Saturday, September 27, 2008

Danger

9/27/08 Danger

Thomas Jefferson: “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Now read the following and compare. "The private market has screwed itself up," explained Representative Barney Frank "and they need the government to come help them unscrew it." Bill Bonner observes "He left out the extenuating circumstance that the U.S. money supply, the shortest term lending rates, Fannie Mae, Freddie Mac, the Fed, the Federal Housing Administration, the SEC…and a whole plethora of agencies, commissions and meddlers…as well as one out of every 4 dollars spent…were all under government control all along!"

Marc Faber: "Looking at the size of the credit market in the United States, the equities market, the housing market and then looking at the size of the credit default swap market, which is around $62 trillion now, and the world wide derivatives market which is now $1,300 trillion dollars, I very much doubt that $700 billion would make any difference at all. In fact, I think it's a bad proposal in the sense that it will distort market pricing."

Nouriel Roubini: "Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.

Moreover, the plan does not address the need to recapitalize badly undercapitalized financial institutions: this could have been achieved via public injections of preferred shares into these firms; needed matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; suspension of dividends payments; conversion of some of the unsecured debt into equity (a debt for equity swap).

The plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession.

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown."

J.P. Morgan Chase, which late Thursday bought Washington Mutual, said the peak-to-trough average home price in California could fall as much as 58% if the country enters a severe recession. Faced by severe liquidity issues and banks unwilling to lend to them, Bair said the FDIC stepped in and revoked Washington Mutual's charter. The transaction will allow Washington Mutual to be open for business on Friday. Washington Mutual's collapse is the biggest bank failure ever. JPMorgan Chase will pay $1.9 billion for deposits and branches.

Treasurys stayed higher after the government said the economy grew 2.8% in the second quarter, revised from a previous reading of 3.3%.

KB Home reported a third-quarter loss of $144.7 million, or $1.87 a share, compared with a loss of $35.6 million, or 46 cents a share, in the year-ago period. The latest quarter's results included pretax charges of $82.2 million for inventory and joint venture impairments and $58.1 million to record a valuation allowance. The Los Angeles-based residential builder said total revenue fell to $681.6 million from $1.54 billion. "Continued deterioration in new home demand, new and existing home prices, excessive inventories and mortgage credit availability prevailed across most U.S. housing markets in the third quarter," said Jeffrey Mezger, president and chief executive officer. "These difficult conditions have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets, and it is too early to assess whether the federal government's proposed interventions will be effective."

Alpharma Inc. said Friday it's rejecting a bid from King Pharmaceuticals Inc.because it's inadequate.

With nervous banks reluctant to lend to each other beyond overnight, the U.S. Federal Reserve and other central banks announced joint actions Friday to ease tensions in money markets. The Fed said it had added $13 billion to its existing $277 billion in swap lines with other central banks to provide funds for short-term loans to money markets. The Fed, the Bank of England, the European Central Bank and the Swiss National Bank will use the swap lines to provide dollar-liquidity through one-week loans in an effort to ease funding pressures through the end of the quarter. In addition, the Bank of England said it would auction 40 billion pounds in loans that will mature Jan. 15, 2009.

Shares of American International Group Inc. sank in premarket trading Friday, as investors reacted to the news that the insurer's former chief executive will unload his stock.

A regulatory filing Thursday revealed that Maurice "Hank" Greenberg, who ran AIG for almost 40 years, plans to sell an undisclosed amount of shares for "liquidity and other purposes." The sales may "materially" decrease the holdings that he controls, according to a filing with the Securities and Exchange Commission.


Political wrangling threw the $700 billion bailout plan into disarray, despite a day of negotiations that seemed to promise a deal. Talks broke off with no agreement and with plans to reconvene in the morning, without House Republicans. Barney Frank, the chairman of the House Financial Services Committee declared Friday that an agreement on legislation to relieve a spreading financial crisis depends on House Republicans "dropping this revolt" against President Bush. He called the rival proposal being pushed by House conservative Republicans "an ambush plan."


According to AMG Data Services, including ETF activity, Equity funds report net cash inflows totaling $13.897 billion in the week ended 9/24/08 with Domestic funds reporting net inflows of $14.763 billion and Non-domestic funds reporting net outflows of -$867 million;
Excluding ETF activity, Equity funds report net cash outflows totaling -$9.318 billion, the largest net outflow since 1/23/08; with Domestic funds reporting net outflows of -$5.277 billion and Non-domestic funds reporting net outflows totaling -$4.040 billion.


Research In Motion says its margins will contract in the current quarter as it spends more to produce snazzy new BlackBerrys.


According to the FT, Morgan Stanley lost close to a third of assets in its prime brokerage last week, amounting to hundreds of billions of dollars, as hedge funds fled after the collapse of Lehman Brothers and moved to rival banks.

The losses, confirmed by several people familiar with the business, will deal a big blow to Morgan Stanley as its prime brokerage is one of its most profitable and successful businesses.


Venezuela, the world's fifth-largest oil exporter, will boost crude shipments to China by 25 percent in 2009 to benefit from rising energy demand in the fastest- growing major economy, President Hugo Chavez said.

Crude sales will rise to 500,000 barrels a day from an estimated 400,000 barrels by the end of this year, Chavez, who is visiting China, told reporters in Beijing today. The Latin American country currently exports more than 300,000 barrels a day to China, he said.


OAO Gazprom and other Russian energy producers will join with Petroleos de Venezuela SA to work on projects around the world, Venezuelan President Hugo Chavez said.

``It's a colossus being born,'' Chavez said live on Venezuelan state television from Russia, which he was visiting for the second time in two months. The companies will combine ``investment, exploration, exploitation, processing and commerce in energy, oil, gas and many other areas,'' he said.


China's banks are limiting foreign- exchange transactions with U.S. and European financial companies on concern tighter global credit markets will cause more failures.


Gasoline shortages hit towns across the southeastern United States this week, sparking panic buying, long lines and high prices at stations from the small towns of northeast Alabama to Charlotte in the wake of Hurricanes Gustav and Ike.


PICC Property & Casualty Co. said Chinese housing prices may drop as much as 50% over the next few years, citing the insurer’s asset management arm. Property prices have “gone far beyond what people can afford” and the nation’s housing bubble is “on the verge of ending,” citing Ling Xiuli, a senior researcher at the company. Shimao Property Holdings Ltd., a Chinese developer, yesterday cut its sales target for this year by 20% to $2.05 billion on falling demand. Shimao also lowered its sales targets for next year and 2010 by about 30%.


MMS has recalculated the number of manned platforms in the Gulf since 23 manned platforms were destroyed by the recent hurricane. Personnel are still evacuated from 179 offshore platforms, and 59.3% of oil production is currently shut-in.


In the Sept. 19-22 poll, the undecided voters said Obama would do a better job than McCain of addressing the market meltdown by a margin of 57 percent to 18 percent. That's significantly wider than among all likely voters, where there is just a 12-point gap between Illinois Senator Obama and McCain, an Arizona senator.


Wachovia Corp. and National City Corp. slumped after negotiations on the government's financial bailout stalled and failed lender Washington Mutual Inc. was sold by regulators to JPMorgan Chase & Co.

Wachovia dropped $3.40, or 25 percent, to $10.30 at 8:46 a.m. in early New York trading, leading bank stocks lower. Cleveland-based National City fell 15 percent to $4.25. Charlotte, North Carolina-based Wachovia has lost more than 70 percent of its market value in the last 12 months and National City plunged 80 percent through yesterday.


