Welcome to the Weekly Report. Normally at An Occasional Letter From The Collection Agency we try to focus attention on the macro-economic near term effects using the Weekly Report, allowing the Occasional Letter to look further into the future by about 18-24 months. We have reached a stage now where it is becoming difficult to keep the various strands of my convoluted thoughts distinct and clear for the readers so, in keeping with one or two other writers it is time for a re-cap.
My first public post on a financial site was 21 months ago so the timing is right. Unfortunately for the readers of my eco-babble I cannot do a 6 month resume, so here it is, a 21 month review of my work. We start off with a quick update to last week and a quirky question and then into the meat of the review.
Last week I opened by saying even I was worried about my own bearishness, using my own thoughts to make me think about possible supports (highlighting LTCM levels as possibly the area to watch for banks and financials). I am still watching this level. If support doesn't hold we are on our way down to the 9300 area on the Dow, eventually.
I have very little to sell, my little website was set up using the Austrian School of Economics as a guideline, it ticks along at a minimal cost to members because I didn't incur any debt or debt servicing costs to set it up. The capital I use is from savings and is repaid by the small subscription I charge, it even makes a small profit which when saved over a period of time may allow me expand the facility. If all my subscribers left tomorrow I could close the site down and walk away without having incurred any loss and move on to something new.
Now apply that line of thought to every single company in the S&P500. Can you find a single company that would be able to follow the same path? If you can, let me know because it would be nice to find a well run, properly capitalised Large Cap to put on the "long" watch-list. Remember, no debt. That includes bond issuance. If you wanted to be really at the cutting edge of investment in the new era of capitalism that will rise from the ashes of this Monetarist/Keynesian credit/debt orientated fiasco, check out the Funds in your portfolio, any leverage being used? The expression that "cash is king" is going to become the"new" catchphrase in the near future.
It is here that I have to do a recap of my previous remarks and comments about the economy. Unlike many bloggers and writers who are looking at the next Quarter or the second half of '08 and recounting what they said in March, my view has to go back much further than that to see if what I wrote about last year or earlier is coming to fruition. It is the only way I can help readers understand how my poor befuddled brain works. Now I cannot re-create each article here but what I can do is give you a link and a couple of key words or a phrase with the date of the article.
Is this an ego trip, a boost to my already self enhanced view of my abilities? Not really, it's just a way of showing you my timespan, how my thought processes work, you will find the odd wrong call too. So here we go:
A First Sighting originally written in November 2006:
"A lack of cash, driven down by tighter, more expensive credit, a lack of liquidity that starts at the bottom and works its way higher up the food chain, until even those, referred to in whispered tones as daz boyz, see that the health of the US economy is going to require a donation of wealth from everyone. Even them.
Can you see what I have caught a first sighting of?
And out there, somewhere in Hedgeland, someone is finding it more and more difficult to sleep at night, thinking about all those CDO's sitting on the books. No one to lay it off to, a one way bet on liquidity."
Gone in Sixty Seconds originally written in June 2007:
"If you have debt you are bending over and picking up the soap.
Straightforward, no nonsense, in the prison block showers, soap collecting. Hopefully coffee has been spat at screens, wives/delicate husbands have been offended and stopped reading within 60 seconds. Because what I'm about to impart to you should make you feel this way. You, Joe Public, are about to be ridden into the oblivion. No one can save you, no one really cares. Big boyz, from companies like mine are going to take your possessions away. Faceless corporations are going to take your home away. All because you have debt."
The Second Sighting originally written in September 2007:
"This leads us back to a rather large problem. In fact its huge problem and its not being talked about out there in Media land. What happens to a tapped out consumer, loaded with debt, trying to roll a teaser/innovative (thanks AliG) mortgage if rates are going up? It's not going to happen, it's a train crash. Borrowers are already operating under tighter credit controls so the ability to re-fi is curtailed for many. Add in much higher rates and the situation becomes impossible. Banks are going to suffer from a curtailed income stream, as debt default rises, just as the teaser rates for the Banks' borrowings come to an end and reset much higher. Can you see the irony?
Banks are no better off than over stretched sub-prime mortgage borrowers. They need an income stream from lending to ensure they can pay the liabilities they owe to savers, savers that will demand higher yields. It's unsustainable and it's going to stop, soon.
Banks are hit with a double blow, as a lack of income leaves them either unable to service their own debt and default or forces them into repaying the debt using capital holdings or returns from assets sold in the markets. Either way, credit for business and consumers becomes impossible to provide. A massive contraction of activity is a given.
It's been noticeable of late to see the recession word crop up, even in the mainstream media. I think they are wrong. I think the future contains a scenario much worse than a recession.
So, my forewarned reader, will you be leaving your money in a "sub-prime" bank?"
