NewstraderFX

EUR/USD Below The Trend Line

2009-06-18T08:18:00.002-04:00

I'm holding a short EUR/USD trade to the 38.6 retracement of the last up trend. A stop would be on a close above the trend line.

Daily Trend Line on GBP/USD

2009-06-18T07:51:00.002-04:00

I'm going to be keeping an eye on this trend line-a break and close below it signals further weakness for the pound.

The Crisis and How to Deal with It

2009-05-25T21:57:00.003-04:00

Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros and Robin Wells offer their insights on the economic crisis. What I took from this are 2 things:

1. The "medicine" administered by governments and central banks, while necessary, is likely to make us very sick.

2. Nouriel Roubini seems to be the only one offering a clearer solution (nationalization of insolvent banks) but one which is not likely to be implemented.

S&P: Corner Turned To The Downside

2009-05-24T13:33:00.004-04:00

The S&P 500 looks as if it has already turned the corner to the downside. The red trend line, which follows the March 6 rally, acted as support on 5 separate days before finally being breached on May 13. Five days later, it acted as resistance and on that day, price formed an bearish inverted hammer (pin bar). Conformation of the downside move will be seen as the index declines and closes below 875, which is just below recent support.

The big question now is how falling equity markets will affect Treasuries and the dollar. Under normal circumstances, the dollar trends higher against the better-yielding currencies while bond prices gain, but if there truly is a crisis of confidence in the credit rating of the U.S. we could see the opposite occur.

Essential Reads

2009-05-21T20:08:00.003-04:00

China Grows More Picky About Debt by Keith Bradsher

"New data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt."

Green Shoots or Yellow Weeds? by Nouriel Roubini

"Medium term risks and vulnerabilities imply a mediocre, sub-par, weak and well below potential growth recovery in 2010-2011," as the "lack of true deleveraging – or appropriate debt restructuring – will lead to a corrosive debt deflation and limit the ability of households to spend, of firms to invest and of banks and other financial institutions to lend."

A Feast For Thought

2009-05-18T19:27:00.000-04:00

If financial crises were distributed along a bell curve — like traffic accidents or people’s heights — really big ones wouldn’t happen very often. When the hedge fund Long-Term Capital Management lost 44 percent of its value in August 1998, its managers were flabbergasted. According to their value-at-risk models, a loss of this magnitude in a single month was so unlikely that it ought never to have happened in the entire life of the universe. Just over a decade later, many more of us now know what it’s like to lose 44 percent of our money. Even after the recent stock-market rally, that’s about how much the Standard & Poor’s 500 index is down compared with October 2007.

Financial crises will happen. In the 1340s, a sovereign-debt crisis wiped out the leading Florentine banks of Bardi, Peruzzi and Acciaiuoli. Between December 1719 and December 1720, the price of shares in John Law’s Mississippi Company fell 90 percent. Such crashes can also happen to real estate: in Japan, property prices fell by more than 60 percent during the ’90s.

For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. As a result, 9 times out of 10 we overreact. The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

All of these were sins of commission, not omission, by Washington, and some at least were not unrelated to the very considerable political contributions and lobbying expenditures of the financial sector. Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Niall Ferguson is a professor at Harvard University and the Harvard Business School and the author most recently of “The Ascent of Money: A Financial History of the World.”

USD/JPY Breaks To The Downside

2009-05-10T14:00:00.007-04:00

One of my favorite charts formations is the wedge, or triangle.

The yen has not been able to decline against the dollar since the start of the Mar 06 stock rally although it's fallen dramatically against the euro, pound and Australian dollar in that time. The year to date picture is somewhat similar; the yen has managed to decline by about 5.5% to the greenback as the S&P recovered to just below the break-even point. And while the yen made a similar move against the euro, it's fallen about 13% against the aussie and 9.2% against the pound.

What this means is that overall, the trend for the yen to weaken as the S&P improves is intact. Stocks should continue to improve as long as the data supports the move, although the inevitable profit taking moves will no doubt occur. For now, things look quite expensive which is why I closed my long positions.

With price closing below the triangle on Friday, it's worth it to stay short here as UJ perhaps tests the support in the mid to upper 95's.

The Post Stress Test World

2009-05-09T10:42:00.007-04:00

Banks Can Offset Capital Raising Requirements With Q2 and Q3 Profits

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’

Merger Time For Regional Banks?

Weaker regional banks (SunTrust, Regions Financial, KeyCorp and Fifth Third) could become takeover targets of banks identified by the stress tests as being stronger (U.S. Bancorp and BB&T and PNC Financial).

Egan-Jones Says Morgan Stanley May Need $40B After Stress Tests Say $1.8B

In a note to its clients Friday afternoon, the credit rating agency said that Morgan Stanley needs far more than what the government's stress tests showed. If true, it means MS needs to raise 130% of its current market capitalization.

Euro Daily Trend Line

2009-05-03T20:58:00.006-04:00

It's worth staying long here as long as the euro remains above the daily trend line. No promises that it will, but with risk appetite running stronger and the Fed noting some "green shoots" in its statement, it's certainly a trade.

With U.S. pending home sales up 1.1% YoY, there's a reason for risk appetite to keep improving which will help this trade. Also helping will be Chinese manufacturing, which poked its head into expansion according to last night's report. The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 50.1 in April from 44.8 in March

Buffett Trapped?

2009-05-03T11:51:00.003-04:00

Berkshire Chairman Warren Buffett seemed to go out of his way to dismiss the importance of the stress tests, saying Wells Fargo (WFC) and US Bancorp (USB) will prosper no matter what the results show.

“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said yesterday.

It looks as if Mr. Buffett is aware that the stress tests will show both firms need additional capital and is therefore seeking to protect the short-term share value of his holdings, figuring that the stocks will take a hit on the news. WFC is Berkshire’s second-largest holding and the company also has a large stake in USB. Both banks have relatively large exposure in percentage terms of total loans (15.9% and 18.2% respectively) to the rocky commercial real estate market.

Longer term we agree WFC and USB will prosper. So if it does turn out that the shares take an immediate hit on the stress test results, it would represent a chance to get into both firms at a better price.

My View-Markets Set To Go Bear

2007-11-10T12:58:00.000-05:00

Calling turns in the markets is a notoriously difficult thing to do, but I believe the corner has been turned here and that the bear trend will continue. The sub prime prime related banking write downs are projected to get worse, as is housing in general. Tech had been a bright spot, but the NASDAQ has sold off more then the DOW and S&P indexes due to expected reductions in business expenditures (CapEx) for technologies. Cisco is leading the way here as it frequently does.

You can throw out Q3 GDP. Many economists have noted that real GDP was elevated due to a decades-low inflation reading on the deflator. That reading only came about because higher import prices subtracted from inflation because gasoline fell. Import prices rose over 10% in October according to Friday's Trade balance report while gasoline gained nearly 20 cents/gallon this week. And the NFP is not being taken seriously by some because over 100,000 of the reported 133,000 new jobs came from the birth/death model the BLS uses in October. What worse, is that jobs in the model were derived (meaning estimated, not counted) from the hard-hit banking and construction sectors!

Markets are already jittery about the U.S. consumer. Weekly retail sales looked bad with Wal-mart reporting same store sales up a platry 0.4% (and that was after price reductions). On Tuesday, Capital One boosted its forecast for 2008 credit losses to between $4.9 billion and the mid-$5 billion range after it had projected $4.9 billion of losses on Oct. 18. Tuesday will bring further consumer information. Pending Home Sales will be released at 10.00 EST while Home Depot and industry bell weather Wal-Mart report earnings before Wall Street opens. October retail sales will be reported on Wednesday.

The only possible area of support equity markets may find will be the potential of a fed rate cut. The financial press is reporting a high degree of certainty of fed easing at the December 11th meeting and as of Friday, the Cleveland Fed is reporting the implied probability of holding at that time to be just under 30%. That means 70% of the market sees the fed moving with just under 50% looking for another 25 basis point reduction to 4.25. The market actually sees a higher probability of the fed moving to 3.75 (about 20%) then to 4.00 (about 2%)!

My view is that the fed will not be able (and will not want) to move at the next meeting IF equity markets, oil and the dollar remain at current levels, but I also believe equities have a strong potential to fall and the dollar has a strong potential to rise vs. the high yielders before then. And if the dollar gains, oil will fall.

Still, with the banking crisis projected to worsen the fed is going to be cutting in 2008, but an interesting trend has emerged: After making new post-September 18 highs, the DOW and S&P are now below where they were before that 50 basis point ease and the pace of selling has increased since the October meeting.

When I hear Trichet label recent currency moves "brutal" and Bernanke mention the inflationary pressures related to the weak dollar in Congressional testimony, I have to see the potential for dollar strength. (While it's true the ECB is hawkish, what's the real potential for tightening in the middle of a banking crisis)? And when banks are writing down $billions of losses (with the projections being for the situation to worsen), reductions in CapEx and consumer spending (to say nothing of a continuing housing recession), I have to see the potential for a bear trend in equities and carry trades to continue.

That aligns two major forces with the dollar; Central Bankers and the unwinding carry trades that will accompany an equity sell-off. (Be aware "with the dollar" means vs. the high yielders; the dollar will depreciate vs. the Yen in this scenario).

Also be aware that I am the only person saying the dollar has the potential to gain vs. the high yielders over the next few weeks. It's already happening against the AUD and NZD and I expect to see the same thing happen vs. the Pound and Euro, although I am not ready to short those yet. The dollar gained on the AUD for the week and there's a weekly pinbar on the NZD/USD chart. The Pound only managed 13 pips vs the dollar this week, but the Euro still looks strong.

Currency Analysis From Paul Chertkow of The Bank of Tokyo

2007-09-24T08:28:00.000-04:00

Paul Chertkow talks about the Dollar, Euro and Pound

EUR/USD-Where To Now?

2007-09-22T08:21:00.000-04:00

With EUR/USD in unchattered territory the question now is where might it go. I'll tell you what I am looking at but let me mention a few things first. We have all seen news "bullets" regarding "option barriers", "commitments of traders" and information being "priced into the market". While such things are good to know, I remain sceptical of using them for trading purposes for several reasons. First off, barriers and resistance to new levels are always there. I'm sure you can remember when 1.3 on E/U was a major barrier. Every significant step along the way to 1.4 has met with option barriers and resistance.

If you are into sports i'm sure you have heard this phrase regarding sports records: "Records are there to be broken". I like to apply that to support and resistance levels by saying "support and resistance are there to be broken". The trick is to have a good sense of when the "record" is likely to be broken and the likelihood of that happening is when important "new" information comes into the market.

Here are some things we will be looking at:

Sept. 22 (Bloomberg) -- European government bonds fell the most in almost two years this past week after the Federal Reserve's interest-rate cut rekindled speculation global inflation will quicken.

The spread between German two- and 10-year debt yields widened to the most in a month yesterday as traders wagered the Fed's rate cut will encourage consumer spending and push prices higher. European Central Bank officials this week said they're still worried about inflation in the euro region.

"There's a high risk of inflation expectations continuing to rise,'' said Peter Mueller, a fixed-income strategist at Commerzbank AG in Frankfurt. "So the tendency toward lower bond prices and steeper curves should continue.''

The yield on the benchmark 10-year German bund, the security most sensitive to inflation expectations, gained 19 basis points this past week to 4.36 percent by 4:23 p.m. in London yesterday. That's the most since the week of Oct. 28, 2005.