Those looking for opportunities to short stocks and want to avoid the ban can bet on a downturn in the industrial sector, Simon Goodfellow, Head of European Equity Strategy Research, ING Wholesale Banking told CNBC on Friday.

Return on equity (ROE) in the sector is at a historic high 21 percent, compared with a median of 9 percent, which means the sector is prone to fall, Goodfellow said.

"It is quite literally incredible. The ROE in the industrial sector is the highest it has ever been, and absolutely no-one is forecasting any serious downturn," he told "Squawk Box Europe."

"And when the downturn comes it won't just be a small six or 12 months affair, it will be a proper two-year, maybe even three-year affair. This is where the shorting activity should go," he added.


Money Markets Grind To A Virtual Halt: Interbank and Repo Rates At Record Highs.


At $55+ Deere is trading at a new 52-week low and is down 40 points from the high. There will be more bad news to absorb on Deere; however, if the shares drop another 10%, I believe the risk/reward becomes favorable for a long-term investor an could present a buy/write opportunity.


J.P. Morgan Chase & Co. priced a $10 billion offering of approximately 246.9 million shares of its common stock at $40.50 per share.


James Bullard, the new president of the St. Louis Federal Reserve Bank, said the outlook is uncertain and there could be a severe downturn from the credit crunch. But Bullard also said he was still uncomfortable with the inflation outlook. The challenge for the Fed would be to navigate this crisis without "creating a new and difficult-to-solve inflation problem in its wake," Bullard said in a speech at Middle Tennessee State University. Until the overall inflation rate "clearly slows," the Fed must remain on alert, he said. At the moment, the 2% Fed funds rate is well below inflation, he added.


David Letterman described Paris Hilton -- Thursday's guest whose celebrity was once used in a McCain campaign ad to mock Democrat Barack Obama -- as McCain's first choice for a running mate.

"Here's how it works: You don't come to see me? You don't come to see me? Well, we might not see you on Inauguration Day," Letterman said.


Gold for December delivery ended up $6.50, or 0.7%, at $888.50 an ounce on the Comex division of the New York Mercantile Exchange. November crude closed at $106.89 per barrel Friday on the New York Mercantile Exchange, down $1.13, or 1.1% for the session. But prices ended the week with a gain of 4%.


George Harris: "Who won the debate?

CBS Insta Poll shows Barack Obama won 39% to John McCain's 25% with 36% saying the debate was a draw.

Insider Advantage reports those polled Obama won 42% to McCain's 41% with Undecided 17%

CNN reports voter opinions that Obama "did better" 51%, McCain "did better" 38%

The CNN poll showed men were evenly split, but women gave Obama higher marks 59% to 41% for McCain.

The CNN pollster noted a slight Democratic bias in the survey. Well, there just are more Democrats in the country. So more Democrats watched. However, this may also suggest Democratic enthusiasm which will help turn out the vote.

The MSNBC on-line (non-scientific) poll showed Obama winning the debate 52% to 33%. (But this is what one would expect from such a poll at MSNBC because of the nature of its viewers.)"

Thursday, September 25, 2008

Tightening Credit Markets

9/26/08 Tightening Credit Markets

Chinese regulators have asked domestic banks to stop lending to U.S. financial institutions in the interbank money markets to prevent possible losses during the financial crisis, the South China Morning Post reported Thursday. The China Banking Regulatory Commission's ban on interbank lending of all currencies applied to U.S. banks, but not to lenders from other countries, the report added, citing a source.

Anzia Yezierska: "Give a beggar a dime and he'll bless you. Give him a dollar and he'll curse you for withholding the rest of your fortune. Poverty is a bag with a hole at the
bottom."

Robert McHugh: "There is an ominous Head & Shoulders top in the Dow Industrials that is confirmed, and has a downside target of 7,500. That crash could start soon, maybe after one more rally leg, but we cannot rule out that it could happen without any further bounce. Same for the NDX: Ominous Head & Shoulders top pattern is confirmed with a downside target of 1,200, about a 30 percent crash, which should start soon.

If you are a conservative investor, the next two months are dangerous. We could witness the worst crash in over two decades. Raising cash would be a solid conservative strategy sooner rather than later."

General Electric Co. reduced its annual profit forecast for the second time this year and suspended its stock buyback because of ``unprecedented weakness and volatility'' in the financial services market.

Profit this quarter will be 43 cents to 48 cents a share, less than its previous forecast of 50 cents to 54 cents, GE said today in a Business Wire release. GE, the world's fourth-largest company by market value, fell in early New York trading.

``Difficult conditions in the financial services markets are not likely to improve in the near future,'' Fairfield, Connecticut-based GE said in the statement.

Full-year earnings will be $1.95 to $2.10 a share, down from an earlier projection of $2.20 to $2.30, the company said. GE said it is increasing capital in GE Capital to reduce leverage ratios, by reducing the unit's dividend to the parent company and by suspending the current stock buyback. The board voted to maintain GE's 31-cent quarterly dividend for investors through the end of 2009.

The company also will reduce GE Capital's commercial paper to 10 percent to 15 percent of GE Capital's total debt going forward. The company said it is working to ensure that industrial businesses deliver 60 percent of earnings by the end of 2009. Last year financial services accounted for about half.


The ``intensification'' of the financial crisis in recent weeks is curbing Americans' access to borrowing, making the outlook for consumer spending ``sluggish at best,'' Bernanke told lawmakers in Washington yesterday. While he noted that risks to inflation remain, the Fed chief's testimony focused on ``grave threats'' to the banking system.


U.S. weekly jobless claims shot to their highest level in seven years, the Labor Department said Thursday, as people in the hurricane-hit states of Louisiana and Texas filed for benefits. First-time claims for unemployment benefits jumped by 32,000, to 493,000 for the week ending Sept. 20. The four-week average of claims also jumped, by 16,000, to 462,500, the highest since November 2001. Continuing claims were at 3.54 million for the week ending Sept. 13, a five-year high. The four-week average of continuing claims also remained at a five-year high, of 3.48 million.


Orders for U.S.-made durable goods sank in August, falling 4.5% on weaker demand for a broad range of goods, the Commerce Department reported Thursday. Excluding the 8.9% decrease in transportation goods, orders fell 3.0%, the sharpest drop in nineteen months. It was the largest drop in total orders since January. The report was weak across the board. Shipments fell 3.5% in August, the largest decline since April 2001. Inventories rose 0.7%.


U.S. home sales fell 11.5% to a 17-year low in August, the Commerce Department estimated Thursday. The decline in new-home sales to a seasonally adjusted annual rate of 460,000 was much weaker than the 505,000 pace expected by economists surveyed by MarketWatch. Economists are wondering how far the housing market can fall. There are few signs of a bottom in the data. New-home sales are down 34.5% compared with a year ago. The months' supply of homes on the market rose to 10.9 months from 10.3 months in July. Median sales prices have fallen 6.2% in the past year to $221,900.


Medtronic Inc. will bid to acquire CryoCath Technologies Inc. for C$8.75 a share in cash.


Overnight dollar LIBOR edged lower to 2.5626% from 2.6875%, while overnight euro LIBOR rose to 4.38% from 4.375% and sterling libor rose to 5.08125% from 5%, according to data compiled by Dow Jones Newswires.


Washington Mutual has approached several private-equity firms about a potential takeover, according to a published report Thursday. Carlyle Group LLC, and Blackstone Group LP are among the firms considering a deal, the Wall Street Journal reported, citing unnamed sources. Interest among banks considering a deal for Washington Mutual, including J.P. Morgan Chase and Wells Fargo, has diminished in recent days over reluctance to absorb problem loans on Washington Mutual's books, according to the report.