What Do Paulson, Bernanke and Greenspan Have in Common? Originally written in October 2007:
I want to walk you through why I see deflation in the future.
At this point I have to make something clear, whilst the traditional view of deflation is less money in the economy, I do not see cash as the current driver of inflation/deflation. The mover is credit. Allowing an unfettered increase of credit to replace the traditional over printing of notes to sustain a bubble(s) or ponzi scheme (if banks have, as a % of loans, effectively no reserves, what else can the system be based on?) then a reduction in credit must be deflationary.
The importance of this cannot be under-estimated. Credit itself has/is being used as an asset to beget more credit. This explains the exponential rise in credit; it feeds on itself as credit notes become the asset to allow further credit to be lent out. By allowing credit to underwrite itself to form other types of credit the whole system becomes reliant on the confidence of lenders and borrowers having the means to eventually repay. If that confidence is put under pressure, the system stops. If confidence cannot be restored in a very short timescale (Central Bank / Tsy intervention) then the system begins to reverse, as credit is redeemed. The reversal will be at the same pace as the initial rise in credit growth. Although painful, the reversal would be orderly, as long as all the borrowers have the ability to repay. If that ability to repay is impaired then the redemption becomes disorderly.
Is Ben Bernanke Getting Undeserved Criticism? Originally written in November 2007:
"So is Mr Bernanke getting undeserved criticism? I think he is and I think I know why. There is a war on Wall St right now and it's viscous. There are interests that need protecting, accounts that need to be kept hidden and rescues that have to be carried out. All of this has to happen in conjunction with falling rates. If it doesn't happen quickly, with the full cooperation of the Regulators, Fed and USTsy, then whole ponzi scheme comes crashing down. Someone though isn't giving out enough covering fire. Mr Bernanke is keeping some of his powder dry by not telegraphing further rate cuts, in fact you could easily see a case for rate rises if some of the downside risks become too big to ignore.
Wall St doesn't like it. The last thing the Cabal expected was that they would have to use their own money to sort out their own mess.
Is Mr Bernanke getting bad press at the behest of Wall St?"
The Event Horizon For Credit originally written in November 2007:
"You can now see why, as a result of a flat to falling monetary base coupled with a contraction of credit, I see the risks of a deflationary recession as a very high probability. A depression is not as remote as many think.
Is this just a US-centric problem? Not according to Esteban Duarte and Steve Rothwell at Bloomberg, who unearthed this:"
Europe Suspends Mortgage Bond Trading Between Banks
Nov. 21 (Bloomberg) -- European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.
The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.
Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded banks pay the highest interest premiums on covered bonds in five years.
"We are in a deteriorating situation," Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. "A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation."
"You can find more about Covered Bonds at: http://ecbc.hypo.org/Content/Default.asp - if you can spot the difference between a CB and the MBS, ABCP or ABX derivatives then you have a keen eye.
Oh, and yes, you read that correctly - that is a $2.8 Trillion lending market that has been closed. No wonder LIBOR has been climbing to new 2 month highs and above and reaching new all time high in spreads from the Fed Funds Rate.
You are probably realising that this weekends events are not a surprise to me. As you can see my eco-babble ratcheted up as my first blog came into existence, prior to the blog I published my thoughts on financial bulletin boards, I moved on as the spammers began to disrupt any possible conversation and a core demand grew for my thoughts. Now I know you want more, especially as it is free, so refresh that beverage and we will move forward into 2008. First though was my long term warning about the state of the Stock market, given to readers as a Christmas present in December 2007:
- The next chart shows 2 things. The first is my dire attempt to display what I consider to be the best chart of the year. If only I was better at this graphics stuff eh? Ah well readers, you can't have everything..... The second is the chart itself. I have overlaid a chart of the Fed Fund Rates from 1986 to present with a monthly chart of the Dow from 1986 with its Coppock Indicator. It's clear to see the CI before 1996 did indeed lag and post '96 it's a much better tool. Although the CI is used to indicate a bull market on a rise through zero it can be seen that in either half of the chart CI did give a lower high before stocks broke lower (marked by faint red lines). What's more those lower highs were divergent when compared to the Dow which made higher highs:
So, what are the Coppock, Fed Fund Rates and the Dow trying to tell us now? Firstly a rider. Although Fed Fund Rates are falling, other rates, especially LIBOR are not. We should keep this in mind. Firstly, we have a falling CI, with a divergent lower high when compared to the Dow. The Dow itself is beginning to resemble the 1999/2000 top, without a lower low as yet. Fed Funds are dropping and if consensus (a warning in itself) is correct, FFR will be much lower next year.
With the CI acting in a much more timely fashion, the minimum we can expect is for a flat return on stocks whilst FFR has ongoing cuts and the downward direction of the CI is maintained. A lower low on the Dow would make the flat return scenario seem less likely and open up expectations of a larger fall in 2008.