Full Article: http://www.bloomberg.com/apps/news?pid=20601087&sid=aYuFKS3rBZpk&refer=home

Mueller's opinion is not what i'm really interested in. What is of interest is that this article is telling me what to look for as a gauge of whether market participants believe Eurozone inflation will continue or not: 10 y German bond yeilds and the 2y to 10y spread (currently 30 basis points). If the 10 y yeild rises and the spread widens, participants still believe inflation is a threat and that the ECB will raise rates sometime in the future. EUR/USD is likely to keep going up in that case. The info is updated on Bloomberg:

http://www.bloomberg.com/markets/rates/germany.html

The article further states: Royal Bank of Scotland Group Plc economists said they now expect the ECB to cut interest rates next year to 3.5 percent after growth in the region's manufacturing and service industries slowed this month. RBS previously anticipated the central bank would keep its benchmark on hold.

Knowing what RBS thinks is good, however, I believe the deciding factor will be seen in LIBOR. LIBOR is saying that the ECB is still likely to be rasing rates sometime after 3 months. Three month and longer Euro LIBOR has remained elevated while Sterling and Dollar LIBOR's have dropped. You should also know that the fed has never dropped rates only once.

If Euro LIBOR remains elevated or goes higher, 10 y German bond yeild will continue to rise and the 2 y to 10 y spread will widen. EUR/USD will continue to rise if that occurs no matter where resistance or option barriers are. Step one is to get the Monday LIBOR fixing (BB gets it around 7.30 AM NY time-type LIBOR into the search window) and compare that to Friday's fixing.

Fears of Dollar Collapse as Saudis Take Fright

2007-09-20T10:35:00.000-04:00

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 8:39am BST 20/09/2007

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

Ben Bernanke has placed the dollar in a dangerous situation, say analysts
"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.

Greenspan Says Recession Odds More Than Third Even With Fed Cut

2007-09-20T10:31:00.000-04:00

By Steve Matthews and Albert R. Hunt
Sept. 20 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the odds of a recession remain ``somewhat more'' than one in three even after this week's reduction in interest rates, with home prices likely to drop further and hurt consumer spending.

"Remember, we still have a problem out there, which is a large overhang of unsold newly constructed homes,'' Greenspan said in an interview today following the publication of his book, "The Age of Turbulence.'' Home prices ``are down only about 3 percent but they are clearly moving lower.''

The Federal Reserve on Sept. 18 lowered its benchmark interest rate by half a percentage point, saying tougher credit standards had the potential to hurt economic growth. Economists said this week's action was similar to Greenspan's approach in taking preemptive measures to reduce the risks of recession.

"We would expect to find some erosion in consumer expenditures, but we haven't seen it yet,'' Greenspan said.

Greenspan said in an earlier interview on the 60 Minutes program that he had more flexibility to lower rates as chairman than his successor Ben S. Bernanke does, because inflationary pressures today are a greater threat.

Trading The Psychological Perspectives

2007-09-15T10:40:00.000-04:00

by NewstraderFX
Friday's review:

The retail sales and consumer sentiment numbers did not provide a psychological consensus of thinking in the market because what they said was open to interpetation depending on how an observer looked at them. Retail sales including auto's showed a gain while ex-autos showed a decline. Using the number the BEA uses for calculating GDP (ex-autos, gas and building materials) a small gain was indicated. Consumer sentiment remained near yearly lows, but the actual number was a few 10th's higher then expected. What's the conclusion here? Sales and sentiment remain low, but are not providing evidence that the consumer is taking a big sub-prime related hit. That means the glass is either half empty or half full depending on how one looks at it. We want to trade when everyone agrees the glass is either empty or full. You can rest assured that if the consumer number would have been close to 80- no one could have said the consumer looked anything other then bad and the glass would have looked empty. Fear would've existed. That would've been our trade.

What they do show is an exact mirror of the market as a whole. There have been some very serious problems in both the mortgage and commercial credit markets. Central banks have had to provide $500B of emergency liquidity. The ABCP market was completly siezed up a few weeks ago. Numerous hedge funds have keeled over. Recession talk is in the air. The markets have taken a hit but if you really look at where they are, they've actually held up very well in spite of the challenges. The DOW, with all the problems present, is only off about 4% from 14,000 and are still positive for the year. Markets have taken a "lickin", but so far seem to still be "tickin".

I think that some valuable trading info was gained for future reference on Friday. Merryl announced that is was marking its CDO paper to market and that 3rd quarter profits would be taking a hit. Sounds ominous, but let's dig a little deeper.

Are you surprised to hear that an investment bank is going to suffer a sub prime related loss? I'm certainly not and I don't think that anyone else is either. In my experience, when a big investment bank talks the street hears what they say but if what they say offers no surprise, then nothing happens. As we often say as traders, the information is already "priced in". I think that the probability is strong that further announcements along these lines are also priced in and likely will not have an effect on the equity markets. What is not priced in at this time in my opinion is hard evidence that the consumer is going to take a big hit.

The reason i'm saying this is because if the U.S. consumer stops spending, recession will inevitably occur. Since equity markets remain in positive territory for the year, I don't believe we can say that a recesssion is priced in. Therefore the potential for big hits to the equity markets, should they occur, are likely to come from consumer data (jobs, wages, spending and sentiment).

As i've said many times, the market exists in 3 states: greed, fear and confusion. Trade the first two and take the day off when the third exists.

Commercial Paper Slump Eases; Asset-Backed Drop Slows

2007-09-13T11:55:00.000-04:00

By Mark Pittman
Sept. 13 (Bloomberg) -- The decline in the U.S. commercial paper market slowed last week, as concerns eased that borrowers would be unable to repay their short-term debt.

The $8.2 billion reduction, down from $31.3 billion a week earlier, signals the credit squeeze sparked by defaults on subprime mortgages may be easing. The freeze shut out borrowers including lenders Countrywide Financial Corp. and Thornburg Mortgage Inc. and GMAC LLC. Issuers with the biggest chance of default had stopped trying to sell debt, said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.

"Investors have already pushed out the weakest issuers,'' said Crescenzi, who is based in New York. ``The commercial paper that remains is a relatively more respected crop.''

Short-term debt maturing in 270 days or less fell to a seasonally adjusted $1.92 trillion in the period ended yesterday, including a $21.6 billion decline in asset-backed commercial paper, according to data released today by the Federal Reserve in Washington. Commercial paper outstanding has fallen $306.4 billion in five weeks.

The slump is the longest since at least July and August 2003, when the amount of debt decreased by 1.5 percent over four weeks. Asset-backed paper, which dropped 2.2 percent in the past week to $945.1 billion, declined $237.8 billion, or 21 percent, in the past five weeks.

Countrywide Shares Gain as $12 Billion Borrowing Limit Arranged

2007-09-13T11:53:00.000-04:00

By Elizabeth Hester
Sept. 13 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage company, rose as much as 10 percent on the New York Stock Exchange after the company said it has $12 billion in borrowing capacity through new and existing credit lines.

The stock, which has lost more than half its value this year, climbed $1.35 to $17.97 at 10:04 a.m. after reaching $18.31 earlier today.

Countrywide, based in Calabasas, California, last month borrowed $11.5 billion from bank credit lines and accelerated a plan to fund mortgages through its thrift unit. The company "recently arranged for $12 billion in additional secured borrowing capacity through new or existing credit facilities,'' Countrywide said today in a statement.

Those steps "should substantially address funding concerns,'' a team of Credit Suisse Group analysts led by Moshe Orenbuch wrote in a research note today. They rate the stock "outperform.''

Countrywide said last week it would eliminate as many as 12,000 employees, or 20 percent of its workforce. Lending last month totaled $34 billion and applications fell 12 percent from August 2006, the company said in the statement. About $52 billion of applications were being processed as of Aug. 31, a 19 percent drop.

Global Economic Prospects `Less Buoyant,' OECD Says

2007-09-05T05:52:00.000-04:00

By Sandrine Rastello

Sept. 5 (Bloomberg) -- The Organization for Economic Cooperation and Development prospects said the financial market turmoil that followed the collapse of the U.S. subprime mortgage market has curbed prospects for global economic growth.

"Downside risks have become more ominous,'' Jean-Philippe Cotis, the OECD's chief economist, told reporters today in Paris.

The organization cut forecasts for growth in the U.S. and the 13-nation euro region this year and said "there may be a case'' for an interest rate cut by the U.S. Federal Reserve. Cotis said a rate increase by the European Central Bank may be ``warranted'' after financial markets "steady.''

The assessments by the OECD were the first since the mortgage rout triggered concern spending and investment will falter and crimp the global expansion. European economic growth has already showed signs of peaking. Consumer and business confidence dropped more than economists' forecast in August, while manufacturing and service-industry growth slowed.
The OECD cut its 2007 growth forecast for the U.S. to 1.9 percent from a 2.1 percent estimate made in May. The expansion pace in the euro region will slip to 2.6 percent from 2.7 percent, with the forecast for France slashed to 1.8 percent from 2.2 percent. It held its forecast for Japan at 2.4 percent.

The European Central Bank and other central banks injected more than $350 billion of extra funds into money markets to smooth lending between banks after the overnight lending rate in Europe shot up to 4.62 percent. The U.S. Federal Reserve on Aug. 17 unexpectedly cut its discount rate, at which it makes direct loans to banks, by 0.5 percentage point to 5.75 percent.
The Paris-based OECD, founded in 1961 from the organization formed to administer Marshall Plan aid after World War II, monitors the world's most developed economies and seeks to coordinate domestic and international policies.

Commercial Real Estate in U.S. Poised for 15 Percent Price Drop

2007-09-05T05:49:00.000-04:00

By Hui-yong Yu and David M. Levitt
Sept. 5 (Bloomberg) -- U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales.

"People aren't willing to do deals right now,'' said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., which has arranged financing for real estate purchases including the Lipstick Building in midtown Manhattan. "The expectation is that prices will come down.''

Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show. Archstone-Smith Trust in August postponed its $13.5 billion sale to a group led by Tishman Speyer Properties LP until October. Mission West Properties Inc., the owner of commercial buildings in Silicon Valley, said on Aug. 13 that the company's $1.8 billion sale may fail after a bank withdrew funding.

"There are so many deals falling apart,'' said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. "People who can get out are getting out.''

Sense of Growing Crisis Over Interbank Deals

2007-09-05T04:10:00.000-04:00

By Gillian Tett
As bankers have returned to their desks this week after the summer break, they have been searching frantically for signs that the markets are gaining a semblance of calm after the August turmoil.

However, the money markets are notably failing to offer any reassurance. While the tone of equity markets has calmed, the sense of crisis in the interbank markets actually appears to be growing – especially in London.

In particular, the cost of borrowing funds in the three-month money markets – as illustrated by measures such as sterling Libor or Euribor – is continuing to rise, suggesting a frantic scramble for liquidity among financial groups.

This trend is deeply unnerving for policymakers and investors alike, not least because it is occurring even though the European Central Bank and the US Federal Reserve have taken repeated steps in recent weeks to calm down the money markets.

“What is happening right now suggests that the moves by the Fed and ECB just haven’t worked as we hoped,” admits one senior international policymaker.