The United States won't be the world's financial superpower in the wake of the banking crisis, German Finance Minister Peer Steinbrueck said Thursday, according to news reports. Steinbrueck told the lower house of Germany's parliament he would push for a global ban on speculative short selling and limits that would prevent banks from fully securitizing loans and selling them on to third parties, Dow Jones Newswires reported. Steinbrueck criticized the U.S. government for a late response to the crisis and laissez-faire market policies. "The U.S. will lose its status as the superpower of the global financial system," he said. "The global financial system will become more multi-polar."


M3 money supply growth slowed to an annual rate of 8.8% in the 15-nation euro zone in August, the European Central Bank reported Thursday, down from 9.1% in July and slightly below expectations for growth of 8.9%.


Pilgrim's Pride Corp., the No. 1 U.S. chicken producer, said on Thursday that it expects to report a "significant" fiscal fourth-quarter loss because of high feed-ingredient costs, continued weak prices and demand for breast meat, and the "significant negative impact" of hedged grain positions. The loss for the quarter ending Sept. 27 will probably put the company out of compliance with its fixed-charge coverage ratio covenant under its main credit lines at the end of the fiscal year, Pilgrim's Pride said. It expects to comply with all other covenants at the end of fiscal 2008.


The Hong Kong Monetary Authority injected HK$3.88 billion ($497 million) into the money markets Thursday to ensure there is enough liquidity in the system, according to reports. The move came a day after thousands of customers lined up to withdraw their money from Bank of East Asia, following rumors raising doubts about the lender's financial stability.


According to the FT, The House of Representatives on Wednesday approved a $25bn package of low-cost loans to help hard-pressed carmakers and their suppliers finance plant modernisation at a time of restricted access to public capital ­markets.

The automotive loans are separate from the proposed $700bn bail-out for the banking sector, which is still being debated in Congress. The House approved the measure 370-58, setting the stage for Senate approval within days.


Occidental Petroleum agreed to acquire the 50% interest it didn't already own in two Midwest oil-and-gas fields from Plains Exploration & Production for $1.25 billion.


Gary Dorsch: "When all the numbers are tallied up, in the worst-case scenario, the US government's borrowing demands could reach $1.8 trillion in fiscal 2009, or about 13% of US gross domestic product.

President George Bush's secretive Working Group on Financial Markets, (aka: the infamous "Plunge Protection Team" - PPT) will be working overtime, pulling all the strings at their disposal, in order to find a way to prevent a tsunami of new government debt from swamping the bond markets, and sending interest rates sharply higher. But the US government's choices are clear - either increase taxes to cover the debt, instruct the Federal Reserve to print more money to inflate the debt away, or allow interest rates to rise sharply to attract overseas lenders.
The Fed opted for monetization on Sept 19th, when it printed $69 billion out of thin-air, in orderto buy debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks through primary dealers.
The amount of US Treasuries outstanding has been rising at a rapid clip, and stands at $9.6 trillion, up from $4.5-trillion when President Bush took office in 2000. The cost of servicing the interest on the debt has risen to $400 billion annually."

European Socialist leader Martin Schulz: "Profits are being privatized, losses are being nationalized and that has got to stop. More than ever, the future requires supervisory powers over casino capitalism that never respected anything."

Rep. Ron Paul: "With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity."

Venezuelan President Hugo Chavez held talks with Chinese President Hu Jintao on Wednesday before the two sides signed an oil cooperation deal and several economic agreements.
The Chinese government gave no immediate details of the oil agreement but it said other documents covered economic cooperation, education and justice.
The Venezuelan government said more than 20 agreements would be signed during Chavez's three-day visit to China, which began on Tuesday.

"There is a structural risk we could exhaust our credit line," says Brad W. Setser, a former Treasury official now with the Council on Foreign Relations. "We're asking foreigners to keep lending to us when U.S. assets aren't looking good."

Bill Bonner: "The Bush administration used the 9/11 attacks as an excuse for the biggest increase in military spending and police power since WWII.

Now it is using the market correction (caused largely by its own interventions in the credit industry) to expand state power in the financial area. Half of all Americans pay their mortgages, directly or indirectly, to the federal government. Most older Americans depend, in whole or in part, on money from the government to live. Now, Americans depend on the government to keep house prices up - by subsidizing demand for mortgage backed securities - and to keep up stock and bond prices too - by buying up Wall Street's mistakes. Homeowners want protection from their own bad judgment. Investors want protection from Mr. Market. The old want free medicine. The young want free schooling. The unemployed want jobs and money. The rich want politicians in their pockets. The poor want the rich's money. Investors, homeowners, pensioners - is there anyone left in America who isn't trying to pick someone else's pocket?"


Natural-gas inventories rose by 51 billion cubic feet for the week ended Sept. 19, the U.S. Energy Department said Thursday. Analysts at Global Insight expected a climb of 74 billion. Total stocks now stand at 3.023 trillion cubic feet, down 162 billion cubic feet from the year-ago level but 35 billion cubic feet above the five-year average, the government data said. October natural gas was up 2.3 cents at $7.702 per million British thermal units on Globex.


D K Preston: "A handful of entrepreneurs nurtured a graduate school business plan into an actual company called PFNC Global Communities. The acronym stands for "por fin, nuestra casa," which is translated as "finally, a home of our own." PFNC's purpose is to convert shipping containers into affordable housing for those who most desperately need it around the globe.

With operations in New Mexico, PFNC has built a prototype, 320-square-foot home. The home, although small, has room for a kitchen, bath, toilet, and sleeping areas. It also has windows for natural ventilation, electrical and water systems, and hookups for air conditioning.

PFNC plans to outfit the homes for under $10,000 USD, but subject to site conditions, land costs, and transportation costs. To keep prices low, the company will try to sell homes in large quantities, with production planned for early 2009 at an initial capacity of 3000 homes per year. PFNC has both single family and multifamily options in the works."


Rep. Ron Paul: "A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank...When one gets in bed with government, one must expect the diseases it spreads."


Sen. Chris Dodd, the top Democrat on the Senate Banking Committee, said Thursday that bipartisan meeting with President Bush at the White House on the mortgage rescue plan was nothing short of a disaster. In an interview on the CNN cable news network, Dodd described a meeting in which Democrats were blindsided by a new core mortgage proposal from House Republicans, with the tacit backing of Republican presidential candidate John McCain. "I am not going to sign on to something I just saw this afternoon," he said. Dodd said Republicans and Treasury Secretary Henry Paulson had to decide what they wanted to support. The whole meeting "looked like a rescue plan for John McCain," Dodd said. He said he was simply going to pretend that the meeting had never happened.

Sen. John McCain met with House Republicans prior to the White House meeting and brought some new language to the White House meeting, upsetting Democrats.


For the current quarter ending November 29, Research in Motion forecasted earnings per share of 89-97 cents a share on revenue of $2.95 billion to $3.1 billion. Analysts had been expecting earnings of 97 cents a share on revenue of $2.9 billion, according to FactSet estimates.


November crude closed at $108.02 per barrel Thursday on the New York Mercantile Exchange, up $2.29, or 2.2%. Gold for December delivery fell $13, or 1.5%, to end at $882 an ounce on the Comex division of the New York Mercantile Exchange.

Senate Democrats proposed a $56 billion economic stimulus package that would increase government spending on unemployment benefits, food stamps, infrastructure projects, aid to state governments and heating aid to the poor.

