancement.

The finance sector is not going to fall apart as they are the “gateway” to the flourishing of “commercial sectors”. The financial institutions with necessary regulations and stopgap measures are attractive in many ways. It must address the foreclosures effectively and cooperate with the government in expediting the financial liquidity in the housing and commercial sectors.

Investors must get into a buying frenzy and not the other way around, as the prospects are far greater in the near future and an opportunity for people of the United States to own their assets rather than leaving it for foreign venture capital.

The United States as a nation has never failed in its endeavors and will never fail now or in the future. It is important for the people of the United States to restore confidence in their ability to rebuild a great nation that has accepted a great many challenges in the past, emerged successful in all frontiers and shared the progress and prosperity with the rest of the world.

The present time may appear to be tough but this nation has sailed through rough seas and the “Superpower” status is testimony to the resilience and intellectual power of the people.

The United States has every reason to be proud of all its achievements. The future ahead of us is bright, with a remarkable work force prepared to overcome all obstacles in their path to success and glory.

Thank you.

Padmini Arhant

Written by Padmini Arhant · Filed Under Business, Economy, Featured | Leave a Comment 

Foreclosures

October 7, 2008

The stock market performance particularly on October 6 and 7, 2008 is a strong indication of the lack of effective measures to address the problems that triggered the financial crisis and subsequently the economic meltdown. The tumbling of the stocks due to aggressive selling day after day is from panic and deep concern among investors across the globe.

The “Treasury” has secured the financial package for the “rescue” plan as an instant relief to the current crisis. However, in preparation to relieve the financial institutions from “bad debts” and “toxic assets”, it has failed to look beyond the “Corporate” horizon. The immediate priority is to lift the nation from the burgeoning “housing market” crisis i.e. “foreclosures” and provide relief to the “homeowners”.

The Congress must act now on bipartisan basis to implement “Moratorium” on the “foreclosures”, and vigorously re-enact the “Bankruptcy provision” to relieve homeowners across the nation. It should not be at the discretion of the financial institutions that are primarily responsible for the mortgage crisis to resolve on their own terms and conditions. As stated earlier, the “foreclosures” are the result of the multi-tiered structures in the financial and real estate industry engaging in unethical practices and reckless conduct with no oversight.

If the “rescue” package does not involve the solutions to the problems of the current economic and stock market turbulence, the entire effort by the Congress is futile. Therefore, it is necessary for government intervention to relieve all homeowners dealing with “foreclosures” and delinquency on their mortgage payments due to the sudden increase in interest rates initially offered as “teaser” rates on the subprime mortgage loans.

The urgent and direct focus on the “housing market” is the only prudent economic strategy available to revive the “housing sector”, one of the structural foundations of the economy. The consistent decline of “home values” is a major factor for the “economic stress” with a ripple effect on the entire financial and commercial sectors.

The “housing” and “energy” industry are fundamental components of the economic infrastructure. Hence, the rescue plan must address the “cause” of the current financial crisis i.e. the “foreclosures” besides facilitating financial liquidity in the commercial sector to stimulate economic growth and development. In terms of the economic stimulus package under consideration, the “energy” subsidies would highly benefit the economy and ease the burden on the “main street” anticipating high “energy” costs in winter.

The impending purchase of the mortgage-backed securities under the “rescue” plan must follow the guidelines to benefit the investor i.e. the taxpayers in both the short and long run. It is important to address effectively any concern by experts such as “The HOPE for Homeowners Act needs to pay less than 36.5 % of the face value of the subprime mortgage backed securities. If more is paid the government loses money in the long run and owners of the securities profit now” and any loopholes that might hamper the deal in the investor i.e. taxpayer’s favor must be eliminated as a safety measure.

The consensus on the legislation of the bill “HOPE” for The Homeowners Act, 2008 is promising and expected to provide relief to an estimated 400,000 families. It is important to follow through the process and ensure transformation of “HOPE” into reality for “homeowners” severely hit in the “housing” market crisis due to massive “foreclosures”.

“Congress” and the financial institutions could reverse the current stock market decline through diligence and prudent economic strategy combined with robust fiscal policy and financial measures to boost investor confidence. Meanwhile, domestic and foreign investors must restrain short selling in the wake of current crisis that is contributing to the pandemonium in the stock market.