Banks to Test Debt Market This Week

2007-09-03T23:54:00.000-04:00

By MICHAEL J. de la MERCED and ERIC DASH
This week will offer the first big test of the credit market as seven banks try to entice investors to buy $24 billion in loans and bonds to pay for the sale of the First Data Corporation, the credit card payments processor, to the private equity firm Kohlberg Kravis Roberts.

All summer, bankers have sweated on Wall Street. Instead of spending time at the golf course or at their summer houses, many found themselves in the office trying to make sense of the credit market shutdown that had left their companies responsible for the billions of dollars used to finance leveraged buyouts, yet facing uncertain prospects of getting investors to take some of the debt off their hands.

But the deal for First Data is expected to provide the first true litmus test for the credit markets.

Unlike with Home Depot, First Data is not suffering from a slump in its industry, one that would set in motion what is called a material adverse change clause — allowing the deal to be broken without penalty. And the five banks backing the buyout have no escapes from their financing agreements, leaving them on the hook if they cannot sell the company’s leveraged loans and bonds.

Analysts see the First Data offering as one of the most aggressively structured. Part of the offering is expected to include so-called covenant-lite loans, which place few restrictions on how much debt the company can assume, and pay-in-kind toggles, or bonds that can be repaid by issuing more notes. Since the middle of the summer, investors have rejected both as unacceptable, forcing banks to restructure offerings or withdraw them and wait for improved marketing conditions.

Still, if investors warm to the First Data sale, other deals may find welcome receptions. “If a big deal can get done, that in and of itself becomes a catalyst for positive momentum,” Justin B. Monteith, an analyst at KDP Investment Advisors, said.

Post Jackson Hole State Of The Markets

2007-09-02T12:35:00.000-04:00

Forming opinions regarding the markets we are trading is something that I encourage, if those opinions are backed by a careful review of the facts. However, because at this particular time markets are so volitile and so sensitive to new information, trading our own opinion is far too difficult. It is essential at this time to have an accurate gauge of market opinion and trade along with it.

From where I sit, there is a deep divide among market participants and top level economists regarding the future direction of the U.S. economy. While I happen to have an extremely high opinion of the job that the fed has done, there are some that have come to a very different conclusion. Bernanke is guiding the federal reserve thru the first crisis of his tenure and there by no means is a definate indication that his course of action will prove to successful.

I'll leave it to you to read this article: http://bloomberg.com/apps/news?pid=20601087&sid=agrcjp4O4M6Y&refer=home but I want to make a point about it here:

Martin Feldman is a top economics professor at one of the world's leading schools. Many important Wall Street executives likely were his students at one time. He is also the head of one of the most important and respected economic think tanks. There's no question that market participants are taking what he says very seriously.

Other participants at the conference have expressed their own opinions about what the fed should be doing and these opinions for the most part do not seem to agree with the fed's present course of action. I have not read one opinion from any conference attendee stating that the fed's present course is likely to lead to a successful outcome. While there does seem to be a general sense that a cut in the overnight rate will occur at the next meeting, I haven't found any opinion stating that things will necessarily undergo a dramatic imporovement once the adjustment is made. Since Marin Feldman is talking about 100 basis points of reduction as being needed, 25 is going to be viewed as merely a first step. There's always the possibility that market participants will react to a 25 basis point reduction with panic, as it could indicate that the fed sees future economic developments as being far worse then they've let on to this point.

The current state of the market is likely to be wavering between uncertainty and outright pessimism. Until proven otherwise, it's likley that bad news will be greeted by a failry strong sell off, while good news is likely to be greeted with a fairly muted response and/or more of the price gyrations that we do not want to trade. We will need to remain very conservative when trading positive information and we may in fact be sitting these trades out until we see that some sustained optimism exists, with the key word being sustained.

Event Risk Trading Protocal

2007-09-02T12:08:00.000-04:00

There is a time when having an open trade during an important event can maintained, if the probabilities are strongly in your favor. Keeping our long trade open during Bernanke's speech was a risk, but there were several important factors that lead me to take it.

1. Obviously the market was well aware of Bernanke's speech and they had also become aware of the speech (and its contents) that was to be given by Bush about 1 hour later. Usually what we see in the hours leading up to events like this is nothing; little if any price movement. In the hours leading up to these events, prices in the equity indexes were moving up while bond prices were trending down. This was a strong indication that the speeches were going to be taken as a net positive.

2. Because 3 mo T-Bills are a proxy for credit markets, we have been observing the movements there to give us an idea of the overall 'health' of this critical sector. During the previous day yeilds had moved strongly up, indicating that participants were more willing then before to get back into the ABCP market (an early sign of easing liquidity).

What I would like to do is to set a policy here. What I would suggest is that no trades be kept open during events, no matter how the indications look. The reason is based on what I refer to as a 'percentage'. The less percentage that exists, the less I want to be associated.

If an event is truly a huge trading oppurtunity, there will be plenty of time to get into the market and make a profit. Not holding a position during an event will protect us from a loss. That to me is a better way to trade. Therefore, in the event that a situation like this presents itself again my suggestion is that no trades should remain open during an event.

Bush to Expand Government Role to Deal With Subprime

2007-08-31T07:50:00.000-04:00

By Holly Rosenkrantz
Aug. 31 (Bloomberg) -- President George W. Bush will today announce steps the administration says will help people with subprime mortgages keep their homes.

Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates, according to an administration official, who spoke on condition of anonymity.

Tighter credit and higher borrowing costs threaten the housing market, which has been an engine of U.S. economic growth. Democrats in Congress and the party's presidential candidates have criticized Bush for not taking action to prevent the spread of foreclosures.

"The Federal Reserve's interest-rate reductions alone can't fix the problem,'' Peter Meister, an economist at BHF Bank AG in Frankfurt, said in a telephone interview. He called the Bush plan "positive'' both for ``the people concerned and the economy as a whole.''

Goldman, Wall Street Firms' Estimates Cut by Lehman

2007-08-30T09:42:00.000-04:00

By David Clarke

Aug. 30 (Bloomberg) -- Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.
Lehman analyst Roger Freeman trimmed his share price estimates for Goldman to $214, for Morgan Stanley to $81, for Merrill to $106 and for Bear Stearns to $142, the company said in a note sent to clients today. He cut his third- and fourth- quarter and 2008 earnings estimates for the New York-based firms.

"Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' New York-based Freeman said in the note. He has an "equal-weight'' rating on Goldman and Morgan Stanley, the two biggest U.S. securities firms by market value, and an "overweight'' rating on Merrill and Bear Stearns.

Wall Street firms have posted three straight years of record earnings, fueled by fixed-income trading. Defaults on U.S. housing loans to subprime borrowers, those with patchy credit histories, have reached a 10-year high, driving down the value of bonds backed by mortgages and prompting a global slide in stocks.

Freddie Mac Net Drops on Provision for Housing Slump

2007-08-30T09:39:00.000-04:00

By James Tyson

Aug. 30 (Bloomberg) -- Freddie Mac, the second-biggest U.S. mortgage finance company, reported second-quarter profit fell 45 percent after setting aside $320 million for losses from the worst housing slump in 16 years.

Net income declined to $764 million, or $1.02 a share, from $1.4 billion, or $1.93, a year earlier, McLean, Virginia-based Freddie Mac said today in a statement. Revenue dropped 4.8 percent to $2.26 billion.

The government-chartered company, with a mortgage portfolio of $720.6 billion, is ``seeing weakening'' in the home-loan market, Chief Executive Officer Richard Syron said in the statement. Subprime mortgage defaults rose to 10-year highs, spreading to higher-quality loans and weighing on housing prices.

"A lot of people's attention will next go to how they manage credit expenses because the time from delinquency to default is compressing,'' said Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee.

U.S. Stock-Index Futures Retreat; Goldman, Merrill Decline

2007-08-30T09:35:00.000-04:00

By Andreas Hippin and Michael Patterson

Aug. 30 (Bloomberg) -- U.S. stock-index futures fell after Lehman Brothers Holdings Inc. said earnings at the country's largest securities firms will be hurt by credit-market turmoil.

Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos. dropped after Lehman cut its profit estimates for this year and next. H&R Block Inc. declined after Chief Executive Officer Mark Ernst said the mortgage market is the "worst since 1930'' and may endanger the sale of the company's money-losing subprime home-loan unit.

Standard & Poor's 500 Index futures expiring in September lost 8.6 to 1,456.8 as of 9:04 a.m. in New York. Dow Jones Industrial Average futures dropped 66 to 13,245. Nasdaq-100 Index futures decreased 6.75 to 1,954.25.

Basis Files for Bankruptcy Protection Over Subprime Losses

2007-08-29T21:55:00.000-04:00

By Laura Cochrane and Tiffany Kary
Aug. 30 (Bloomberg) -- Basis Capital Fund Management Ltd., the Australian firm that invests in collateralized debt obligations, filed for bankruptcy protection for its Basis Yield Alpha Fund, stoking concern more hedge funds face collapse.

The Sydney-based firm's fund asked a court in the Cayman Islands for permission to liquidate its assets, according to a petition filed in New York yesterday. The George Town, Grand Cayman-based fund has assets and liabilities of more than $100 million, according to the petition, which asked a federal bankruptcy judge to bar lawsuits in the U.S. while it liquidates in the Caymans.

"This report revives concerns over how much deeper the subprime-mortgage losses will be,'' said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. He said investors will unwind so-called yen carry trades, in which they borrow money in Japan and then buy currencies including the dollar so they can invest in higher-yielding assets in other countries.

The surge in U.S. home-loan payment defaults has forced more than 100 mortgage companies to close, seek bankruptcy protection or put themselves up for sale. Defaults on subprime loans in the first quarter climbed to the highest since 2002, according to the Mortgage Bankers Association. The defaults led investors to shun securities backed by subprime mortgages.

Fed's Bernanke tells key senator central bank is ready to act if needed

2007-08-29T16:40:00.000-04:00

We were looking for a reason why the markets began turning around Tuesday night and thru the day (Wednsday). Thomson released this article around 4PM, but obviously word of it had leaked out way before then. At this time, after Tuesday's large sell-off this type of news unquestionably has the potential to provide a real boost to the markets.

WASHINGTON (Thomson Financial) - Federal Reserve Board Chairman Ben Bernanke said he and his colleagues at the central bank are ready to give a jolt to the US economy if the current market turmoil spills over into the broader economy.

'The Fed is closely monitoring developments in financial markets' and 'is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets,' Bernanke said in a letter to New York Democratic Senator Charles Schumer, dated Monday and released today.In the letter, Bernanke also said that asset limits on Fannie Mae and Freddie Mac investment portfolios 'need not be lifted to allow them to accommodate new borrowers.'

The Schumer letter was largely a repetition of the points Bernanke made in his meeting last week with Senator Chris Dodd, a Connecticut Democrat and head of the Senate Banking Committee.However, Miller Tabak analyst Tony Crescenzi said the 'most intriguing' part of the Bernanke letter 'was his idea for a public/private solution to the subprime problem.'The Fed chief suggested a collaboration to develop 'a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance.' Such new mortgage products could be put in place to help the thousands of homeowners facing 'payment shock' when their variable rate mortgages reset to higher interest rates and payments later this year and in 2008.Bernanke suggested Congress might allow the Federal Housing Administration to begin developing such mortgage refinancing options.