Senate Majority leader Harry Reid, a Nevada Democrat, said today that the legislation is needed to help millions of Americans struggling with the slow economy.

New Zealand's economy contracted last quarter, driving the nation into its first recession in 10 years and adding to the prospect the central bank will cut interest rates to a three-year low next month.

The banking system needs another $500 billion to survive beyond the $700 billion rescue plan being contemplated by Congress, said Pimco founder Bill Gross.

Wednesday, September 24, 2008

The Bailout Scam

9/25/08 The Bailout Scam

Bloomberg: "Investors outside the U.S., who own more than half of all Treasuries outstanding, say the government's $700 billion plan to revive the banking system will diminish the appeal of the nation's bonds.

Treasury Secretary Henry Paulson's proposal, which seeks funds to rescue banks by purchasing devalued securities, would drive the country's debt to more than 70 percent of gross domestic product. The last time taxpayers owed as much was in 1954, when the U.S. was paying down costs from World War II.

``The image of U.S. Treasuries as a safe haven has been tainted by the ongoing financial debacle,'' said Kwag Dae Hwan, head of global investment in Seoul with South Korea's $220 billion National Pension Fund, which holds about $14 billion of U.S. government debt. ``A big question mark hangs over whether the U.S. can deal with an unprecedented amount of debt. That is unnerving all the investors, including me.''


Publilius Syrus: "It is fraud to borrow what we are unable to pay."

Lowe's Companies Inc. still expects to earn $1.48 to $1.56 a share in fiscal 2008, and sees sales growth of 1% for the period. For fiscal 2009, the home-improvement retailer forecasts a profit of $1.40 to $1.65 on a 2.5% to 6.5% increase in total sales.

Yahoo's new board gave a green light to a fresh round of discussions with the AOL unit of Time Warner, the Financial Times reported.

Japan's Sumitomo Mitsui Financial Group is ready to invest in Goldman Sachs, if requested by the U.S. investment bank, the Nikkei business daily reported Wednesday, citing a source familiar with the matter. Sumitomo Mitsui could invest as much as 100 billion yen ($948 million), the report added.

Barry Ritholtz on Berkshire Hathaway and Goldman Sachs: "If Buffett were to go to the Street earlier today to buy 44 million calls with a $115 strike price (circa 2010), they would have cost him about $1.5 billion dollars. With GS now trading at $135, Buffett’s $5 billion investment is more like $3.5B, in terms of net cost to him. Hence, the 10% interest is more like 14%.

Doug Kass thinks its an even better deal for Berkshire -- goes further than I do, putting an intrinsic value on the warrants of about $2 billion. That makes Buffet's net cost $3B -- so the effective yield is closer to 17%. (Ouch)"


Oppenheimer's Meredith Whitney slashed estimates on Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Wachovia Corp. and Wells Fargo & Co. because their loss provisions will be much higher than what has been written off to date.


Rob Hanna: "The lack of short-coverers may partially explain the recent pullback. Volume has contracted greatly and the pullback has given back gains faster then any other. Under normal circumstances there likely would have been more volume and more support as the shorts that didn’t chase start covering when then market begins to pull back. With reduced explosiveness and less support, the elimination of shorts could actually make the bottoming process more difficult. At the very least it may change the shape of the bottom. It will certainly be interesting to watch and trade."


The best news for Sen. Obama in the new surveys may come in Colorado, where he has moved to a lead of four percentage points, 49%-45%, after being down by a percentage point in August. That means he has a chance there to turn a traditionally Republican state in his direction.


NY Times: "One of the giant mortgage companies at the heart of the credit crisis paid $15,000 a month from the end of 2005 through last month to a firm owned by Senator John McCain’s campaign manager, according to two people with direct knowledge of the arrangement.

The disclosure undercuts a remark by Mr. McCain on Sunday night that the campaign manager, Rick Davis, had had no involvement with the company for the last several years.

Mr. Davis’s firm received the payments from the company, Freddie Mac, until it was taken over by the government this month along with Fannie Mae, the other big mortgage lender whose deteriorating finances helped precipitate the cascading problems on Wall Street, the two people said."


More voters trust Obama to deal with the economy, and he currently has a big edge as the candidate who is more in tune with the economic problems Americans now face. He also has a double-digit advantage on handling the current problems on Wall Street, and as a result, there has been a rise in his overall support. The poll found that, among likely voters, Obama now leads McCain by 52 percent to 43 percent. Two weeks ago, in the days immediately following the Republican National Convention, the race was essentially even, with McCain at 49 percent and Obama at 47 percent.


According to Bloomberg, the cost of borrowing in dollars increased after banks paid a record premium for cash at yesterday's Federal Reserve auction, underscoring the shortage of funds available on money markets.

The one-month London interbank offered rate, or Libor, for dollars rose 22 basis points to 3.43 percent, the highest level since January, the British Bankers' Association said today. Financial institutions paid 3.75 percent at the 28-day Fed term auction facility, or TAF. That's 57 basis points more than yesterday's one-month rate, the widest spread since the TAF program began in December.


Electricite de France SA, the world's biggest nuclear utility, agreed to buy British Energy Group Plc for a sweetened 12.5 billion pounds ($23 billion) as the U.K. turns back to atomic power after decades of neglect.


The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity dropped 10.6 percent to 591.4 in the week ended Sept 19.

The MBA's seasonally adjusted index of refinancing applications declined 11.2 percent to 2,043.4 last week as the average 30-year mortgage rate surged 0.26 percentage point to 6.06 percent, the MBA said.


The Oil Drum: "Gasoline shortages are starting to become a problem in areas such as Nashville and Atlanta. This week's "This Week in Petroleum" (TWIP) is expected to show a big drop in gasoline inventory. In this post, I have prepared a few graphs to supplement this week's TWIP. We know that Hurricane Gustav and Hurricane Ike had a huge impact on refineries, and that these production shortfalls are now slowly making their way through pipelines. It is my view that because Texas refineries have been fairly slow to get back online, and because of the built-in lag due to the slow travel of refined products through pipelines, the present gasoline shortages are likely to get worse in the next two to three weeks."


Rigzone: "The MMS reported that 23 platforms have been confirmed as destroyed by Hurricane Ike. Personnel are evacuated from 203 platforms and 4 rigs, and 66.8% of oil production and 61.6% of natural gas production is still shut-in."


Richard Benson: "The $4.2 Trillion of Intragovernmental Holdings is the "fictional borrowing" from Social Security and Medicare accounts. This fictional borrowing consists of social security taxes collected in excess of benefits paid out since the program began. In the past, the federal government profited nicely from excess social security taxes, but now the excess taxes have been spent on government projects like the war in Iraq, earmarks, etc. In a few short years when the Baby Boomers start to retire, the Social Security benefits paid out will exceed the taxes collected. When that happens, this fictional borrowing will flip back into real borrowing from the public. This means the government borrowing will be real, not fictional.... It took our fine republic a few hundred years to run up $5.2 trillion in debt, but over the next three years Treasury borrowing could exceed $8 trillion, a staggering 60 percent increase in the real national debt. Is it rational to believe that foreigners will double their holdings of US Treasury debt from $3 Trillion to $6 Trillion in the next three years? Yes, indeed!"


Mike Shedlock: "Bernanke wants government to pay significant premium over current "firesale" price for troubled assets. Specifically, he wants to pay close to the "hold-to-maturity" price, which he argues is much higher than the mark-to-market firesale price. Bernanke and Paulson believes this is necessary to get banks to participate.This is a huge boon to banks and will likely hose taxpayers. Why? Because the government will not have time to figure out what the true "hold to maturity" value of these assets is. Instead, it will have to take the word of banks who have every incentive to dump their crap on taxpayers.The justification for this is that banks won't participate in the bailout unless you give them big incentive to do so. To which we say: Tough beans. Make the program expensive, as it should be. Give the banks a specified period of time to accept the help or forever forego it. Then work with the banks that jump at the offer."


