Stocks slide 311 points today

[capeman]

This is a slide that's not based on an event, not based on a loss, not based on an economic downturn, it's merely based on one word: subprime

Don't get confused over that term.  Subprime is a catchword for the media trying to play and spin the bad data coming in.  In the last week a lot of Prime MBS has been downgraded to Subprime status.  That coupled with CFC reports stating that Prime HELOCs are beginning to go unpaid gives a glimpse that at somepoint the media will have to turn to the use of the term Prime to explain things.  When that happens the shat has hit the fan.

Don't be confused by the GDP report.  Consumer spending which is normally 70% of the GDP came in at ~1%.  It went negative in June which likely means bad things and likely a bad Q3 report will be coming.  The Q2 GDP seems snowed and fudged and will likely be revised downward. 

[capeman]

This is a slide that's not based on an event, not based on a loss, not based on an economic downturn, it's merely based on one word: subprime

Don't get confused over that term.  Subprime is a catchword for the media trying to play and spin the bad data coming in.  In the last week a lot of Prime MBS has been downgraded to Subprime status.  That coupled with CFC reports stating that Prime HELOCs are beginning to go unpaid gives a glimpse that at somepoint the media will have to turn to the use of the term Prime to explain things.  When that happens the shat has hit the fan.

Don't be confused by the GDP report.  Consumer spending which is normally 70% of the GDP came in at ~1%.  It went negative in June which likely means bad things and likely a bad Q3 report will be coming.  The Q2 GDP seems snowed and fudged and will likely be revised downward. 

[HereWeGo]

I’m not confused by the GDP report. It clearly indicates that the benefits of free trade and globalization outweigh the pain caused by the housing downturn.

An aggressive California lender had problems with some HELOCs? Gee, who knew? What’s the next terrifying revelation, that a Florida based condo builder is having trouble making ends meet?

Corporate profits are growing at 3x the expected rate for the quarter. Credit worthiness is generally determined by assets and income, although apparently CFC disagrees. Corporate balance sheets are flush with cash.

So why is corporate lending such an issue? Because many brain-dead experts, egged on perhaps by the bear paranoia that seems to permeate the web, can’t seem to differentiate between loaning 600K to purchase a depreciating asset to an individual with a BK, an overstated income, and low prospects of rapid wage increase, and lending to a corporation whose income is rising at 10%+/year, with billions in cash on the books (nevermind the assets and equity.)

It’s just astoundingly stupid.

[HereWeGo]

I’m not confused by the GDP report. It clearly indicates that the benefits of free trade and globalization outweigh the pain caused by the housing downturn.

An aggressive California lender had problems with some HELOCs? Gee, who knew? What’s the next terrifying revelation, that a Florida based condo builder is having trouble making ends meet?

Corporate profits are growing at 3x the expected rate for the quarter. Credit worthiness is generally determined by assets and income, although apparently CFC disagrees. Corporate balance sheets are flush with cash.

So why is corporate lending such an issue? Because many brain-dead experts, egged on perhaps by the bear paranoia that seems to permeate the web, can’t seem to differentiate between loaning 600K to purchase a depreciating asset to an individual with a BK, an overstated income, and low prospects of rapid wage increase, and lending to a corporation whose income is rising at 10%+/year, with billions in cash on the books (nevermind the assets and equity.)

It’s just astoundingly stupid.

[Chris Scoreboard Johnston]

Well that is truly amazing and quite frankly ranks you as the greatest trader who has ever lived. To not have taken one short at all during this whole bull run, then loaded the boat at the exact high! I speak with many of the greats, and am aware of most of what the ones I do not talk to are doing, and none of them have been that good.

I will defer in this blog to you because you are clearly superior to me, and I always check my ego at the door.

Congrats, you have out traded me by a wide margin. BTW, this is not intended to be sarcastic, I am being serious, whoever you are, if you are really that good, we all can learn alot from you.

[Chris Scoreboard Johnston]

Well that is truly amazing and quite frankly ranks you as the greatest trader who has ever lived. To not have taken one short at all during this whole bull run, then loaded the boat at the exact high! I speak with many of the greats, and am aware of most of what the ones I do not talk to are doing, and none of them have been that good.