S&P Says Rout May Hurt Wall Street More Than in 1998

2007-08-29T13:00:00.000-04:00

By Joseph N. DiStefano
Aug. 29 (Bloomberg) -- Standard & Poor's said business conditions for securities firms are worse than in the second half of 1998 and revenue from investment banking and trading could fall 47 percent in the final six months of this year.

The rating company said it conducted a ``stress test'' designed to measure the ``ability of investment banking businesses to withstand such scenarios.'' The conclusions don't constitute a forecast, S&P said in a statement.

"This is more severe than in 1998,'' when investment- banking and trading revenue fell 31 percent in the second half following Russia's debt default, S&P analyst Nick Hill said in the statement. At the time, revenue from fixed-income, currencies and commodities was negligible or even negative, he said. As in 1998, firms are likely to cut bonuses to stay profitable, said Hill, who is based in London.

In a separate report, Moody's Investors Service estimated revenue losses of 10 percent or less due to loan markdowns for the five largest U.S. investment banks in the second half of 2007. The Moody's team, led by senior vice presidents Peter Nerby and Blaine Frantz in Jersey City, said its stress tests predict "positive, albeit depressed, earnings and a respectable level of profitability'' possibly boosted by higher equities and derivatives trading volume in volatile markets.

S&P looked at seven U.S. and four European banks. Banks most at risk include Bear Stearns Cos., Deutsche Bank AG and others more dependent on fixed income, S&P said. The ``least affected should be Citigroup Inc. and Morgan Stanley,'' which are more diversified.

Markets recovered quickly after the 1998 drop and favorable economic fundamentals now could cushion the impact of declines in investment banking and trading, the report said. This time,
"the source of the problem has shifted from emerging markets to the world's most developed economy.''

Lehman, Bear Stearns, Citigroup Rating Cut by Merrill

2007-08-28T09:37:00.000-04:00

By Sebastian Boyd
Aug. 28 (Bloomberg) -- Lehman Brothers Holdings Inc., Bear Stearns Cos. and Citigroup Inc. were downgraded to "neutral'' from "buy'' by Merrill Lynch & Co. analyst Guy Moszkowski, because of probable losses on mortgage bonds and leveraged loans, as well as a slowdown in investment banking.

New York-based Lehman and Bear Stearns, the fourth- and fifth-biggest U.S. securities firms, will probably lose out because of their dependence on debt markets, and Citigroup may be pinched by loans and leveraged finance commitments, Moszkowski wrote in a note to investors today. He cut his profit estimates for all three companies and JPMorgan Chase & Co.

Rising foreclosures on U.S. subprime mortgages have rippled through debt markets, cutting revenue from underwriting bonds and debt-financed buyouts. Lehman fell 26 percent and Bear Stearns was down 31 percent this year in New York trading through yesterday as investors lost confidence in the asset-backed securities that fueled three years of record Wall Street profit.

"There has been no good place to hide during the month of August, which must surely go on record as one of the industry's most hair-raising ever,'' wrote New York-based Moszkowski, the top-rated U.S. brokerage analyst in Institutional Investor magazine's survey of money managers. Next year's "forecasts appear increasingly unrealistic for most,'' he wrote.

Keys For This Week

2007-08-26T12:06:00.001-04:00

by NewstraderFX

Since information regarding credit markets will remain crucial, we'll need to carefully scan the financial press for any information related to this. Improvements (or a lack thereof) will be crucial for determining market direction.

According to Wachovia, spreads on asset-backed commercial paper remain at their widest levels since early 2001 and the spread between conforming mortgages and ten-year Treasury notes remains about a quarter percentage point wider that it did a few weeks ago. Subprime mortgages are still extremely difficult to find and rates on jumbo mortgages remain unusually high relative to Treasuries.

You can also assume that economists expect housing sales to decline going forward and some expect sizable drops will be seen in the August and September reports. Whether this will start to affect markets at this time is unknown, but I would tend to think that most market participants are expecting this to occur. Should the August report print better then expected (in September), you can expect a strong surge in equities and carry trades. Aside from housing, there is very strong evidence that business investment remains strong, so that is likely to be supportive.

Just How Contagious Is That Hedge Fund?

2007-08-26T11:50:00.000-04:00

By MARK HULBERT

While I wouldn't describe the following article as market moving-it does provide insight as to why markets move as they do-NFX

HEDGE funds may well stay vulnerable to the kind of rapidly spreading losses that have been precipitated this summer by problems in the subprime mortgage market.

The fundamental problem is that even when hedge funds say they are pursuing entirely separate investment strategies, they often actually use common approaches, according to several experts. When one of these bets goes bad for one hedge fund, losses can result for many of them, disrupting the broader financial markets.

The convergence of hedge fund strategies is quantifiable. It was detected in a study completed earlier this year by Nicole M. Boyson, an assistant professor of finance and insurance at Northeastern University; Christof W. Stahel, an assistant professor of finance at George Mason University; and René M. Stulz, a professor of finance at Ohio State University. A copy of their study, “Is There Hedge Fund Contagion?,” is at http://http://ssrn.com/abstract=884202.

This Week's Big Lesson

2007-08-25T08:35:00.000-04:00

This week provided a lesson in trading that will serve you very well in the future. It has to do with the news and why it may affect markets.

I saw in the chat that a couple of members were using the news to gather facts and form opinions, which is great. If you're going to trade from the information available, obviously the first step in doing that is to get into the habit of actually looking in the financial press to see what's going on. The next step is deciding whether that news will have an effect on the markets and how big that effect will be.

I generally try to divide "news" into two categories-information and opinion. Either category can have an effect on the market at times-for example the BoA/CountryWide investment was "information" while the interview with CountryWide's CEO Dick Mizilo was "opinion". Let's analyze these news items further to get an idea of why there were so important to market participants.

The first step is recognizing that news regarding the housing situation is central to to market thinking. The next step is to decide if that news is realy "new". The BoA making an investment in CW at this particular time is significant. Why? Because all that anyone's heard about housing related issues have been bad. Here's the first piece of good news regarding the subject. That makes it "new" news. Aside from that, The BoA is one of the largest banks in the world. CountryWide is the largest U.S. mortage broker. Both are very important participants. Both are making "new" news that runs counter to everything that's been going on in the markets recently. This kind of thing is going to make everyone feel good, when all they've felt is bad. It changes the psychology and gives people confidence.

Next is the Mozilo interview. The whole world has been reacting to the BoA/CW story. Now he gives an interview in which he says a recession is still likely. Party over! (For now). If he wouldn't have said that-we would have seen 237 in G/J easy.

You have to realize that we are trading on probability here. We're trying to wiegh the odds and make a judgement. Mozilo makes his statement. Does it sound bad to you-does it make you feel less sure about your position. Of course it does. What are the chances that other people are going to feel that way? I would say very possible. I would say it's very possible that people are going to react to it just like you would. If it looks like crap and smells like crap-it's crap! The least you can say is that it's time to get out of your optimistic, long position and stay neutral while the effects of this can be observed.

The article that was posted in the chat has to do with Merill losing some money in their sub-prime investments. It's great that the news is being scanned and that it's being talked about. Now let's form an opinion about whether it has the potential to be truly "market moving".

Are you surprised to hear that someone is taking a loss on their sub prime investment? I would say the probability of that is low. Well surprise, you're not really all that different from any other market participant. If you're not surprised, I doubt that many others will be either. Merill may have a few points shaved from their stock's price, but the market overall is not likely to go into any big sell-off. The news about Merill is bad, but it's expected. Losing money on sub prime investments is old news. It has very little if any shock value. No one's likely to be surprised to hear that another loss was taken in sub prime, unless they just woke up from a very long sleep.

Everyone knows ducks fly south for the winter. When you see them flying north for the winter, then you have "new" news. Yes, Reuter's had an article regarding Merill, but they have a lot of space to fill and it's their job to provide as much information as possible. We're traders, so it's out job to decide if that news is likely to be market moving. If we can't decide, then we watch to see what happens. With our money off the table.

S&P Sees Fed's Benchmark Rate At 4.5% By End Of Q1 2008

2007-08-23T00:34:00.000-04:00

I'm posting this for a reason. It's not that I believe they are correct, but any financial or economic body that says the fed will cut in September is a boost to our GBP/JPY trade. Goldman Sachs said the same thing the other day and that contributed to the start of the turnaround.

8/22/2007 10:46:41 PM Standard & Poor's said Wednesday that it expects the Federal Reserve to cut its key rate to 5.00% at its September 18 meeting. Furthermore, the firm predicted a rate of 4.5% by the end of the first quarter of 2008.The prediction comes after the Fed cut the discount rate 50 bps to 5.75 percent and extended the loan period window to 30 days.

Standard & Poor's said this move was “neither symbolic nor a one-time event.”According to the report, Wall Street generally has a positive reaction when new rate-cutting programs are initiated. The Fed has started a rate-cutting program 11 times since 1945. Stock prices fell through the first six months on four of those occasions but rebounded to gain 10 times over a 12-month period.S&P also acknowledged the recent gains of the U.S. dollar but called them “trade-weighted.” The firm suggests that the gains will not last, as fundamentals suggest to it a weaker greenback over the longer term.

Bank of America Invests $2 bln in Countrywide

2007-08-23T00:22:00.000-04:00

Key News Item That Is Likely To Be Very Supportive For The Markets

This news was released after the NY session and helped support Asia. It will very likely support the Euro and NY sessions also.

By Jonathan Stempel
NEW YORK (Reuters) - Countrywide Financial Corp on Wednesday received a $2 billion injection from Bank of America Corp, helping the largest U.S. mortgage lender shore up its finances as it struggles with a liquidity crunch.

Bank of America, the second-largest U.S. bank, said it bought non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares' Wednesday closing price. Countrywide shares soared 20 percent in after-hours trading.

"It's a $2 billion vote of confidence from a major financial institution," said Steve Persky, a portfolio manager at Dalton Investments in Los Angeles. "Are we out of the woods yet in the mortgage market? No."

Sean Egan, managing director of independent credit rating firm Egan-Jones Ratings Co, said the investment "is a large positive in the sense that it bolsters confidence and enhances liquidity."

U.S. Index Futures, Global Stocks Gain; BHP, E*Trade Advance

2007-08-22T08:56:00.000-04:00

By Adria Cimino
Aug. 22 (Bloomberg) -- U.S. stock-index futures rose, following rallies in Europe and Asia, as concern eased that a credit crunch will curb profit growth and takeovers.

TD Ameritrade Holding Corp. and E*Trade Financial Corp. advanced after the Wall Street Journal said they are discussing a merger. Societe Generale SA and Man Group Plc led financial shares higher in Europe. BHP Billiton Ltd. climbed after the world's biggest mining company posted record full-year profit.

Morgan Stanley Capital International's World Index added 0.3 percent to 1,518.37, while Standard & Poor's 500 Index futures increased 8.9 to 1,459.2 at 8:36 a.m. in New York. The MSCI World is headed for a fourth day of gains, the longest winning streak in almost two months, after the Federal Reserve reduced its discount rate last week.

``Sentiment is becoming more positive,'' said Julien Quistrebert, an analyst at Richelieu Finance in Paris, which oversees about $5 billion. ``We're waiting for a gesture from the Fed.''

The Chicago Board Options Exchange Volatility Index has dropped 18 percent since Aug. 16, when it surged to the highest since October 2002. Investors' expectations for price swings in German stocks, as measured by the VDAX Index, declined 13 percent from Aug. 16 when it rose to its highest since June 2006. The VDAX gauges the implied volatility in DAX options.