Richard Daughty: "And betting with gold against a fiat currency in the hands of politicians is the biggest no-brainer on the planet! Whee! This investing stuff is easy!"


Housing prices will hit bottom some time next year, but the California economy will be in distress for months to come, according to a closely followed UCLA economic report scheduled to be released today.
In a series of dire predictions echoed by experts throughout the state, the UCLA Anderson Forecast says that unemployment will continue to increase, consumer spending will decline and tax revenues will plummet.
"We can expect 'doldrums' to be the operative word describing the California economy over the next 18 to 24 months," said Jerry Nickelsburg, an author of the quarterly report on the national and state economies.
Government layoffs and job losses in sectors such as retail, he said, will offset any benefit from the settling of real estate prices.

Goldman Sachs prices $5 billion offering at $123 a share.

Eric Hovde:"The Wall Street investment banking firms, their executives, their families and their political action committees contribute more to U.S. Senate and House campaigns than any other industry in America. By sprinkling some of its massive gains into the pockets of our elected officials, Wall Street bought itself protection from any tough government enforcement.

"This is no doubt the same reason why so many members of Congress were consistently blocking attempts to reform and downsize Fannie Mae and Freddie Mac, which are essentially giant, undercapitalized hedge funds. These two entities have been huge money machines for Democrats in both the House and the Senate, many of whom recently had the gall to ask why these companies hadn't been reformed in the past. Nor should several Republican congressmen and Senators who likewise contributed to watering down legislation aimed at reforming these institutions be let off the hook."


U.S. advertising spending fell 3.7 percent in the second quarter from a year earlier, the biggest decline since 2001, as automakers and phone companies cut marketing budgets as the economy struggled.


David Paul Kuhn: "Democrats have not won a majority of whites since 1964. Since 1980 though, Democrats have struggled to even remain competitive among whites, particularly men, and that has allowed Republicans to dominate the last quarter century of presidential politics.

The DLC set out in its analysis, an early draft of which was provided to Politico, to investigate the most influential swing blocs for Democrats. It concluded that slight but significant gains with working class whites— who constitute four in ten voters and were defined by the DLC as white high school graduates without a four-year college degree—is the best means to enlarge the Democratic coalition."


The Federal Reserve, in coordinated action with foreign central banks, plowed $30 billion into money markets overseas Wednesday, part of an ongoing effort to fight a global credit crisis.


U.S. Aug. existing home sales down 2.2% to 4.91 mln pace. The inventory of unsold homes on the market fell 7% to 4.26 million, an 10.4 month supply at the current sales pace. This is the lowest level since March. The median sales prices fell 9.5% in the past year to $203,100. As many as 2 in 5 home sales are by borrowers who have seen their property lose value or are facing foreclosure.


The Bush administration's $700 billion plan to bail out the financial industry is "extremely faulty," Former President Jimmy Carter said at a Tuesday night town hall-style meeting.

Carter said he believes action is necessary but is skeptical of Treasury Secretary Henry Paulson's current plan."It's only three pages of outline. It gives him dictatorial power with no supervision," Carter said.


George Will wonders if John McCain is fit for office, because of his “temperament.”


The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time. Banks ``are suffering the consequences of their own actions,'' said Thomas Priore, chief executive officer of Institutional Credit Partners, LLC, a New York-based hedge fund with $13 billion in assets. ``They created a mechanism through default swaps to reflect a view on credit that has taken on a life of its own.'' Credit spreads were exaggerated as banks and investors hedging the risk of their trading partners defaulting rushed to buy swaps. That sent the price of protection soaring.


OPEC's 13 members are expected to pump 32.6 million barrels per day in September, down from a revised 33.4 million bpd in August when output was unusually high, Conrad Gerber, head of Petrologistics, told Reuters.


Chesapeake Energy said it would cut its capital expenditure for drilling by 17 percent through 2010 due to a plunge in natural gas prices and concerns about a U.S. market surplus.


The American Petroleum Institute reported Wednesday a drop of 2.1 million barrels in motor gasoline supplies for the week ended Sept. 19. The Energy Department had reported a decline of 5.9 million barrels for the latest week. Crude supplies were down 91,000 barrels, the API said. The government had reported that supplies fell by 1.5 million barrels. Distillate supplies were down 1.7 million barrels, the API said. They were down 4.2 million barrels for the week, according to the Energy Department. Refinery utilization dropped to 66.7% compared with 77.4% of capacity a week earlier.


Gold for December delivery closed up $3.80, or 0.4%, at $895 an ounce on the Comex division of the New York Mercantile Exchange. November crude closed at $105.73 per barrel Wednesday on the New York Mercantile Exchange, losing 88 cents for the session. October heating oil gained 1.7 cents to close at $3.0133 a gallon.


Sen. Barack Obama said Wednesday that he plans to issue a joint statement with his rival for the presidency, Sen. John McCain, on a $700 billion bailout plan for the nation's financial system. Obama said he called McCain this morning to ask if he would join him in issuing a joint statement, and McCain called him back at mid-afternoon to agree to it. "The two campaigns are currently working together on the details," Bill Burton, Obama's press secretary, said in a prepared statement. McCain has released prepared remarks saying he plans to suspend his campaign to deal with the crisis and wants to postpone a debate scheduled for Friday with Obama in Mississippi.


Citigroup Inc.may sell its Primerica insurance unit to private-equity firm J.C. Flowers & Co. and Alabama insurer Protective Life Corp., Bloomberg News reported Wednesday on its Web site, citing sources with knowledge of the talks.


"Houses may be more affordable, but they will probably be even more affordable next year," says Nigel Gault, chief U.S. economist at Global Insight, an economic forecasting firm. "So why buy now?"


Bed Bath & Beyond Inc.'s second-quarter profit fell to $119.3 million, or 46 cents a share, from $147 million, or 55 cents a share, in the year-ago period. Revenue rose to $1.85 billion from $1.77 billion last year. Same-store sales for the second-quarter declined 0.1%, the company said.


Nike Inc.'s net income for its fiscal first-quarter 2009 fell to $510.5 million, or $1.03 a share, from $569.7 million, or $1.12, a year ago. The year-ago results included a one-time tax gain that added 20 cents a share to the bottom line.


After one of the biggest money-market mutual funds broke the $1 per share benchmark and the Treasury pledged to insure money-fund assets, investors pulled a record $120.5 billion from 1,860 taxable and tax-exempt funds during the week ended Sept. 23, according to Money Fund Report, a service of iMoneyNet of Westborough, Mass.

Tuesday, September 23, 2008

Massive Government Intervention

9/24/08 Massive Government Intervention

Doug Noland: "A massive inflation of government obligations; a major government intrusion into all matters financial and economic; and an unprecedented circumvention of free market forces have been unleashed – but to what end? I believe it is a grave predicament that such a rampage of radical policymaking has been unleashed in order to maintain inflated asset markets and to sustain a Bubble Economy. Normally, such desperate measures would be employed only after a crash and in the midst of a major economic downturn – not in efforts specifically to forestall the unwind. Not only will such measures not work, I believe they will only exacerbate today’s already extreme Global Monetary Disorder. They will definitely worsen the inevitable financial and economic dislocation...So to generally stabilize today’s maladjusted system will, as we are now witnessing, require massive government intervention. Enormous government-supported Credit growth will be necessary this year, next year, and the years after that. To be sure, a protracted and historic cycle of Misdirected Credit Runs Unabated...Moreover, our economy must adjust and adapt to being much less dependent on finance and Credit growth – which will require our “output” to be much more product-based as opposed to “services”-based. We’ll be forced to trade goods for goods.The current direction of Bubble-sustaining policymaking goes the wrong direction in almost all aspects. At some point, the markets will recognize this Bubble Predicament, setting the stage for a very problematic crisis of confidence for the dollar and our federal debt markets."

