Posted by Adrian on September 29, 2008
The stripped down version I thought was going to get passed through, that essentially which ever way you look at it, was a waste of tax payers money. It would have done nothing for the US economy, except solidify certain banks positions in the market.
I suspect the Fed will now cut rates and become majority share holder of certain ailing banks (choosing who will live and who will die) – as it has been doing. But I doubt the buying of toxic assets from banks and throwing them multi handed, infinite lifelines is ever going to see the light of day.
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Posted by Adrian on September 25, 2008
The 700 billion (an underestimated amount for press release) bail out of the banks and Wall Street was not only a rushed and poorly thought out ‘plan’ to deal with a liquidity/bank crisis, the fact is the ‘crisis’ will remain even if this plan is passed through congress.
This plan, despite congress and various republican and democrats attempting to make amendments to the extraordinary one dimensional plan. That in all retrospective, even on paper says nothing of bailing out the US consumer. This is a bank bailout nothing more.
What is occurring in the markets, is a attempt at controlling market events. Many commentators have referred to this as a socialization of the US financial system on a large scale. Which is true, as mentioned in The Treasury and the Federal Reserve will bail out the WHOLE American banking system. (Updated 2) – All distressed debt on the table, cracks now appearing in the ‘plan’ USD sell off, commodities rev up, the Federal reserve will be keeping alive banking ‘corpses’ and the pays of upper echelon management. It is a slap in th face to the free market ideals, the over regulation that is creeping in to protect US capital markets, hence the ban on Hedge Funds short selling stocks. The craziness here is the ban of short selling reverberating around the world. As stocks/companies that the market feels are losing value and should be purged on the market place; now are thrown a life line. Of course the stocks and companies that are getting thrown this life line are the banks. Such hypocrisy in the market place.
There are problems of implicating too much intervention into free markets dynamics (seen with recent volatility), the question is how far will intervention go?
The excuse that Ben Bernanke and Henry Paulson have made in regards to the bail out proposal, that it will free up liquidity between the banks, hence they will function again, lend money and so on. I think this is bad assessment; liquidity will still remain thin, pricing is going to be a huge problem for ‘junk’ assets. The ‘bail out’ will have to cover extensively credit card debt. We have to then trust banking/business models to work, but human nature and risk will finally kick in; the banks will be stingy in their lending, even between other banks. Yes, they will have a lifeline thrown to them by the Federal Reserve, but to assume that a bailout’ will spur economic activity is a bet with odds staked way against it, a bet placed on behalf of the US taxpayer by a wealthy ex banker.
Wall Street should take the pain, but they won’t. This bill will be passed very soon.
The markets will react how they did when the Treasury and The Federal Reserve a week back, revealed the bail out plan. Large spikes in all the global indices, slight rise in the USD then a sell off. Markets to watch will be commodities, gold, oil etc.
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Posted by Adrian on September 23, 2008
As I discussed in the post Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing? (dated August the 13th). Analysis was made arguing that the oil price is showing price instability as it fell heavily from September the 1st 2008 closing at 111 to its low price of 90 on the 16th September 2008. The spike occurred on the 22nd September 2008 when trading began – touching 130. The large spike is a mixture of various reasons, traders covering short positions, the USD losing value, inflation and the possible bail out of the whole US banking system – which will effect the USD, contributing to the massive US account deficit and fanning inflation.
Although I wouldn’t call this a ‘mother of all price shocks’, I would say that the indication of a larger spike is on the cards. As long as you have over regulation in the markets, particularly the hysteria of banning short selling. If this spike was a squeeze on covering short positions, the other main reasons would be the USD falling and the market shifting funds out of stocks back into commodities. Again this is indicating dreadful interference by the Federal Reserve and Treasury – which are both responsible for causing wild swings in the market.
Regardless the commodity markets are now locking in long positions.
From a technical perspective in regards to CCI refer to WTI crude chart below, (please click for larger image)
Note the price irregularity on the CCI (2), as it bounced off the -50.00 – very thin trading and unstable. Hence the straight breakout. Formula for the CC1 (2) as follows: 91 (3mths) / 32 x 12 / 7days = 4.87. This gave a nice tight range for overbought and underbought signals; and clearly indicates a restrained under bought signal.