Fed May Avoid Rate Cut as Liquidity Bid Bears Fruit-Video

2007-08-21T20:58:00.000-04:00

By Craig Torres and Deborah Finestone Video: http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/v8Apj0U8Trqc.asf
Aug. 21 (Bloomberg) -- The Federal Reserve may be able to avoid an emergency reduction in the benchmark interest rate as some of its steps to increase liquidity show signs of success.

``The flight to safety may be diminishing a bit,'' said Holly Liss, a bond saleswoman in Chicago at Citigroup Global Markets Inc. ``We're seeing more calming of the market as T-bill rates come back to normal.''

U.S. Treasury bill yields rose for the first time in six trading days as demand for the safest government debt declined. Fed officials still don't expect to know for days whether their Aug. 17 cut in the discount rate will improve trading in the $1.1 trillion market for asset-backed commercial paper.

Richmond Fed President Jeffrey Lacker, in the first speech by a policy maker since the Fed cut the cost of direct loans from the central bank to 5.75 percent, said decisions need to be guided by the outlook for prices and growth. Market gyrations shouldn't be the sole consideration, he emphasized.

``Financial market volatility, in and of itself, doesn't require a change in the target federal funds rate,'' Lacker said at a luncheon of the Risk Management Association of Charlotte. ``Policy needs to be guided by the outlook for real spending and inflation.''

Lacker added that ``the jury is still out'' on whether the Fed has done enough to relieve overall liquidity

Tough Love on Wall Street

2007-08-20T14:34:00.000-04:00

By Bill Gross
(Fortune Magazine) -- During times of market turmoil it helps to simplify and talk basics -- explain things to the public and even yourself in terms of what can be easily understood.
Goodness knows, it's not a piece of cake for anyone over 40 these days to understand the maze of financial structures that now appears to be unwinding. They were created by youthful financial engineers trained to exploit cheap money and leverage, who showed no fear and who have, until the past few weeks, never known the sting of the market's lash.

Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios.

Regulators have been absent from the game, and information release has been left in the hands of individual institutions, some of which have compounded the uncertainty with comments about volatile market conditions unequaled during the lifetime of their careers.
Also many institutions, including pension funds and insurance companies, argue that accounting rules allow them to mark subprime derivatives at cost. Default exposure, therefore, can hibernate for many months before its true value is revealed to investors and, importantly, to other lenders.

The significance of proper disclosure is, in effect, the key to the current crisis.

Money Markets Driving Drama

2007-08-20T14:25:00.000-04:00

By Saskia Scholtes in New York
Money market investors are emerging as drivers of the latest global financial drama, roiling credit markets and hurting corporate borrowers by shunning commercial paper and piling into short-term US government debt.

Yields on short-term Treasury bills last week made their biggest two-day fall since the “Black Monday” stock market crash of October 1987, as spooked commercial paper investors sought to put money in the safest and most liquid short-term assets.

Friday’s extraordinary conditions in money and bond markets led the US Federal Reserve to intervene, making direct loans available to cash-strapped banks on more favourable terms and signalling that it would cut its main interest rate if necessary.

Tony Crescenzi, a strategist at Miller Tabak, said the plunge in yields was a result of bets on Fed rate cuts and a flight to quality, and that the demand for bills was “accentuated by shifts out of commercial paper”.

Money market funds are important buyers of highly-rated short-term debt such as commercial paper, which has accounted for the largest share of their holdings. However, they have changed their strategy in recent days.

Trading The Next Asian and European Sessions

2007-08-18T11:27:00.000-04:00

by NewstraderFX
With the S&P 500 having its biggest move up in 4 years, all signs point to an Asian recovery and to an extension of the European recovery in their next sessions. However, it's not the type of slam-dunk that you may think and it will take careful observation of what we always are looking at when we trade: equity futures and bond prices.

While I do believe that the trend in the markets will eventually be up (no big brainstorm there), what I also believe is that volitility will remain high and that wild swings in price will be common, making trading a bit more difficult then in a typical market that does not have all these additional issues to deal with. A simple fact of trading is that when more issues are on the table, there is more that needs to be considered. This is true for all market participants.

Let me pose a scenario to you that illustrates the complexities now. Let's say there is some more bad news regarding the current situation. This news up until now has been taken as a negative and has caused the big sell off's we've seen. But now, something else is on the table: the rate cut. It's certainly possible that The Fed will not see the need to cut rates if stock and credit markets stabilize, because they will view that as a lowering of the risks to their growth forcasts. So the question is, what will bad news do now-cause markets to get further depressed (fear) or will it further implant the inevitability of the rate cut and cause markets to go up (greed)? The answer is that we don't know what the reaction will be. All we know is that the potential for a different reaction exists.

Until we can make further observations in market behavior we should trade very carefully and conservatively while staying ready to be more aggresive when the psychology is better understood. It all comes down to the three states the market exists in: greed, fear and confusion. Fear might very well diminish and morph into greed very quickly. We saw the first signs of this Friday. Let's be sure the typical signs of greed (increasing equity index prices and decreasing bond prices) on a global scale remain firmly in place before we get aggressive.

I will be on-line Sunday at 20.00 GMT. If SKYPE is working we will use that and if not we'll use Yahoo. Have a great weekend.

Looking For Signs of Stabilization in the Commercial Credit Markets

2007-08-18T10:48:00.000-04:00

by NewstraderFX
First, I would say that the consensus in the market is that a rate cut in the target rate is a given and the possibility of a surprise move before then is very much on the table. Please be sure to see my article on FF: http://www.forexfactory.com/showthread.php?t=43243

I want to expand on that article here, because it relates to exactly what we should be looking for in the market as signs of stabilization in the CDO and therefore in the commercial credit markets in general.

The key is that these obligations can now be used as collateral on a revolving line of credit from The Fed. Remeber what a CDO really is: it's a product that is created by an investment bank and sold to investors such as big pension funds, hedge funds etc. Mortgages are bought from lenders such as Country Wide. These mortgages have different credit ratings attached to them which could be anything from AAA to sub prime. Each category of rating is called a "tranche". By bundling the tranches together, theoretically the risk is spread and therefore the investment is safer. As with any other bond, interest and principle payments have to be made on the CDO's, although exactly what they are is not generally available.

It was the sub prime tranche (and later the Alt-A) that went bad. Now that a revolving line of credit has been made available in theory it should be easier to obtain money to make those payments. (It should also make the writing of new mortgages easier, because the previously written mortgages can be used as collateral for the new ones). In my opinion, investment banks will want to make those payments because their credibility is at stake. Once the scheduled payments are made, the CDO holders should be less inclined to sell.

This is essentially the stabilization process that should be occuring and we should be acutely aware of any news regarding this as it will be very supportive of the markets in general.

Moody's Warns of Potential LTCM-Scale Fund Collapse

2007-08-16T11:53:00.000-04:00

By John Glover
Aug. 16 (Bloomberg) -- Moody's Investors Service warned that the global credit rout may cause a major hedge fund collapse on the same scale as Long-Term Capital Management LP in 1998.
Hedge funds face potential losses on collateralized debt obligations, securities packaging other assets, Chris Mahoney, vice chairman of Moody's, said on a conference call today. Buyers and sellers of ``risky assets'' are unable to agree on prices, causing the market to seize up, Mahoney said.

``A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as LTCM threatened to do in 1998,'' Mahoney said.

Credit markets started falling in June as two Bear Stearns Cos. hedge funds collapsed because of bad subprime bets. Goldman Sachs Group Inc., the world's most profitable securities firm and second-largest hedge fund manager, was forced to put $2 billion of its own money into one of its hedge funds and waive some fees after the fund lost 28 percent of its value this month.
Basis Capital Fund Management Ltd. yesterday told investors losses at one of its hedge funds may exceed 80 percent as the U.S. subprime mortgage rout prompted creditors to force the Sydney-based company to sell assets.

Treasury Bills, Notes Soar on Rising Commercial Paper Concern

2007-08-15T18:41:00.000-04:00

By Daniel Kruger
Aug. 15 (Bloomberg) -- U.S. short-term Treasury securities rallied, led by the biggest gain in three-month bills since 1989, as investors sought shelter in the safest assets on concern that companies are having trouble raising funds.

Two-year notes rallied as traders stepped up bets the Federal Reserve will cut borrowing costs. Merrill Lynch & Co. lowered its rating on Countrywide Financial Corp., the biggest U.S. mortgage lender, to "sell'' today and raised the possibility of bankruptcy. Sydney-based Basis Capital Fund Management Ltd. said losses at one of its hedge funds may exceed 80 percent. A report showing slowing inflation also boosted debt.

``As long as other markets remain dysfunctional the bid will remain in Treasuries,'' said William O'Donnell, U.S. government bond strategist at UBS Securities in Stamford, Connecticut, one of 21 firms known as primary dealers, which trade with the Fed.

Ten-year notes yielded as little as 2.23 percentage points above 10-year inflation-linked Treasuries yesterday, a two-year low as investors are less concerned about the prospects of accelerating prices. The difference (Tip Spread) represents investors' expectations for inflation over the life of the securities.

Countrywide Falls; Merrill Cites Bankruptcy Prospect

2007-08-15T18:11:00.000-04:00

By Elizabeth Hester
Aug. 15 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, fell 13 percent, the most since the 1987 stock-market crash, after Merrill Lynch & Co. raised the possibility of bankruptcy.

``Effective insolvency'' would result if creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note today.

Shareholders shouldn't ``understate the importance of liquidity,'' Bruce wrote. ``If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,'' said Bruce, who downgraded Countrywide to ``sell'' from ``buy.'' The company trades under the ticker CFC.

Countrywide's shares have lost almost half their value this year on concern a credit crunch in the mortgage industry will erode profit at the Calabasas, California-based company. KKR Financial Holdings LLC, Scottish Re Group Ltd. and other companies tied to the mortgage industry dropped today on speculation earnings will be hurt by the crisis.

Sentinel Management Group Seeks to Halt Redemptions

2007-08-14T16:32:00.000-04:00

By Jenny Strasburg and Matthew Leising
Aug. 14 (Bloomberg) -- Sentinel Management Group Inc., the Illinois-based firm that manages $1.6 billion, said it asked regulators for permission to freeze client withdrawals because credit-market turmoil made it impossible to trade.

The firm, based in the Chicago suburb of Northbrook, contacted the Commodity Futures Trading Commission for approval to halt redemptions ``until we can honor them in an orderly fashion,'' according to an Aug. 13 letter to clients.

The CFTC hadn't granted permission as of this morning, said an assistant to Eric Bloom, Sentinel's president and chief executive officer, who declined to be identified. Bloom didn't return calls for comment.

CFTC spokesman Dennis Holden declined to say whether the firm's request had been received.

``We are aware of the situation and we are monitoring it.''
The firm said it was a victim of panic by investors caused by the collapse of the subprime-mortgage market.

``Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,'' according to the client letter, which does not specify which funds are affected. ``We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.''

Hedge Fund Losses Prompt Exits as August 15 Deadline Looms

2007-08-14T13:17:00.000-04:00

By Svea Herbst-Bayliss
BOSTON (Reuters) - For hedge funds, August 15 may be D-Day, when investors rattled by heavy losses demand their money back from big and small portfolios alike.