I will defer in this blog to you because you are clearly superior to me, and I always check my ego at the door.

Congrats, you have out traded me by a wide margin. BTW, this is not intended to be sarcastic, I am being serious, whoever you are, if you are really that good, we all can learn alot from you.

[LA_Renter]

I thought this was good article from Barrons. This little crisis will put BB to the test and allow him to show his true colors. Right now the Fed Funds Futures are putting .25 rate by the end of this year at 100%.

Will Bernanke Bail Out This Credit Meltdown?
“THE TURNING POINT IN LEVERAGED FINANCE HAS BEEN reached,” junk-bond guru Martin Fridson declared four weeks ago in the print version of Up and Down Wall Street (“Dear Lord!” July 2). Any doubters of that prophesy were disabused by Thursday’s rout in the stock market that had the Dow Jones Industrial Average down by more than 400 points at its low.

Since then, the cost of credit has skyrocketed, imperiling the raft of corporate buyouts that have fueled the bull market. And Business Week’s cover story of Feb. 19 — “It’s a Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years” — is looking like a worthy successor to its infamous “Death of Equities” cover of 1979.

The entire spectrum of credit was being repriced, with far greater premiums to compensate for risk that had been cavalierly accepted by lenders and investors just a few short weeks ago. The notorious ABX.HE — the index of credit default swaps on asset-backed securities, the main hedging vehicle for subprime risk — not surprisingly took another tumble amid unrelenting bad news from home builders and in home sales data. And junk bonds had their worst day since the collapse of WorldCom in 2002, according to KDP Investment Advisors.

But the more important indicator has been the widening of spreads on corporate loans, the lifeblood of the deal business, evident in a further deterioration in the LCDX, an index which reflects credit default swaps (derivatives based on the cost of insuring against default on loans.) The LCDX hit another new low in its young life, resulting in the cost of default insurance rising to 325.5 basis points (3.255 percentage points).

That represents a doubling in the risk premium on corporate loans since Fridson made his prescient statement at the end of June, and triple where it started in May. Wall Street firms and banks that made commitments to lend to private-equity firms at the previously narrow spreads may now be holding the bag.

As a result, the cost of insuring Wall Street firms’ credit soared Thursday, Dow Jones Newswires reports. For instance, the cost of insuring $10 million of Bear Stearns debt soared to $105,000 from $83,500, a huge increase in a single day. Indeed, the credit derivatives market is pricing Bear and Lehman Brothers investment-grade debt as junk, the DJ story adds.

That’s set off a chain reaction throughout the markets. “Large banks, choking on LBO bridge debt that they cannot distribute, have likely tapped all their traders and risk takers to lower any and all risk positions and refrain from taking on any more, regardless of level,” writes William Cunningham, head of global fixed-income research for State Street Global Markets.

[LA_Renter]

I thought this was good article from Barrons. This little crisis will put BB to the test and allow him to show his true colors. Right now the Fed Funds Futures are putting .25 rate by the end of this year at 100%.

Will Bernanke Bail Out This Credit Meltdown?
“THE TURNING POINT IN LEVERAGED FINANCE HAS BEEN reached,” junk-bond guru Martin Fridson declared four weeks ago in the print version of Up and Down Wall Street (“Dear Lord!” July 2). Any doubters of that prophesy were disabused by Thursday’s rout in the stock market that had the Dow Jones Industrial Average down by more than 400 points at its low.

Since then, the cost of credit has skyrocketed, imperiling the raft of corporate buyouts that have fueled the bull market. And Business Week’s cover story of Feb. 19 — “It’s a Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years” — is looking like a worthy successor to its infamous “Death of Equities” cover of 1979.

The entire spectrum of credit was being repriced, with far greater premiums to compensate for risk that had been cavalierly accepted by lenders and investors just a few short weeks ago. The notorious ABX.HE — the index of credit default swaps on asset-backed securities, the main hedging vehicle for subprime risk — not surprisingly took another tumble amid unrelenting bad news from home builders and in home sales data. And junk bonds had their worst day since the collapse of WorldCom in 2002, according to KDP Investment Advisors.