Posted in Finance and Economics. Strategy and Society | Tagged: bailout, inflation, oil spike, stagflation | Leave a Comment »
Posted by Adrian on September 22, 2008
As the Treasury and Federal Reserve bail out proposal of the whole US (and possibly even global) banking sector gets approval via congress. It has to be kept in mind that the approval for such a broad institutionalization, or protection of banks and the finance sector, is no way a broader effort to bail out the indebted/poor American citizen. Who, as it has been discussed will be footing the bill of such bizarre and in someways desperate measure to stop the rich from going into recession.
The dangers are immense in this ‘bail out’ scheme, obvious at this point with a Trillion plus money pledge to buy banks distressed assets, it’s effect on inflation and devaluation of the US dollar. Traders will be now trying to bet at which way the US economy will go, whether a deflation recession, or stagflation recession. With the new bank bail out proposal it appears to be a stagflation ‘severe’ recession looming; just as the commodity markets were adjusting to a US slowdown, the USD strengthening. Then Federal Reserve (under Ben Benanke) and US Treasury (under Henry Paulson) whack this badly thought out plan of propping up badly run banks and their losses. The commodity markets, being relatively good safe havens to inflation, may start to rally again.
The market will of course tear this plan apart with due skepticism, more notably the problems with asset valuation and the buying of distressed debt at discount from banks. In other words, to what extend should the bailout cover the toxic assets of bank, which in some cases could equal the value of the bank itself, say 100% (remember AIG insurance was 80% junk). Which would essentially qualify as a complete takeover from the US government. Otherwise the bank with it’s ‘junk’ bought at a discount, may find it hard to function – after selling it’s distressed assets at a cheap rate to the US government. Hence they might as well close up shop anyway.
With broader consumer markets in recession, it has to asked how a bank which has had it’s toxic waste disposed of return to profit? Or, do they scale down, horde cash and sit it out – likely scenario. If this is the case banking stocks will still come under pressure with no real recovery occurring (in the bank sector).
The Foreign Exchange markets may be good indication of the soon to be worries of the USD under a lot of pressure.
Politicians who should be looking after the interest of the electorate have now helped distinguished the two separate economies in markets, the banks, Wall Street and main street. This plan will essentially shut off main street from the finance markets; insulting the banking world from further losses (but as discussed this plan may still not stop the banks running at a loss – even if they do disengage from the broader economy and it’s ills. The banks may just become corpses kept alive with government money).
Of course main street will go further into recession. A dreadful distortion of free markets, as the powers at be are now reshaping and protecting the gamblers who caused their own markets to meltdown.
Posted in Finance and Economics. Strategy and Society | Tagged: banking bailout, commodities, gold, recession, USD sell off | 1 Comment »
Posted by Adrian on September 21, 2008
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Posted by Adrian on September 19, 2008
Although we will see some rallies in distressed banking stocks as the SEC will crack down on short sellers, which again is a stupid idea. All to prop up the illusion of bull markets, which have finished.
All these ideas, or lack of grasping the reality of the free markets will do nothing, except (I know this has been said a lot) bail out the bankers and the banks, or create a socialist (for the rich) based buy up of American financial institutions- that’s it.
After the market euphoria of such a crazy idea dies down, the staggering costs to take on US banks toxic assets will come into play. The taxpayer may already be (market estimation) looking at a 500+ billion tax bill (from all the bank ‘junk’); not including a further depreciating of mortgage/debt related assets and the horrendous costs of bailing out (buying) AIG and Fannie Mae and Freddie Mac.
The 1 Trillion cost could be the estimated range of a tax payer bailout of the US banking industry.
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Posted by Adrian on September 17, 2008
It has to be acknowledged that the last two days have been incredible, starting with the bankruptcy’s of Lehman brothers on the 15th September 2008, Merrill Lynch (separate investment bank Morgan Stanley could also be looking for a buyer) being bought by the Bank of America and the American Insurance Group is in a major default problem; in other words the US government (if they decide on conservativeship) is going to end up being the biggest insurance company in the world.
This is of course the beginning of ‘the’ biggest global financial meltdown since the Great Depression, Bear Stearn’s bailout and rescue was a precursor. Now the banking sector is in dire trouble, a liquidity squeeze will replace the credit crisis; and we will now see a liquidity ‘crisis’ envelope the finance world. The liquidity ‘crisis’ showed it’s self briefly in late 2007, then the Federal Reserve pumped so much money into the system, cuts rates to the current 2%; and took on huge amounts of debt – we saw some reprieve. Although a ‘reprieve’ as most commentators, economists, investors/traders, analysts jeez anyone with a gut instinct knew would only delay a major meltdown. Now we are facing that major financial meltdown globally.