The stock market turmoil will cease upon following all of the above measures with no further procrastination to protect the interests of all i.e. the “main street”, the “wall street” and the global market.

Thank you.

Padmini Arhant

Written by Padmini Arhant · Filed Under Business, Economy, Featured | Leave a Comment 

Bailout Failure

September 29, 2008

The democratic system has failed to rescue the nation at the hour of crisis. The party bickering and “partisan politics” has taken precedence over “main street” struggles. It is clear from the action of the legislators voting against the “emergency” plan that their concern for the return to power is paramount than the “average citizen’s” livelihood. The explanation for their refusal to cooperate does not resonate with the realities in the “main street”. The nature of global economy is slighted with distracted opinions and determined position in this crucial legislation.

Excerpt of one of the legislators reason to vote against the bailout.

Source : Democracynow.org – Thank you.

According to Democratic Congressman Rep. Dennis Kucinich – “Is this the United States Congress or the Board of Directors of Goldman Sachs?” Rep. Dennis Kucinich Rejects $700 Billion Bailout
The House is set to vote today on a $700 billion emergency bailout plan for the financial industry. The proposed legislation was forged during a marathon negotiating session over the weekend between lawmakers from both parties and Treasury Secretary Henry Paulson. The 110-page bill would authorize Paulson to initiate what is likely to become the biggest government bailout in US history, allowing him to spend up to $700 billion to relieve faltering banks and other firms of bad assets backed by home mortgages, which are falling into foreclosure at record rates.

AMY GOODMAN: Right, but the Democrats are in charge of this.

REP. DENNIS KUCINICH: Right. You know, I’ll tell you something that we were told in our caucus. We were told that our presidential candidate, when the negotiations started at the White House, said that he didn’t want this in this bill. Now, that’s what we were told.

AMY GOODMAN: You were told that Barack Obama did not want this in the bill?

REP. DENNIS KUCINICH: That he didn’t want the bankruptcy provisions in the bill. Now, you know, that’s what we were told. And I don’t understand why he would say that, if he did say that. And I think that there is a—the fact that we didn’t put bankruptcy provisions in, that actually we removed any hope for judges to do any loan modifications or any forbearance. There’s no moratorium on mortgage foreclosures in here. So, who’s getting—who’s really getting helped by this bill? This is a bailout, pure and simple, of Wall Street interests who have been involved in speculation.

AMY GOODMAN: Congressman Kucinich, can you explain how it is that the Democrats are in charge, yet the Democrats back down on their demand to give bankruptcy judges authority to alter the terms of mortgages for homeowners facing foreclosure, that Democrats also failed in their attempt to steer a portion of any government profits from the package to affordable housing programs?

REP. DENNIS KUCINICH: Well, I mean, those are two of the most glaring deficiencies in this bill. And I would maintain there was never any intention to—you know, well, many members of Congress had the intention of helping people who were in foreclosure. You know, this—Wall Street doesn’t want to do that. Wall Street wants to grab whatever change they can and equity that’s left in these properties. So— .”
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Review: There is no disagreement in this context. However, the repercussions of failing to act is far greater than the stakes involved in the initial bailout that is being carried out cautiously and judiciously by the remaining members of the “Congress”. The legislators’ rhetoric does not serve the purpose as the U.S economy is the engine of the global markets and the ripple effect is already felt in Europe and worldwide. Today’s plummeting of the stock market is yet another sign of the “financial catastrophe” at our doorstep.

With respect to the elimination of “bankruptcy provision” as discussed in the above interview, the “Democratic Presidential Candidate”, i.e. Senator Barack Obama’s position is apparent in the “housing market” debacle. It is time for the Democratic Party to be forthcoming to the democratic base as well as others and explain the reason behind such notion to alienate the worst hit population i.e. the “homeowners” in this bailout proposal.

As for the GOP members of Congress, defying the national interest by voting against the bailout proposal, the following questions arise,

1. Where were the legislators when the economic meltdown was happening under their watch?

2. Why did they not alert their own party and the administration that is notorious for reckless
policies and “bankrupting” the economy under their reign of power?

3.Whatever happened to the passion and pessimism about the “Wall Street” performance leading
the world’s economic power on the verge of collapse?

Alas, “Rip Van Winkle” is awakened by the financial “thunderbolt” and causing havoc in the “Capitol Hill” , the heavenly abode of the legislators.