"We are seeing a 'shoot first and ask questions later' mentality among many investors," said Philippe Bonnefoy, chairman of hedge fund advisory group Cedars Partners, describing how everyone from the wealthy to chief investment officers at endowments are now shunning risk.

Unnerved by heavy losses at some of the $1.75 trillion industry's most famous offerings, including AQR Capital Management, Highbridge Capital Management, D.E. Shaw and Goldman Sachs (GS.N: Quote, Profile, Research), many people want out before things get worse.

But exiting can be a difficult process in an industry where managers routinely lock up money for months, if not years, and often require 45 days' advance notice before returning it.
To pull out at the end of the third quarter, investors will have to notify their managers by August 15.

Home Depot Net Income Falls 15% on U.S. Housing Slump

2007-08-14T07:29:00.000-04:00

By Mark Clothier
Aug. 14 (Bloomberg) -- Home Depot Inc., the world's largest home-improvement retailer, said profit fell 15 percent and revenue dropped for the first time in four years after a U.S. housing slump reduced demand for appliances and remodeling.

The company also said today that it's evaluating market conditions in preparation to buy back as much as $22.5 billion in shares, adding a note of caution to its repurchase plans.

Home Depot repeated its forecast for annual profit to fall as much as 15 percent. The U.S. home-improvement market will ``remain soft,'' the company said today, as slowing home sales, rising mortgage rates and declining house prices make consumers hesitant to invest in new bathrooms or kitchen cabinets.

Wal-Mart Posts Profit Below Estimates, Cuts Forecast

2007-08-14T07:27:00.000-04:00

By Lauren Coleman-Lochner
Aug. 14 (Bloomberg) -- Wal-Mart Stores Inc., the world's largest retailer, said second-quarter profit rose less than analysts anticipated and lowered its earnings forecast after the company cut prices on thousands of back-to-school items.

Full-year profit will be as much as $3.13 a share, the company said today, less than the $3.16 analysts had estimated.

Net income increased 49 percent to $3.1 billion, or 76 cents a share. Excluding one-time items, profit was 4 cents less than analysts' estimates. A year earlier, Wal-Mart earned $2.08 billion, or 50 cents, after costs to exit Germany.

UBS Falls as Market `Turbulence' Threatens Profit

2007-08-14T07:25:00.000-04:00

By Jacob Greber
Aug. 14 (Bloomberg) -- UBS AG, Europe's largest bank, fell to a 2007 low on the Zurich exchange after acknowledging that ``turbulent'' markets may reduce profit for the rest of the year.

Net income in the three months ended June 30 rose for the first quarter in a year, increasing 79 percent to a record 5.62 billion Swiss francs ($4.67 billion), or 2.69 francs a share, buoyed by money-management fees, UBS said in a statement today. Profit included a 1.9 billion-franc gain from the sale of Julius Baer Holding AG shares and beat analysts' estimates.

Goldman's Global Alpha Falls 26% in 2007, People Say

2007-08-12T10:00:00.000-04:00

By Katherine Burton and Jenny Strasburg
Aug. 10 (Bloomberg) -- Goldman Sachs Group Inc.'s $8 billion Global Alpha hedge fund has fallen 26 percent so far this year, a decline that may prompt more investors to withdraw their money, according to people familiar with the fund.

Goldman's largest hedge fund, managed by Mark Carhart and Raymond Iwanowsk, has dropped almost 40 percent since July 31, 2006, said the people, who declined to be named because the fund is private. The Standard & Poor's 500 Index of the biggest U.S. stocks has returned 16 percent during the same period.

``It's hard to imagine how investors can maintain confidence, because their losses have been taking place over a long period of time, starting last year,'' said Virginia Parker, who helps oversee about $1.8 billion at Parker Global Strategies LLC in Stamford, Connecticut. ``There has been a broad range of market climates, and the fund has not demonstrated the ability to excel in any of them.''

Quantitative, or ``quant,'' hedge funds in the U.S., including those run by Goldman, Highbridge Capital Management LLC, AQR Capital Management LLC and Tykhe Capital LLC, have lost money in August as credit spreads have widened and stock-price volatility has jumped, jarring the computer models the managers use to make their bets.

Fannie Mae, Freddie Mac Regulator Rejects Cap Request

2007-08-12T09:56:00.000-04:00

By James Tyson
Aug. 10 (Bloomberg) -- The regulator for Fannie Mae and Freddie Mac rejected requests by the government-chartered companies to allow them to buy more home loans and help ease a credit crunch that has frozen the U.S. mortgage market.

``We are not authorizing any significant changes at this time,'' the Office of Federal Housing Enterprise Oversight said today in an e-mailed statement. The agency ``will continue to reassess that position.''

Ofheo resisted pressure from Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, and Democratic lawmakers who said the companies should step in to fill a gap left by buyers who fled the market. Ofheo's decision parallels the view of President George W. Bush, who said yesterday the companies must complete a ``robust reform package'' before they can buy home loans beyond current federal limits.

Washington-based Fannie Mae requested an increase in its asset ceiling that Chief Executive Officer Daniel Mudd said today amounted to 10 percent of the company's home loan portfolio, or about $72 billion.

Mudd's call for an increased asset ceiling was ``surprisingly out front, especially in light of the president's comment,'' said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. in Washington. ``Most companies are loath to confront the president.''

Petrou's clients include FM Policy Focus, a lobbying group advocating stricter oversight for Fannie Mae and Freddie Mac.

Fannie Mae spokesman Brian Faith declined to comment on Ofheo's decision.

``We continue to believe that raising the cap would enable us to bring some much needed liquidity to the market,'' said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.

Opinion-Fed Could Cut Rates As Early As Next Week

2007-08-11T13:08:00.000-04:00

by NewstraderFX

It does look like an emergency rate cut from The Fed is needed at this time and one could come as early as the week of August 13. The injection of liquidity that occured this week is not likely to enough to stem the tide of the sub prime meltdown. Look for the ECB to shelve their September rate hike as well.

According to Mark Zandi, chief economist and co-founder of Moody's Economy.com, "In October alone more than $50 billion in ARMs will reset". Monthly mortgage payments may climb by35 percentor more. For example buyer in 2005 might have signed on for a $200,000 mortgage, locking in a fixed rate of 4 percent for two years. After paying $955 a month, his bill would now be set to spike to $1343.

Ken Goldstein, an economist for the Conference Board, estimates the mortgage market adds up to about $10T, with about 10 percent to 15 percent of that in subprime. Of that, some 15 percent or so is imperiled, meaning that about $150-200B is threatened.

On August 8th, Bush hinted at government intervention in the US stock market. “Treasury secretary Paulson and his advisors are paying close attention, as the market begins to readjust its assessment of risks and are watchful for any downturn,” he said. “There is a lot of liquidity in our system and liquidity will provide the capacity for our system to adjust”.The Federal Reserve acted on the 9th and 10th by injecting nearly $40B into the system.

Those "advisors" could allude to the Plunge Protection Team, created by President Reagan in the 1980's.

After the 9/11 terrorist attacks, Former president Clinton advisor George Stephanopoulos told “Good Morning America”: “There are various efforts going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the market, what is called the “Plunge Protection Team.”

“The Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges have an informal agreement to come in and start to buy stock if there appears to be a problem. They acted more formally in 1998, during the Long term Capital Crisis, and propped up the currency markets. And, they have plans in place if the markets start to fall.”

No doubt that the PPT was hard at work last week and that this week promises more of the same.

Big Investors Fleeing Risk

2007-08-11T11:53:00.000-04:00

State Street report: Big-money investors at one-year high for risk aversion.

LONDON (Reuters) -- Big-money institutional investors have turned more risk averse than at any time since August last year, taking positions they typically do not reverse quickly, State Street data showed Friday. The U.S. financial services firm said its clients, who keep some $13.04 trillion with it as a custodian, have moved into what it called a "safety first" regime.

This is characterized by moving from emerging to developed market equities, embracing bonds and unwinding currency "carry" trades.

Institutional investors tend to take a longer-term view of markets than other investors, so shifts in their strategy can have a significant impact on a market's recovery. The firm said that since September last year investors had been taking positions reflective either of abundant liquidity or leverage opportunities.

"A quick move back to risk-seeking is unlikely given ... previous history ... and the backdrop of markets," State Street said in a note.

Specifically, the latest data showed risk averse moves such as a sharp fall in demand for emerging Asian equities.

State Street said that a month ago, flows into emerging Asia equities were in the 65th percentile, meaning that they had been larger on only 35 percent of occasions over 10 years.
In the latest data, however, they were in the 5th percentile - almost the lowest level of demand seen since it started collecting data.

Similarly, institutional investors have been unwinding the carry trades in which they have borrowed in low-yield currencies such as the Japanese yen to invest in assets in higher-yielding currencies.

Credit Fears Hit Global Markets

2007-08-10T03:32:00.000-04:00

HONG KONG (Reuters) - Stocks tumbled and government bonds rose on Friday as investors dumped risky assets amid a global credit squeeze, while Asian central banks weighed in to calm jittery money markets or prop up their currencies.

Asia's major stock markets fell as much as 4 percent and financial bookmakers were calling indexes in London, Frankfurt and Paris to open 1.6-2 percent weaker as fallout from the U.S. subprime lending woes spread.

The low-yielding yen rallied as investors unwound risky currency carry trades and safe-haven bonds jumped. Yields on benchmark 10-year Japanese government bonds (JGBs) sank to a 2-½ month low as expectations of an interest rate rise from the Bank of Japan this month faded in the market turmoil.

"Central banks are not supposed to be tightening credit when markets are in complete disarray," said John Richards, head of Asia-Pacific Strategy at RBS Securities.
"And this is close to a complete disarray."

The Bank of Japan and the Reserve Bank of Australia followed the European Central Bank and the U.S. Federal Reserve by pumping additional funds into markets amid a global rush to cash and other liquid assets.

Subprime Problems Spread-AIG

2007-08-10T03:28:00.000-04:00

AIG sees uptick in defaults in more credit categories. European investors feel the pain too.

NEW YORK (CNNMoney.com) -- Another rough day on the subprime front. AIG, the world's largest insurer and one of the biggest mortgage lenders, said residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime.

France's biggest listed bank, BNP Paribas, froze $2.2 billion worth of funds, citing subprime woes. And the European Central Bank felt it had to inject $130.5 billion into euro-zone money markets to help calm jittery markets.

AID said total delinquencies in its $25.9 billion mortgage insurance portfolio were 2.5 percent.
It said 10.8 percent of subprime mortgages were 60 days overdue, compared with 4.6 percent in the category with credit scores just above subprime, indicating that the threat to the mortgage market may be spreading.

While maintaining that it is "comfortable" with its mortgage exposure, AIG gave a gloomy assessment of the market in a presentation to investors and analysts.
It said delinquency rates for first mortgages had risen to 3.98 percent in June from 3.56 in April and a low of 3.08 in July 2005. First mortgages represent 90 percent of AIG's domestic mortgage business.

Countrywide Says `Unprecedented Disruptions' May Hurt Profit

2007-08-10T02:52:00.000-04:00

Aug. 10 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, said it faces ``unprecedented disruptions'' that may crimp profit, suggesting a credit crunch that started with the U.S. subprime market will spread.