Wall street is essentially going into a deep recession, whether the Federal Reserve is willing to cut rates (they didn’t last meeting 16th September 2008 ) they may eventually. Will this help? No, what is now unfolding in the markets, nothing on this planet can stop it. Fear, uncertainty and a slew of psychological factors will take place. No one likes to lose money, and the big players have asset pools that are shrinking rapidly. Unable to capitalize, or borrow to prop up capital bases, their ratio’s and spreads from equity to liability look predictably dire. If the banks go, so do the over leveraged businesses, medium and small. There is, I suspect a frantic restructure of business models, which in includes selling business units (or trying to), sacking staff, shrinking business down and reigning in debt.
Same with Europe especially the German banking sector which has connected closely to wall Street, refer to German Bank troubles, Credit crunch still on. Profit losses and writedowns in coming quarters. China could be a lurking problem, depending on Chinese desire to sell treasuries and US dollars; which I suspect is one of the main reasons the Federal Reserve decided to keep rates unchanged refer to (on speculation of a rate cut) Market meltdown on the cards when US markets open 15/09/2008. Asia on holiday, major indicies sell off feared . If Treasuries tank and the USD starts to melt refer to (with real time graph – Treasury Notes) Freddie Mac and Fannie Mae – US government takeover, there will be a capital flight out of America unprecedented in history. I think if the Fed does bail out AIG, we are going to see massive pressure on the Fed books; this could ultimately cause a major sell off of US treasuries and continue to weigh on the US dollar.
American economy is in such a precarious and risky state, we are witnessing history unfold.
Posted in Finance and Economics. Strategy and Society | Tagged: AIG, economic depression, lehman, meltdown, Wall Street | Leave a Comment »
Posted by Adrian on September 15, 2008
Lehman Brothers will most probably not exist in 17hrs from this blog entry; already major stock markets are advising brokers to not touch Lehman Brothers. Not to forget American Insurance group, which is in so much trouble, it is unlikely they will come through the next 20+ hrs as a functioning insurance company.
Of course, this will send all the indicies globally into a major tailspin. So it will be bloody day when America wakes up and Asia comes off holiday.
But, a rumour has come through that the Federal Reserve will cut rates in an emergency meeting on Monday (15th September 2008) morning EST. A .25% cut off the extraordinary low 2.00%, which will make it 1.75%. Will they do it? The US futures seem to think so (300+ point loss); the FX market says so, the EUR against the USD has shot up to 1.44.
I think back to a blog post I wrote in June 2008 called A US dollar currency crisis just a stone throw away, this post was written prior to the ‘appetite for risk’ that had occurred in the FX markets for the last month of so, with high yield currencies being sold off and the USD gaining strength. It now appears that the USD may be under major selling if the Federal Reserve do decide to cut rates to fend off a major market meltdown.
“In my opinion, if the US enters a stagflation depression (severe recession with rising costs), The Fed may cut further from their 2% (Ben Bernanke has indicated through speeches and thesis on the 1920′ 30′ Great Depression that a lack of liquidity was the reason the depression was as severe as it was) . This could essentially send the US dollar into a currency crisis as the world will shift the peg from the USD to the EUR, or a basket of currencies.”
Posted in Finance and Economics. Strategy and Society | Tagged: FX, Lehman brothers, sell off, USD | 2 Comments »
Posted by Adrian on September 15, 2008
There is talk about systemic crisis in the whole banking system, if Lehman is allowed to fail or go bankrupt. Who cares. The banking system has been a dysfunctional mess since the Federal Reserve propped up Bear Stearns, bought Fannie Mae and Freddie Mac and has loaned out billions to every bank you can think of (in the States) to keep them alive. Hence creating a delayed (and contributing to) mega implosion of the banking system. With the US taxpayer sadly getting the bill, as the Fed’s balance sheet turns to nothing. Terrible situation.
So, the banking system is problematic, has been for a long time. Will Lehman’s filing for bankruptcy cause major turmoil in the markets? Particularly banking stocks? The answer, most probably. But with a false confidence that the Federal Reserve was going to bail out every second bank that was going to go bust. This has unfortunately shoved some delusional optimism into the markets that somehow the market will gradually unwind out of the credit mess. This as we know is fallacy.
Posted in Finance and Economics. Strategy and Society | Tagged: bankrupt, lehman | Leave a Comment »