The Office of Thrift Supervision is pushing Washington Mutual to find a buyer and is considering brokering a deal to break it up between several banks, the Financial Times reported, citing people familiar with the talks.

According to the FT, investors owning Lehman Brothers bonds face potential losses of nearly $110bn, reflecting the sharp reductions in the value of assets that are likely to be left to be paid out to creditors.

In the week since Lehman Brothers, the fourth-largest investment bank in the US, filed for bankruptcy, the value of its bonds has plummeted. “Lehman bonds are trading in the high teens, which reflects the bankruptcy filing, in which a large number of creditors are competing for a shrinking pool of assets of uncertain value,” said Kathleen Shanley of Gimme Credit, a credit research firm.

"During this past week consumers spent cautiously as the stock market dropped to its lowest levels in years on turmoil within the financial industry," said Michael Niemira, ICSC chief economist." Niemira lowered his September sales estimate for a second straight week to a 1% to 1.5% gain from his week-earlier projection of a 1.5% to 2% gain
Holiday sales are expected to grow at the slowest pace in six years as shoppers worry about jobs, the housing and stock markets and high gas and food prices, according to a forecast from the National Retail Federation being released Tuesday.

Niels Jensen and Jan Wilhelmsen: "Deutsche Bank has calculated that senior secured loans are now trading at an implied price earnings ratio of about 5 - less than a third of the cost of equities. There is no question that the real value is to be found in credit instruments. This is where most of the damage has been inflicted and it is where the big bargains are in today's market."

On Monday, gold futures rose $44.30, or 5.1%, to close at $909 an ounce on the Comex division of the New York Mercantile Exchange, ending above $900 for the first time since Aug. 4.

Kohlberg Kravis Roberts & Co: "Recent market conditions have not been favorable as compared to prior periods," KKR said in Amendment No. 4. "Weakness in the U.S. housing market and global financial markets, coupled with a large backlog of unsyndicated debt financing related to leveraged acquisitions, has led to a significantly diminished availability of credit and an increase in the cost of financing, which has materially hindered the initiation of new, large-sized transactions for our private equity segment and, together with declines in valuations of equity and debt securities, has adversely impacted our recent operating results."

Lennar Corp., the Miami home builder, narrowed its fiscal third-quarter net loss on 53% lower revenue. For the quarter ended Aug. 31, the loss was $89 million, or 56 cents a share, compared with $513.9 million, or $3.25 a share, in the year-earlier period. Revenue fell to $1.11 billion from $2.34 billion.

The new lead oil contract slipped over 2% on Tuesday after the $16 run-up in the last session. Crude for November delivery sliped $2.27 to $107.10 a barrel in electronic action.

A composite purchasing managers index for the euro zone fell more than expected in September, slipping to 47.0 from a reading of 48.2 in August, news reports said.

Bristol-Myers Squibb Co. increased its offer for ImClone Systems Inc. to $62 a share from $60 and said that it would take the offer directly to shareholders of the New York oncology-drug specialist.

Union Pacific said it expects earnings of $1.28 to $1.33 a share, up from a previous estimate of $1.10 to $1.20 a share.

On Monday, the Dow Jones Industrial Average fell 373 points, or 3.3%, to end at 11,015. The S&P 500 index lost 48 points, or 3.8%, to close at 1,207, while the Nasdaq Composite fell 94 points, or 4.2%, to end at 2,178. On Nymex, October crude rose $16.37, or 15.7%, to close at $120.92 per barrel.

Fitch Ratings said Monday downgraded General Motors Corp.'s issuer default rating to CCC from B- because of the auto maker's diminishing liquidity and lack of access to capital. The outlook is negative.

Net outflows from money market funds were down to $5.2 billion on Friday from $47.68 billion on Thursday and $85.37 billion Wednesday, according to data from money market fund research company iMoneyNet Monday.

Rob Hanna: "What’s significant here is that the market is acting in a way that it shouldn’t. It especially shouldn’t if it is planning on launching a great bull move. Look at some of the charts I’ve posted in the blog the last few days. Look at periods like March ‘03, July & October ’02, September ’01, September & October ’98, November ’97 and any other bottom you find. Massive one-day gains coming off lows simply don’t get wiped out the next day. It doesn’t happen. It happened Monday.
I would consider Monday’s action a warning sign."

According to the Wasington Post, in Colorado, Obama takes 49 percent to 45 percent for McCain while in Michigan Obama stands at 48 percent as compared to 44 percent for McCain. The contest in Minnesota, once considered a lock for Obama, is also quite close with Obama at 47 percent and McCain 45 percent. Only in Wisconsin does Obama have an edge -- 49 percent to 42 percent -- outside the statistical margin of error for the poll.

Robert McHugh: "Unemployment, income starvation, excessive debt burdens, excessive real estate taxes, a high cost of living, and a deteriorating confidence in the Master Planners intentions and skills assure continued economic distress."

"We are very excited with the results and progress of our PL-3994 program," stated Dr. Carl Spana, Palatin's President and Chief Executive Officer. "A clinical study is targeted to start later this calendar year which will randomize chronic heart failure patients to receive daily subcutaneous injections of PL-3994 in addition to their existing drug regimens. While existing medications are effective in reducing symptoms, reducing the rate of hospitalization and extending life, chronic heart failure patients nonetheless have poor prognoses. Thus, there is clearly a significant medical need for newer agents which can provide further improvement."

U.S. home values declined 0.6% in July, the Office of Federal Housing Enterprise Oversight reported Tuesday. Home values were 5.3% lower than a year ago. For July, prices fell among all regions.

Oct. natural gas gains 4.5% to $8.001/mln BTUs on Globex.

Economics scholar and former Federal Reserve Governor Frederic Mishkin says the shock that continues to rip through the nation's economy is actually worse than what was felt during the Great Depression.

The Treasury has a "blank check…to buy troubled assets," says the FT.

Rob Kirby: "Late last week, I wrote about a very strange occurrence – the reporting of J.P. Morgan “transferring” 138 billion dollars to Lehman, after Lehman had already filed for Chapter 11 bankruptcy early last Monday morning.

This bears repeating.

The advance was reportedly “to allow” Lehman to settle securities trades with clients. J.P. Morgan was then immediately reimbursed by the Federal Reserve for the same 138 billion.

What was not originally reported, or likely not understood at the time due to the types of securities that Lehman did most of their business in [Credit Derivatives], it is a virtual certainty that J.P. Morgan [the largest derivatives player in the world with 8.1 Trillion in Credit Derivatives alone] was the “client” [the other side of the Lehman trades that needed to be settled].

The critical piece of information that completes the daisy-chain: The world only learned about J.P. Morgan’s 138 billion advance from a bankruptcy court document, where Lehman was asking the court for the authority to give the settlement of claims of J.P. Morgan “special status.”...It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was “BAILED OUT” last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.

This makes sense. Investment banks are dropping like flies, owing to their involvement in credit derivatives – this is a fact.