Countrywide won't be able to sell as many of its loans as expected because investor demand has dried up, the Calabasas, California-based company said in a filing with the U.S. Securities and Exchange Commission. It also said it may have difficulty obtaining financing from creditors. Shares of the company fell as much as 13 percent in after-hours trading.

``The secondary market and funding liquidity situation is rapidly evolving, and the potential impact on the company is unknown,'' Countrywide said. ``These conditions may continue or worsen in the future.''

Investors have stopped buying loans made to the riskiest borrowers, leaving hedge funds, banks and securities firms unable to find accurate prices for their holdings. BNP Paribas SA, France's biggest bank, halted withdrawals from three investment funds yesterday because it couldn't ``fairly'' assess the value of subprime mortgage holdings. Banks roiled by the crisis are shifting assets into cash, prompting the European Central Bank to loan them an unprecedented 94.8 billion euros ($130 billion) yesterday.

Fed Will Likely Retain The Inflation Bias This Week-

2007-08-05T10:36:00.000-04:00

by NewstraderFX
Coming at a time when Fed Chairman Bernanke is facing is first potential crisis, it will be very interesting to watch The Fed's policy play out through all of this. I would not expect to see any change in the inflation bias, although market's will be looking for any sign of change in The Fed's opinion regarding the housing/debt situation. As Bernanke clearly stated during his testimony last month, the situation is viewed as being "contained".

Former Fed Chairman Allan Greenspan would have been talking about easing by this time and it's fairly well established that Greenspan's over-easing of policy helped cause the housing/credit bubble to begin with. Ben Bernanke operates in a very different way then his predecessor. Greenspan was much more of an intiutive, seat-of-the-pants type, while Bernanke's academic and research background leads him to rely on history, models, projections and mathematics. If Bernanke were to paraphrase the former chairman, he might use the phrase "Immoderate Indulgence" to describe what had existed before all this blew up.

In my opinion, Bernanke will not be easing policy or changing his statement based on what he likley sees as a necessary adjustment to the "immoderate indulgance" despite the fact that people are going to be hurt in the process, because it's likely that the "biting of the bullet" that will occur now is probably the best chance for assuring the long term health and stability of the economy. Economic leaders from Central Banks, the IMF and the BIS have long warned against the excesses they saw in the markets, making the current situation of the "chickens coming home to roost" variety in their view.

If the Fed were to alter its "contained" opinion now, markets would certainly feel supported and would interpet the remarks as indicating The Fed is that much closer to a rate cut. While the underlying problems would still exist, markets would see a light at the end of the tunnel and that might be enough to avert further serious declines in equity markets. What that would also do is further weaken the dollar (due to renewed risk appetite) and possibly ease the present constraints on liquidity.

Since I don't believe that will happen this week further aversion of risk is likely to prevail, with the most likely outcome to be dollar strengthening vs the high yeilders as carry trades unwind with equities.

Wall St Sinks On Credit Worries After Bear Talks

2007-08-04T17:25:00.000-04:00

By Kristina Cooke
NEW YORK (Reuters) - Stocks slid sharply on Friday after Bear Stearns said credit markets were in their worst shape in two decades, while jobs data aroused further concerns about weakness in the economy.

Bear Stearns Cos. stock fell 5.9 percent as mortgage jitters drove a broad market sell-off with the three major indexes falling more than 2 percent.

Earlier, Standard & Poor's lowered its outlook on Bear Stearns' debt to "negative," saying the biggest U.S. underwriter of mortgage bonds may have problems, including with its hedge funds, that could hurt the firm "for an extended period."

"It's particularly ugly right now," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

"The Bear Stearns comments are what really pushed the market over the edge."

Bond Turmoil Worse Than Internet Bubble: Bear CFO

2007-08-04T17:22:00.000-04:00

By Dena Aubin and Al Yoon

NEW YORK (Reuters) - Bear Stearns Cos. (BSC.N: Quote, Profile , Research) on Friday said it is weathering the worst storm in financial markets in more than 20 years after a major rating company warned mortgage credit problems could hurt the investment bank's profits.

Bear Stearns' chief financial officer said the shockwaves hitting lending markets, triggered by rising mortgage losses, were as bad as crises such as the Internet bubble bursting in 2001 or the 1998 collapse of hedge fund Long-Term Capital Management.

"These times are pretty significant in the fixed-income market," CFO Sam Molinaro said on a conference call with analysts. "It's as been as bad as I've seen it in 22 years. The fixed-income market environment we've seen in the last eight weeks has been pretty extreme."

Molinaro's dire assessment of the market rocked stocks, bonds and currencies on Friday afternoon. U.S. government bonds surged as investors sought the safety of taxpayer-backed debt and stock indexes fell more than 2 percent. The dollar tumbled against other major currencies.

Credit Market Turmoil Effects May Last Years

2007-08-03T09:18:00.000-04:00

By Adam Jones in Paris
The turmoil in the credit markets is likely to have an effect on financial institutions for years, according to the chairman of Société Générale, the French bank.

Daniel Bouton, one of the most senior figures in the French banking industry, said “an extremely sizeable credit bubble has burst”.

“When a bubble bursts, the distribution of the cost of the bubble among the thousands of involved parties around the world is probably going to take years.”

However, the veteran banker said that there had been no signs so far that the big US or European banks would be hit by losses of a menacing scale: “For the moment, I don’t see any news that suggests that the big financial players in the US or Europe are involved at a substantial level in relation to their size.”

Buy-out Deals May Be On Hold For Months

2007-08-03T09:15:00.000-04:00

By Peter Thal Larsen in London

Leading bankers on Thursday moved to calm the global markets even as they admitted that the shockwaves from of the US subprime collapse could put private equity deals on hold for the next few months.

Shares in European and US banks have slumped in the past week as investors have fretted about their exposure to subprime-related losses as well as leveraged loans stuck on their balance sheets. Analysts estimate large banks have underwritten loans worth $300bn to finance deals not yet been completed.

Bob Diamond, Barclays president, on Thursday predicted the consequences of the subprime collapse could take more than a year to be resolved. However, he said the leveraged loan market should recover more quickly: “We would expect at some point over the next two to three months to see that market at more normal volume levels.”

Brady Dougan, chief executive of Credit Suisse, said: “There has been a back-up in pricing and probably in August it will be a bit quieter . . . our hope is that the market will begin to operate more normally in the short term.”

Tighter credit could slow U.S. GDP growth

2007-08-03T00:25:00.000-04:00

By Emily Kaiser
WASHINGTON (Reuters) - From subprime borrowers to lumberyards to corporate giants, tighter lending standards are starting to pinch consumer and business spending, threatening to slow already tepid U.S. economic growth.

While Treasury Secretary Henry Paulson insists credit problems stemming from a housing downturn are "largely contained," banks are increasingly leery of backing all sorts of risky loans, not just subprime mortgages for borrowers with shaky credit.

"All the hoopla about subprime has created a sense among creditors and lenders that maybe they should rethink their easy terms," said Milton Ezrati, senior economist at Lord Abbett & Co. "It means that we have what is equivalent to a Fed (interest rate) tightening going on."

U.S. Housing Is one of History's `Biggest Bubbles,' Rogers Says

2007-08-03T00:22:00.000-04:00

Aug. 3 (Bloomberg) -- The U.S. subprime-market rout that wiped out $2.1 trillion from global share values last week has ``got a long way to go,'' Jim Rogers said.
By Chen Shiyin and Pimm Fox
Concern that defaults among subprime mortgages may be spilling over to other credit markets and hurting earnings and takeovers last week sent the Morgan Stanley Capital International World Index to its worst weekly drop in five years. Further losses may be in store even as shares rebounded this week, said Rogers, chairman of New York-based Beeland Interests Inc.

``This was one of the biggest bubbles we've ever had in credit,'' Rogers, who predicted the start of the global commodities rally in 1999, said in an interview from Hong Kong. ``I have been and am still short the investment bankers in America. I'm also short homebuilders.''

The MSCI World plunged 5.3 percent last week, the most since the five days ended July 19, 2002, after Countrywide Financial Corp., the largest U.S. mortgage lender, said more borrowers are defaulting on mortgages and D.R. Horton Inc. reported its first quarterly net loss in at least a decade.

American Home Mortgage Is Just The Tip Of The Iceberg

2007-08-01T00:48:00.000-04:00

by NewstraderFX

The problems with American Home Mortage could be just the tip of an enormous iceberg-and the good ship "mortgage" may have just hit it. AHM is the 10th largest provider of mortgages with over $34B in outstanding loans primarily of the "Alt-A" category, a credit rating above the sub-prime level. They may never write another though as margin calls and dried up funding sources could cause the company to sink permanently.

The implications could be much farther reaching then that.

The banks and investment banks that up to now had been the source of funding have now decided to either raise prices or stop funding entirely. Wall Street banks and brokerages have increase margin demands and pulled their lines of credit from AHM and are likely to do the same to other mortgage companies, effectively turning off the flow of capital and liquidity that ha supported the mortgage and housing industries thru the boom. These actions can only cause the cost of loans to rise further and would be especially damaging now, given the high levels of current housing inventory.

And while all this is happening, the nation’s two largest credit-rating agencies added to the unease yesterday. Standard & Poor’s listed 10 collateralized debt obligations, or C.D.O.’s, for a potential downgrade at the same time that Moody’s Investors Service said that it expected more severe losses on Alt-A loans.

What all this points to is obvious: Tight, jittery markets and aversion to risk. Equity indexes and carry trades could be taking a major hit in coming days, while bond yeilds fall.

U.S. Stocks Retreat on Subprime Concern; Banking Shares Fall

2007-07-31T16:05:00.000-04:00

By Eric Martin
July 31 (Bloomberg) -- U.S. stocks declined, erasing a rally, on concern losses from subprime mortgages are worsening.

Banking shares fell after American Home Mortgage Investment Corp. said it's unable to fund loans and may have to liquidate assets. MGIC Investment Corp. and Radian Group Inc. tumbled after the two home-loan insurers said their combined stakes of more than $1 billion in a subprime mortgage company may be worthless.

``On American Home Mortgage, the news is pretty bleak,'' said Michael James, senior equity trader at Wedbush Morgan Securities in Los Angeles. ``That's lent some renewed concerns about whether we have in fact gotten to the bottom of this subprime mortgage crisis.''

The Standard & Poor's 500 Index slipped 4.37, or 0.3 percent, to 1469.54 at 2:49 p.m. in New York. The Dow Jones Industrial Average fell 41.62, or 0.3 percent, to 13,316.69. The Nasdaq Composite Index slumped 22.52, or 0.9 percent, to 2560.76.

American Home Can't Fund Loans, May Liquidate Assets

2007-07-31T14:28:00.000-04:00

By Rick Green
July 31 (Bloomberg) -- American Home Mortgage Investment Corp., the lender whose shares stopped trading yesterday after it disclosed a cash shortage, said it's unable to fund new loans and may have to liquidate assets.

The company has been cut off from credit and didn't have money yesterday to make $300 million of mortgages it had already agreed to provide, the Melville, New York-based company said today in a statement. American Home said it anticipates $450 million to $500 million of loans probably won't get funded today.

American Home said it's ``seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of homebuyers to whom it has committed to provide mortgages.'' The company said it hired Milestone Advisors and Lazard Ltd. to evaluate ``strategic options.''

U.S. S&P/Case-Shiller Home Price Index Declines 2.8%

2007-07-31T14:26:00.000-04:00

July 31 (Bloomberg) -- Home prices in 20 U.S. cities fell the most in at least six years, suggesting the housing recession has yet to touch bottom.