But the more important indicator has been the widening of spreads on corporate loans, the lifeblood of the deal business, evident in a further deterioration in the LCDX, an index which reflects credit default swaps (derivatives based on the cost of insuring against default on loans.) The LCDX hit another new low in its young life, resulting in the cost of default insurance rising to 325.5 basis points (3.255 percentage points).

That represents a doubling in the risk premium on corporate loans since Fridson made his prescient statement at the end of June, and triple where it started in May. Wall Street firms and banks that made commitments to lend to private-equity firms at the previously narrow spreads may now be holding the bag.

As a result, the cost of insuring Wall Street firms’ credit soared Thursday, Dow Jones Newswires reports. For instance, the cost of insuring $10 million of Bear Stearns debt soared to $105,000 from $83,500, a huge increase in a single day. Indeed, the credit derivatives market is pricing Bear and Lehman Brothers investment-grade debt as junk, the DJ story adds.

That’s set off a chain reaction throughout the markets. “Large banks, choking on LBO bridge debt that they cannot distribute, have likely tapped all their traders and risk takers to lower any and all risk positions and refrain from taking on any more, regardless of level,” writes William Cunningham, head of global fixed-income research for State Street Global Markets.

[LA_Renter]

(cont)

Job risk is greater than market risk in this environment,” he adds pithily. In which case, discretion is the better part of valor for traders and portfolio managers.

All of which has accelerated the contraction of credit discussed ad infinitum in this space. And the evaporation of this propellant for the market’s moonshot, to lift Cunningham’s turn of phrase, sent the markets crashing around the globe.

“Equity investors should not ignore the message from the fixed-income markets,” Richard Bernstein, Merrill Lynch’s chief investment strategist, wrote in a note to clients before the market’s open. “The rationing of credit means equity investors should discontinue their speculation regarding takeovers and LBOs.”

As they heeded that advice, the market’s slide recalled the minicrash of Oct. 13, 1989, when financing for UAL’s proposed LBO fell through. That event marked the end of the junk-bond-financed takeover boom of the 1980s.

Cunningham of State Street likens Thursday’s rout to the Long Term Capital Management crisis of 1998, when the collapse of that hedge fund caused the capital markets to seize up, even while the economy was in relatively good shape. At the behest of the Federal Reserve, the major banks and brokers arranged a bailout of LTCM. The Fed helped out by cutting its short-term interest rate target, even as growth was humming along.

The LTCM incident helped burnish the legend of the so-called Greenspan Put, the perceived insurance policy provided by the former Fed chairman to the markets when things got rough. After the crash of October 1987, the Maestro flooded the financial system with liquidity. And after the Tech Bubble burst, he did the same, slashing the overnight federal-funds rate all the way to 1% through 2003 into mid-2004, by which time the bull market and recovery were well along.

That’s had two consequences: The cheap money inflated the housing bubble, which is now deflating with noxious effects. And it increases moral hazard — the tendency of market participants to take on risk with impunity with the knowledge that they won’t suffer the consequences if there’s a bust. The expected Fed easing in reaction to any market setback is their Get Out of Jail Free card.

This episode marks Ben Bernanke’s first test as Fed chairman. “Never mind foreign oil, the U.S. economy is addicted to easy credit, and an easing by the Fed in the current situation will only maintain this addiction, but it still may be necessary in the short term,” asserts Cunningham. “The real test would be how quickly it was reversed, which was likely the mistake Greenspan made following LTCM,” he concludes.

Or Bernanke could show he’s no Gentle Ben and apply some tough love to the adolescents in the markets who don’t know any limits.

So we are looking at a spectrum between Volcker and Greenspan. Who and where is BB on this??

[LA_Renter]

(cont)

Job risk is greater than market risk in this environment,” he adds pithily. In which case, discretion is the better part of valor for traders and portfolio managers.

All of which has accelerated the contraction of credit discussed ad infinitum in this space. And the evaporation of this propellant for the market’s moonshot, to lift Cunningham’s turn of phrase, sent the markets crashing around the globe.

“Equity investors should not ignore the message from the fixed-income markets,” Richard Bernstein, Merrill Lynch’s chief investment strategist, wrote in a note to clients before the market’s open. “The rationing of credit means equity investors should discontinue their speculation regarding takeovers and LBOs.”