J. P. Morgan is – HANDS DOWN – the largest derivatives player in the world with a book of 90 Trillion in notional value on March 31, 2008 – with 9% of the book composed of Credit Derivatives. That amounts to a cool 8.1 Trillion worth of Credit Derivatives. We know this from the Office of the Comptroller of the Currency’s Quarterly Derivatives Report – pg. 24."


The Federal Reserve lent $75 billion in 28-day loans to financial institutions in its bi-weekly Term Auction Facility, at a rate of 3.75%, it said Tuesday. Seventy-eight bidders, the most since July, offered $1.78 for every dollar available. The Fed has a revolving fund of $150 in one- or three-month loans of cash to commercial banks with sufficient collateral. Monday's rate was the highest since January, signaling increasing strains on liquidity in money markets.


Jim Jubak: "Derivatives were a key lubricant in the system that kept dollars moving around the world.That lubricant gradually failed over the past year as the financial crisis kept growing deeper. Companies and countries that bought derivatives as insurance discovered that first some, and then many, buyers of derivatives realized their insurance was only as good as the counterparty on the other end of the contract. If the financial company that had sold insurance against a rising dollar or a default by Fannie Mae didn't have the cash to pay up, then the derivative was worthless as insurance. Better to keep your money at home in your own pockets if you couldn't trust the derivatives market to deliver on its insurance promises.

The lubricant also failed as the price of insurance went up. If the price of buying a derivative to insure against some unpleasant possibility rose high enough, then it was again better to keep your money at home than to pay the extra premium."


U.S. Securities and Exchange Commission Chairman Christopher Cox said Congress should grant authority to regulate the credit-default swaps market amid concern the bets are fueling the global financial crisis.

Lawmakers should ``provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets,'' Cox told the Senate Banking Committee today at a hearing in Washington.

``Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure,'' and that should be addressed ``immediately,'' Cox said in prepared testimony at a hearing to consider the government's $700 billion financial rescue plan.

Investors may buy credit-default swaps to bet that a company's financial condition will worsen. The contracts pay the holder face value for the underlying securities or the cash equivalent should a company fail to repay its debt. The instruments' value increases as investor perception of the company's stability deteriorates.


Cuno PĆ¼mpin and Maurice Pedergnana:"The tragedy of the worst financial crisis since the 1930s was enhanced by almost every investment bank, all rating agencies and all bank regulators using the same measurement and the same mathematical risk model for market evaluation of securities. This example shows how dangerous the use of the standard deviation based approach is. If most of the market participants make decisions based on the same risk control of a false distribution assumption, and oversimplified risk model, it could cause a complete failure of the system."


Gold for December delivery fell $17.80 to end at $891.20 an ounce on the New York Mercantile Exchange. November crude closed at $106.61 per barrel Tuesday on the New York Mercantile Exchange, down $2.76, or 2.5%, for the session.

Berkshire Hathaway Inc will invest $5 billion in Goldman Sachs Group Inc.

"It's a vote of confidence which is gold plated," said Michael Holland, a money manager at Holland & Co in New York. "You don't get better than this." Berkshire will buy $5 billion of perpetual preferred stock that carries a 10 percent dividend. It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give it a roughly 9 percent stake in Goldman.


Iran's president addressed the U.N. General Assembly Tuesday declaring that "the American empire" is nearing collapse and should end its military involvement in other countries.

Iranian President Mahmoud Ahmadinejad said terrorism is spreading quickly in Afghanistan and that "the occupiers" are still in Iraq nearly six years after Saddam Hussein was ousted from power in Iraq.

"American empire in the world is reaching the end of its road, and its next rulers must limit their interference to their own borders," Ahmadinejad said.

He accused the U.S. of starting wars in Iraq and Afghanistan to win votes in elections and blamed a "few bullying powers" for trying to undermine Iraq's nuclear program.

Monday, September 22, 2008

Liars and Incompetents

9/23/08 Liars and Incompetents

The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks — Goldman Sachs and Morgan Stanley — to change their status to bank holding companies.
The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.
The change continued the biggest restructuring on Wall Street since the Great Depression.

Uncertainty about the workings of the government's $700 billion bank bailout drove U.S. stock index futures and bond futures lower Sunday evening as Asian markets got ready to start the week.

The dollar weakened against the yen on concerns that government borrowing will exacerbate the U.S. budget deficit as it needs to issue more debt to finance its rescue plan to buy bad mortgages from financial institutions.

S&P 500 futures fell 11.80 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures dropped 201 points and Nasdaq 100 futures shed 18.75 points.

Crude oil for November delivery rose $3.53 to $106.28 a barrel in electronic trading on Globex. Oil for October delivery, which expires today, gained $2.45 to $107 a barrel. Gold for December delivery rallied $24.90, or 3%, to $889.60 an ounce in electronic trading on Globex.

Reuters reports that Nomura reached a deal to buy Lehman's (LEH) Asia assets.
Reuters says that tax-exempt funds will have access to the Treasury's new rescue facility.

Republican presidential nominee John McCain, who only a week ago said the economy was fundamentally sound, now says the U.S. financial system is facing a major crisis.
Speaking today on NBC's "Today" show McCain said, "We are in the most serious crisis since World War II." If McCain looks in the mirror, he will see a man in crisis mode. Is he a liar or incompetent or both?

Henry Louis Mencken: “The men the American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth.”

Madame Chiang Kai-Shek:“Every clique is a refuge for incompetence. It fosters corruption and disloyalty, it begets cowardice, and consequently is a burden upon and a drawback to the progress of the country. Its instincts and actions are those of the pack.”

Today in the fall equinox, day and night are equal in length.

According to the FT, the value of leveraged loans fell to record lows during the past week, creating further potential mark-to-market losses for both investors and banks.

The average bid on the most traded US leveraged loans dropped 330 basis points to an all-time low of 84.28 per cent of face value, according to data from Standard & Poor’s LCD and Markit.


Mike Shedlock: Somehow Paulson has gone from "Our banking system is a safe and a sound one" (See You Know The Banking System Is Unsound When....) to Paulson telling Congress "That we're literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally...1) Paulson and Bernanke are liars 2) Paulson and Bernanke are incompetent. There are no other choices except "both of the above"...somehow Congress is supposed to rush through a package that is arguably unconstitutional, because two known liars and/or incompetents say there is an urgent need to do so.

Sadly, Congress is more concerned about getting something done quickly than getting something done right. In the corporate world one would expect to see overtime hours. Here we are in a global financial emergency and Congress is concerned about getting something done before recess."

John Hussman: "As an economist and investment manager, I am concerned that the plan advocated by Treasury is essentially a plan to bail out the bondholders of financial institutions that made bad lending decisions, with little help to homeowners that are actually in financial distress. It is difficult to believe that the U.S. government is contemplating taking on the bad assets of these institutions at probable taxpayer loss and effectively immunizing the bondholders (and shareholders) of these companies.

While it is certainly in the public interest to avoid the dislocations that would result from a disorderly failure of highly interconnected financial institutions, there are better ways for public funds to accomplish this, other than by protecting corporate bondholders while homeowners remain in distress....

It is also of some concern that there is only one precedent for the size of the advance observed in the past two days, which was a short-term stopping point in October 1929, following which the market proceeded to establish fresh lows for two more weeks."

Microsoft Corp. raised its quarterly dividend by 18% and said its board has approved a plan to buy back up to $40 billion in stock by 2013. The company lifted its dividend payment by 2 cents a share to 18 cents, payable Dec. 11 to shareholders of record on Nov. 20. Also, Microsoft's board authorized the company to set up a commercial paper program totaling $2 billion, while also allowing Microsoft to seek "debt financings from time to time of up to $6 billion."