The S&P/Case-Shiller index of home prices in 20 metropolitan areas dropped 2.8 percent in May from a year ago, led by declines in Detroit and San Diego, according to the report issued today by Standard & Poor's and MacroMarkets LLC. The drop was less than the median forecast of four economists surveyed by Bloomberg News.

The declines indicate that housing will continue to hamstring the world's largest economy, economists say. A glut of unsold properties and mounting defaults are forcing builders to scale back construction and hindering consumer spending as homeowners are less able to borrow against home equity.

``Things are getting worse rather than better,'' said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. ``If home prices keep falling, eventually consumer confidence and spending will take a hit.''

Carry Trades Rise As Equites Are Bought And Bonds Are Sold

2007-07-30T17:26:00.001-04:00

The dollar made a strong advance vs the Yen during the NY session and fell vs the high yeilders-a clear indication the market saw an oppurtunity and took on additional risk as expressed by the apparent buying into carry trade positions after last week's sell-off.

On the GBP/JPY, a peak price of 251.6 seen on July 20 was sold all the way down to 240.09 in Friday's rout. Monday's recovery in the NY session took it back to 241.2 just before Wall Street closed after Sunday's open at 238.77. It had opened Monday's Wall Street session at 240.09

Jittery Markets Await Tuesday's U.S. Data

2007-07-30T14:36:00.000-04:00

Equity markets were helped Monday by good earnings reports and analyst buy recommendations which countered news that U.S. foreclosure rates rose more than 30 percent from the previous six-month period and are up more than 55 percent from the first six months of 2006, indicating that the housing recession is the worst in 16 years. Treasuries declined the most in two weeks as a degree of risk aversion came out of the market.

Aside from Friday's NFP Tuesday's readings for the Core PCE Price Index and Personal Consumption could be the most important numbers of the week, as they will provide clues of the Fed's next move and for how well consumers are holding up in the middle of the housing recession.

The psychological implications are very interesting under the present set of circumstances, so let's review two possibilities that would very likely to lead to predictable market reactions.

If the core PCE remains under 2.0 percent and spending grows at a rate faster then consensus, risk will be further accepted. This would likely lead to a very good day for equities and carry trades and a fall in bond prices.

Should the YoY core PCE print over 2.0 while consumption disappoints, the degree of risk aversion would likely rise strongly, meaning that equities and carry trade positions would sell as bonds were bought.

Less certain would be the reaction to a core PCE under 2.0 with disappointing consumption. Under normal circumstances it would indicate the possibility of a fed rate cut, but should the consumer look weak, it might make traders nervous.

If the YoY core PCE prints over 2.0 while consumption number prints higher then consensus, the possibility of a rate cut from the fed would be diminished. However in the current enviorment, the higher rate of consumption just might get traders excited.

Additionally, there are several important earnings reports due tomorrow and those will need to be taken into consideration as well.

Corporate Bond Risk Soars as Subprime Mortgage Losses Spread

2007-07-30T14:05:00.000-04:00

July 30 (Bloomberg) -- The risk of owning corporate bonds rose to the highest in at least three years after a German bank slashed its profit forecast because of ``massive uncertainty'' in the market for subprime mortgages and credit.

Indexes linked to credit-default swaps in Europe and the U.S. rose to the highest since they were created in 2004, showing that the perception of credit quality is deteriorating. Contracts on Dusseldorf-based IKB Deutsche Industriebank AG IKB, which allow investors to speculate on its ability to repay debt, jumped to six times the prices of a month ago. Goldman Sachs Group Inc. rose to the highest on record.

``It's pure fear,'' said Gary Jenkins, a partner at London- based hedge fund Synapse Investment Management, which manages $650 million of debt assets. Jenkins was head of fundamental credit at Deutsche Bank AG before joining Synapse in April. ``It's fear of the unknown, fear of hedge funds unwinding, fear of knock-on effects of the subprime meltdown.''

U.S. Foreclosures Jump in H1

2007-07-30T13:58:00.000-04:00

NEW YORK, July 30 (Reuters) - U.S. home foreclosure filings totaled 925,986 during the first six months of 2007, up 58 percent from the same period a year earlier, RealtyTrac said on Monday.

The first-half total was also up more than 30 percent from the previous six-month period, showing a foreclosure rate of one foreclosure filing for every 134 U.S. households, said RealtyTrac, an online marketplace for foreclosure properties.

How Far Does This Go?

2007-07-29T21:33:00.000-04:00

By NewstraderFX

This is shaping up to be one of the more interesting weeks, as the question of how far this all goes has to be uppermost in everyone's thoughts. My own opinion is that this has a lot more downside and that 12,600 on the DJIA is the next stop. As with all trends-things won't move in a straight line, but the overall trend is down and looks likely to stay that way for the immediate future.

If you are of the belief that the two main drivers of the long bull market were global growth and global liquidity, you have to believe that one of the legs has been kicked out. The asset-backed global liquidity market is no longer functioning anywhere near the degree that it has been and does not look to make a recovery in the near future. As a matter of fact, to a large degree it's not functioning at all at this time as an estimated $200B worth of deals in the pipeline may be delayed or prevented from happening at all by a lack of funding. J.P. Morgan Chase, Citigroup and Goldman Sachs, lead bankers for the buyout of Chrysler, Wednesday shelved plans to sell $12 billion of loans to fund the purchase of the automaker by private-equity firm Cerberus from DaimlerChrysler. Future financing of deals will be hampered because the banks and investment banks who are now left on the hook for billions in loses due to previous LBO loan commitments will be unwilling or unable to take on new commitments. Meanwhile, credit-default swaps, the "insurance" against coporate bond failure, have seen prices rise to levels not seen since thier creation several years ago and spreads of corporate debt to government notes have widened to levels not seen since October 2001.

Another question lies with current debt holders. Their paper is now not returning fair rates of interest and even worse, they may be stuck holding notes who's prices have fallen in a very illiquid market. All those present holders of CDO's, CLO's etc are facing the daunting task of having to make new investments in an attempt to somewhat cover their loss. The pension funds, insurance companies and municipalities will likely be driven to the safety of government debt. We're already in a bull market for bonds that is being driven by a frantic flight from risk. What are the chances that these former buyers of collaterialized debt will be willing to buy more under the present circumstances-in other words-is good money likely to now chase after the bad? If you think that it will, then for you the bottom of this market is close. For me, it's not even within sight.

What does this all mean for currency prices? More of the same that occured this week. Unwinding of carry trades will be the order of the day. The dollar will appreciate vs the high yielders and lose vs the Yen. The BoJ is rumored to have intervened when the Yen hit 118 on the dollar last Friday-so that's the level to watch because if it's breeched, it could indicate that the BoJ may be unable or unwilling to stop the Yen from gaining further. In that case, the GBP/JPY pair could be driven to the lower 230's by week's end.

BillGross: Cheap LBO Financing is "Over"

2007-07-24T16:41:00.000-04:00

Watch and listen to PIMCO's Bill Gross as he talks about the LBO market.

Defaults on Some `Alt A' Loans Surpass Subprime Ones

2007-07-24T16:35:00.000-04:00

By Jody Shenn
July 24 (Bloomberg) -- Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc.

The three-month constant default rate for 2006 Alt A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, New York-based Citigroup analysts led by Rahul Parulekar wrote in a July 20 report. The figures represent the percentage of balances in a mortgage-bond pool expected to default in the next year based on 90-day trends.
The speed at which Alt A hybrid ARMs are being paid off due to home sales or refinancing has also fallen to about the same level as for subprime ARMs, which typically prepay more slowly, the analysts said. Slower prepayments can make the same rates of defaults more damaging by leaving more of the initial balances outstanding to eat into bond-investor protections.

The combination of challenges mean 2006 bonds backed by Alt A mortgages, a credit grade above subprime loans, may need ``lower loss severities to still come out with lower cumulative losses than subprimes,'' the Citigroup analysts wrote.

More than $800 billion of subprime mortgage bonds and $700 billion of Alt A bonds are outstanding, with ARM bonds totaling more than $600 billion and $450 billion, respectively, according to a March report by Zurich-based Credit Suisse Group.

ECB's Stark Sees a Sept/Oct Rate Increase

2007-07-24T10:19:00.000-04:00

European Central Bank Executive Board member Juergen Stark said today that "Euro-zone exporters have not suffered from a strong EUR up to now. What we have today is a new pattern of economic growth. But I would like to add one thing. Up to now we've seen a really gradual appreciation of the EUR. What would be problematic is if it should come to abrupt movements."

Regarding Euro-zone currency policy, he notes that an active currency policy would conflict with the ECB's main goal of ensuring price stability, and has no political support outside France.

On China, he said that, "The call by the Group of Seven is wholly right, that China must allow a stronger appreciation of its currency. But it is very hard to prove that a country is influencing its exchange rate in a targeted fashion, or that it is permitting a permanent undervaluation of its currency."

Commenting on Euro-zone currency policy, he notes that an active currency policy would conflict with the ECB's main goal of ensuring price stability, and has no political support outside France. When asked if the rising EUR might cause the ECB to hesitate about raising rates in September or October, he notes: "If the president says he has no reason to correct the expectations for (a rate rise in) September or October, then that is significant. We are still of the opinion that we have a robust, broad-based upturn."

Asian Investment in U.S. Bonds and Currencies Declines

2007-07-23T23:35:00.000-04:00

Song Tae-jeong, a researcher at the LG Economic Research Institute, said, "For the past decade, Asian countries have functioned as exporters of capital to the United States, offsetting its current account deficit. But changes in the global economic framework are underway".

In the process, the ratio of foreign reserves in U.S. dollars is steadily on the decline. The International Monetary Fund said that the ratio of dollar-denominated foreign reserves was 66.7 percent at the end of 2005 but the figure fell to 64.6 percent in 2006 and to 64.2 percent at the end of the first quarter this year.

Close: Markets Up On Earnings, Deals

2007-07-23T16:44:00.000-04:00

The Dow gained 92 points to 13,943 gaining .67%, while the S&P 500 gained 7.47 or .49%, closing at 1541.

Merck, Halliburton, Schering-Plough and Taser International all posted earnings that beat analyst's estimates.

In announced deals, Transocean Inc. and the GlobalSantaFe Corporation said today that they would seek to consolidate their lead in the fast-growing oil rig market. Hewlett-Packard said it will buy data center automation software company Opsware Inc. for about $1.6 billion and equipment rental company United Rentals said it had accepted a $4 billion takeover bid from private equity fund Cerberus Capital Management.

China's Exported Inflation May Signal Interest-Rate Pressures

2007-07-23T14:27:00.001-04:00

July 23 (Bloomberg) -- The rising cost of goods the U.S. imports from China may be an early warning signal that central bankers from the U.K. to India are about to pay a price for a cause they've championed: globalization.

China, a source of cheap manufactured products for the past two decades, may be starting to export inflation as the world economy grows at the fastest pace in a generation.

CEOs See `No Clear Signs' of Crisis as Sub Prime Woes Intensify

2007-07-23T14:21:00.001-04:00

July 23 (Bloomberg) -- On Wall Street, where the most lucrative credit markets are barely limping thanks to the worst housing slump in a decade, there isn't a chief executive officer who will tell you there is a crisis.