As they heeded that advice, the market’s slide recalled the minicrash of Oct. 13, 1989, when financing for UAL’s proposed LBO fell through. That event marked the end of the junk-bond-financed takeover boom of the 1980s.

Cunningham of State Street likens Thursday’s rout to the Long Term Capital Management crisis of 1998, when the collapse of that hedge fund caused the capital markets to seize up, even while the economy was in relatively good shape. At the behest of the Federal Reserve, the major banks and brokers arranged a bailout of LTCM. The Fed helped out by cutting its short-term interest rate target, even as growth was humming along.

The LTCM incident helped burnish the legend of the so-called Greenspan Put, the perceived insurance policy provided by the former Fed chairman to the markets when things got rough. After the crash of October 1987, the Maestro flooded the financial system with liquidity. And after the Tech Bubble burst, he did the same, slashing the overnight federal-funds rate all the way to 1% through 2003 into mid-2004, by which time the bull market and recovery were well along.

That’s had two consequences: The cheap money inflated the housing bubble, which is now deflating with noxious effects. And it increases moral hazard — the tendency of market participants to take on risk with impunity with the knowledge that they won’t suffer the consequences if there’s a bust. The expected Fed easing in reaction to any market setback is their Get Out of Jail Free card.

This episode marks Ben Bernanke’s first test as Fed chairman. “Never mind foreign oil, the U.S. economy is addicted to easy credit, and an easing by the Fed in the current situation will only maintain this addiction, but it still may be necessary in the short term,” asserts Cunningham. “The real test would be how quickly it was reversed, which was likely the mistake Greenspan made following LTCM,” he concludes.

Or Bernanke could show he’s no Gentle Ben and apply some tough love to the adolescents in the markets who don’t know any limits.

So we are looking at a spectrum between Volcker and Greenspan. Who and where is BB on this??

[capeman]

Well that is truly amazing and quite frankly ranks you as the greatest trader who has ever lived. To not have taken one short at all during this whole bull run, then loaded the boat at the exact high! I speak with many of the greats, and am aware of most of what the ones I do not talk to are doing, and none of them have been that good.

Don't be confused by how I wrote that post. I had a splendid week by timing the shorts right but earlier in the year I did some losing with bad timing on the HBs and Indices. I finally put my money where my mouth was last week and got some luck to boot. It could have easily gone the other way if Mozillo-monster could have cooked the books and I would have watched my shorts evaporate. Now it's time to take that snowball and roll it down the hill with the upcoming crash.

[capeman]

Well that is truly amazing and quite frankly ranks you as the greatest trader who has ever lived. To not have taken one short at all during this whole bull run, then loaded the boat at the exact high! I speak with many of the greats, and am aware of most of what the ones I do not talk to are doing, and none of them have been that good.

Don't be confused by how I wrote that post. I had a splendid week by timing the shorts right but earlier in the year I did some losing with bad timing on the HBs and Indices. I finally put my money where my mouth was last week and got some luck to boot. It could have easily gone the other way if Mozillo-monster could have cooked the books and I would have watched my shorts evaporate. Now it's time to take that snowball and roll it down the hill with the upcoming crash.

[cashman]

I thought a bear market was defined as being 20 percent off of the highs. We’re only about 5 to 6 percent off as of Friday’s close, aren’t we?

[cashman]

I thought a bear market was defined as being 20 percent off of the highs. We’re only about 5 to 6 percent off as of Friday’s close, aren’t we?

[Chris Scoreboard Johnston]

Good work Capeman, you have a very nice trade going. I did misunderstand your post but I was not being sarcastic in my response. I truly meant that as a compliment. I have been reviewing in great detail what happened this week as I am writing my monthly newsletter right now, and I simply missed my call for a sharp drop by a week and my system did not catch it.

I do suspect the rally is going to resume, but I could have done much better exiting and re-entering so far. The question will be, where does the rally resume from. I would not have re-entered yet on this small of a pullback. If it does go back up from right here, staying put has been correct. If it is from much further below, it has been a mistake. Time will tell. The fundamentals look very good and the chart looks very bad.

[Author]

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