Nouriel Roubini: "it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages."

George Ure: "The first thing you need to understand is that any media reference to the Resolution Trust Corp's bailout of the Savings and Loan mess is a deliberate misleading of American public opinion so that our collective life savings can be hijacked by the bankers cabal.The key difference to keep in mind is this: In the case of the RTC, when the assets were rolled up and resold, the main players went out of business. In the flim-flam now being pulled on the American public, the main players will not only stay in business, they will make new fortunes paid for with your tax dollars.
Oh, and if you think this stinks, that's the smell of greed."

Mitsubishi UFJ Financial Group said Monday it plans to buy "between 10% and 20% of common shares" in U.S. investment bank Morgan Stanley, according to news reports from a Tokyo press conference. Mitsubishi UFJ, Japan's largest bank, said its total purchase would depend on the book value of the shares, as determined after conducting due diligence, the reports said. The Japanese bank said its maximum purchase would total 900 billion yen ($8.4 billion) and it would consider dispatching at least one director to Morgan Stanley to sit on its board, according to a Dow Jones Newswires report.

GE, GM, and American Express were added to the no-short selling list. Manipulation is alive and well. It won't help in the long run. It will only make matters worse. The free market determines values-- not politics.

HP announced an $8 billion stock buyback and Nike $5 billion. Do you think these Monday-announced buybacks are orchestrated to calm the markets?

Sunday, September 21, 2008

Unchecked Government Power

9/22/08 Unchecked Government Power

Barry Goldwater: "Those who seek absolute power, even though they seek it to do what they regard as good, are simply demanding the right to enforce their own version of heaven on earth. And let me remind you, they are the very ones who always create the most hellish tyrannies. Absolute power does corrupt, and those who seek it must be suspect and must be opposed."

A federal judge on Saturday ordered Dick Cheney to preserve a wide range of the records from his time as vice president.
The decision by U.S. District Judge Colleen Kollar-Kotelly is a setback for the Bush administration in its effort to promote a narrow definition of materials that must be safeguarded under by the Presidential Records Act.
The Bush administration's legal position "heightens the court's concern" that some records may not be preserved, said the judge.
A private group, Citizens for Responsibility and Ethics in Washington, is suing Cheney and the Executive Office of the President in an effort to ensure that no presidential records are destroyed or handled in a way that makes them unavailable to the public.
In a 22-page opinion, the judge revealed that in recent days, lawyers for the Bush administration balked at a proposed agreement between the two sides on how to proceed with the case.

It's another instance where the Bushies think they are above the law. In addition, it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt. Since when has our government earned your trust?

The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.
The bill would prevent courts from reviewing actions taken under its authority.
``He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.'' The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program. Paulson is seeking an expansion of federal influence over markets that hasn't been seen since the Great Depression, said Charles Geisst, author of ``100 Years of Wall Street'' and a finance professor at Manhattan College in New York.

London Banker: "Good luck, everyone. We're in uncharted waters now. There is no rule of law if this passes - there are no markets. We've all been had, and the worst is yet to come."

Elie Wiesel: "It may well be that our means are fairly limited and our possibilities restricted when it comes to applying pressure on our government. But is this a reason to do nothing? Despair is nor an answer. Neither is resignation. Resignation only leads to indifference, which is not merely a sin but a punishment."

Yves Smith: " $700 billion is comparable to the hard cost of the Iraq war, bigger than the annual Pentagon budget. And mind you, $700 billion is not the maximum that the Treasury may spend, it's the ceiling on the outstandings at any one time. It's a balance sheet number, not an expenditure limit.

But here is the truly offensive section of an overreaching piece of legislation:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

This puts the Treasury's actions beyond the rule of law. This is a financial coup d'etat, with the only limitation the $700 billion balance sheet figure. The measure already gives the Treasury the authority not simply to buy dud mortgage paper but other assets as it deems fit. There is no accountability beyond a report (contents undefined) to Congress three months into the program and semiannually thereafter. The Treasury could via incompetence or venality grossly overpay for assets and advisory services, and fail to exclude consultants with conflicts of interest, and there would be no recourse. Given the truly appalling track record of this Administration in its outsourcing, this is not an idle worry.
But far worse is the precedent it sets. This Administration has worked hard to escape any constraints on its actions, not to pursue noble causes, but to curtail civil liberties: Guantanamo, rendition, torture, warrantless wiretaps. It has used the threat of unseen terrorists and a seemingly perpetual war on radical Muslim to justify gutting the Constitution. The Supreme Court, which has been supine on many fronts, has finally started to push back, but would it challenge a bill that sweeps aside judicial review? Informed readers are encouraged to speak up."

Robert Reich: "Congress, the Fed, and the Administration shouldn't be giving more help to Wall Street. Policymakers should focus instead on people who really need a safety net right now -- workers who have lost or are about to lose their jobs, who need extended unemployment insurance and health insurance for themselves and their families; homeowners who have lost or are likely to lose their homes, who need additional help meeting mortgage payments and reorganizing their debts; and people who have lost or are in danger of losing their savings or pensions, who need better insurance against possible loss.
The only way Wall Street's meltdown doesn't spill over to Main Street is if policymakers begin to pay adequate attention to the people whose wallets really keep the economy going, and who merit more help than the Wall Street tycoons whose carelessness and negligence have put it in such jeopardy."

Robert McHugh: "What is clear from the getgo, is that this is a bailout of Wall Street, not Main Street, that it is going to cost trillions, not billions, and the bill will be paid by both the American taxpayer, and the American consumer via a higher cost of living. Yes, this is going to be hyperinflationary. The Treasury will issue notes to the Fed, the Fed will come up with the cash (printed out of thin air), and the cash will be handed to Wall Street. This process fails miserably to solve the problem, which is the dire financial condition of the average American household. The trillions of dollars being printed out of thin air should be going to each and every household in America, not just Wall Street. If so, Wall Street would benefit because their toxic assets would metamorphose into quality assets as the American household pays off its debts (cash to Wall Street). But what would you expect when the Treasury Secretary authoring this plan is the former Chairman of the largest Wall Street firm in America, Goldman Sachs, which also happens to be a surrogate for the Plunge Protection Team. Because the plan fails to bailout the American household, it will fail -- period. But, fail with an even higher cost of living structure than we have today.
This plan assures that the Dollar will tank."

Mike Burk: "Last weeks retest of the July low was accompanied by enough new lows to make another retest likely. My guess is a rapid growth in money supply will postpone that retest until next year.
I expect the major indices to be higher on Friday September 26 than they were on Friday September 19."

Israel's corruption-tainted prime minister told his Cabinet on Sunday that he would step down, helping the ruling party's new leader try to form a coalition government.

Bill Bonner: "There's a war going on…a battle between a natural market correction…and an artificial attempt to avoid it. On the one hand, Mr. Market wants to correct the excesses of the boom/bubble period that began in 1982. On the other, Misters Bernanke and Paulson want to prevent him. Mr. Market takes down asset prices. Mr. Market Manipulators push them back up.
We know who the ultimate victor will be. Mr. Market never loses. One way or another, real prices must come down. That's just the way it works. Night follows day…whether you like it or not. Stocks, bonds, property, art become expensive…and then they become cheap. Recently, they've been expensive…soon, they will be cheap."

Thomas Jefferson: "A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor and bread it has earned -- this is the sum of good government."