Ironically, the two extreme political factions appear to come in terms with agreement on a single platform , i..e. protests the bailout and attempts to derail the entire economic infrastructure. The spectacular performance is to earn voter confidence and retain power for further economic disasters.

It is time to focus on the dire situation and market reaction in the United States and worldwide that is beckoning to act promptly and effectively by facilitating liquidity in the financial market.

The lawmakers concerned about taxpayers must also realize that taxpayers’ investments are the major casualty in the current political fiasco.

It is the duty of every legislator to put “partisan politics” aside and act diligently by coming forward and resolving the national and world financial crisis in the best interest of the people, responsible for their power.

Thank you.

Padmini Arhant

Written by Padmini Arhant · Filed Under Business | Leave a Comment 

Glimpse of “Hope and Promise” in the Horizon!

June 25, 2008

Source: guardian.co.uk
Tech earnings diverge as U.S. economy weakens
• Reuters
• , Friday July 18 2008
By Jim Finkle

BOSTON, July 18 (Reuters) – IBM and other technology companies whose products help big corporations save money or expand data storage capacity are faring better than those relying on consumers as the U.S. economy slows.

International Business Machines Corp, the world’s biggest technology company, impressed investors by easily beating quarterly profit expectations and raising 2008 forecasts when it reported along with other big tech companies on Thursday.

In contrast, Microsoft Corp missed estimates amid concern about its online business and the economy, while Google Inc also disappointed. The Web leader told investors it was operating under “uncertain economic conditions” after a weaker-than-expected 35 percent quarterly profit increase.
Darren Bagwell, director of equity research at Thrivent Asset Management, which manages $73 billion, reckons IBM’s results point to strong performances for companies like EMC Corp, the world’s biggest maker of corporate storage gear. EMC releases its results on July 23.
“IBM’s mainframe business was on fire,” he said, pointing to a new line of computers that IBM introduced in February. They sold out at the end of the second quarter after the company’s first major upgrade to its mainframes in almost three years. They are used in “green” data centers that help businesses save money on energy and maintenance costs.
In a teleconference with analysts and reporters on Thursday, IBM said demand from companies in developed countries looking to expand data centers contributed to its better-than-expected 22 percent rise in quarterly profit.
Bagwell noted both Microsoft and Google said they plan to invest heavily to develop larger, more sophisticated data centers so they can better compete with each other.
“They are spending a lot of money to build out the infrastructure they need,” he said. “Someone is going to get the benefit of that, obviously.”
Bagwell expects such infrastructure investment will also bolster profits at VMware Inc, whose software helps companies save money by allowing them to boost the efficiency of server computers.
SIZE MATTERS
Companies the size of IBM could fare better in a weakening economy than smaller rivals, analysts said, as customers pare back the number of vendors to focus on those deemed most resilient to an economic slowdown.
Demand for hardware appears to be trickling down to smaller manufacturers such as Sun Microsystems Inc, whose shares have been battered, losing 48 percent this year.
Sun, a maker of high-end servers, reported on Tuesday preliminary results in line with expectations, but that sparked a rally in its shares by investors who had feared much worse.
Jerry Dodson, a portfolio manager with Parnassus Investments, which manages $1.5 billion, said he fears other software makers may post weak earnings after Microsoft’s disappointing results.
“It (the rough economy) seems to be hitting software more than the hardware,” Dodson said.
SAP AG and Oracle Corp, the two biggest makers of business management software, look vulnerable, he said. Germany-based SAP is scheduled to report on July 29, while its California-based rival released results for its most-recent quarter last month, issuing a cautious earnings outlook and saying it expected software sales growth to slow.
Microsoft’s online division posted an eighth consecutive quarter of decline, reporting an operating loss of $488 million. Industry analysts feel that bodes poorly for Microsoft’s rival and acquisition target, Yahoo Inc, which reports results on Tuesday.
“Their weakness in the online division is an indicator in display advertising, which has follow-through implications for someone like Yahoo,” Bagwell said. (Editing by Braden Reddall)

Analysis: It appears from the above report that overall software industry and Web based innovators are experiencing the teething pain of a slowing economy worldwide. However, other technology giants like IBM, EMC and emerging companies such as VMware Inc. could benefit from the major corporations strategy to streamline costs and modify their existing system infrastructure.

Written by Padmini Arhant · Filed Under Business | Leave a Comment 

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