A simple lesson that many refused to listen to is about Fed Funds Rates and stocks, simply put: in this era of credit driven expansion falling rate environments are not a good time to buy stocks and this years events keep that rule intact. On the 4th of January 2008 I issued a warning to subscribers to adjust their strategies as I thought the Fed would cut rates between FOMC meetings.
Are you thinking I may not be specific enough? Well I don't like to mention specific calls on individual shares, that's not really what I am about but this one had reached an important level:
Citigroup - Opportunity or Death Rattle? Originally published in January 2008:
- "The current low is different, a sustained period of selling continues whilst the oversold condition persists. It is the opposite condition of continued buying whilst in an overbought condition as seen in 1999/2000. Unless a financial miracle occurs Citigroup is going lower, 1998 anyone? If my suspicions come to fruition then the price may well end up quoted in cents."
Now Citi was already in a well established downtrend but I wanted readers to note that the low on Citi in January was different that in the previous decade. As we have seen Citi has indeed hit the 1998 low. Whilst the mainstream financial media and some bloggers were saying it was a buying opportunity my Technical Analysis was saying something very different. Fundamental Analysis is not ignored either as we take a look at this:
"We see the same deterioration in price and the widening of spread that has become so familiar in the CDO/MBS indexes. As with housing, the inability to create further derivative structures due to rising spreads (risk premium) will curtail the lenders ability to clear the balance sheets and facilitate further lending.
It isn't just the Markit.com index which is dropping. TRR (Total Rate of Return) CLOs are struggling too as Fitch Rating Agency has noted, downgrading 28 tranches and also placed an additional 37 tranches on Rating Watch Negative. Unsurprisingly TRR CLOs are a mixture of derivatives of loan portfolios that according to Fitch are now at risk for intensified spread/credit risks. Market values on the SMi U.S. 100 have fallen 6% since mid '07. Considering the type of asset and its potential lack of worth in a flooded market (unlike housing) I expect spreads to widen considerably.
It seems to me that a combination of tightening credit for the consumer, caused by the inability of lenders to clear balance sheets due to derivative markets pricing in higher risks which is stifling new issuance, will cause a real fall in spending on Autos. It should not be forgotten that other unsecured debt will have the same problems.
The possibility of widespread damage in the US domestic Auto industry beyond GM and Ford seems much greater today than at any other time."
What really worries me is the manipulation of Joe Public when it comes to investment and, more importantly, the truth about the scale of the impending collapse of the current form of capitalism. The next article was this:
AIG Get Caught By The Auditors originally written in February 2008:
"Support at the $50 seems bust and the threat is a monthly close below the '03 low. It's yet another chart that flags up the lows from 1998. I'm not saying it's a short (or a long) that's not my job. I just want you too see something that looks worse than me in the mornings.
By the way, be careful of who you listen to. This was one of the comments I saw on Bloomberg about the AIG drop:
"Investors eventually will look back at yesterday's announcement and conclude they overreacted, said David Katz, chief investment officer for New York-based Matrix Asset Advisors, who supports Sullivan (the CEO)." Must be a coincidence......
Then again we are at point in the markets were hope is being ladled out to the hungry and despondent. As I write this little snippet appears:
"U.S. Industry: Uber-investor Warren Buffett on tv making remarks about the monoline insurance industry, apparently has offered a reinsurance plan to those firms. Talk has boosted the recently ailing monolines and is said to be behind the solid bounce in US stock futures in recent trading. Provided by: Market News International"
I have some bad news for Mr. Buffett. This isn't the bottom even for the better quality debt. As I have maintained for some time contagion in the derivative bond market is deeper than anyone realises and it has spread beyond investment and traditional banks. AIG know that only too well.
We go on; I know you are getting the point but this NOT an exercise in boasting about my calls on the markets, economy and impaired businesses. This is to remind you that things are truly different this time, to jog your memory, that just because changes are made it doesn't make the problem go away.
By now I was producing the Weekly Report and this particular issue got a huge number of hits: The Weekly Report 25 February 2008:
"Now, I am not going to give you advice on what to do about your cash on deposit and I don't want you to think I am being overly bearish but…….I have called this whole fiat credit collapse correctly from the beginning. No, I don't want a pat on the back. I just want to read the next line carefully.
If I had money in a US bank today, I would be worried. So worried I would withdraw the cash before new regulations are passed restricting account activity. I know it sounds alarmist but then the first warnings always do."
Did you know that this weekend all customer "on-line" and phone access to IndyMac has been suspended, with normal service due to re-start on Monday?
This from CNN Money:
"Customers with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells the bank, said FDIC Chairman Sheila Bair. IndyMac customers will have their funds transferred to a new entity - IndyMac Federal FSB - controlled by the FDIC. They will have uninterrupted customer service and access to their funds by ATM, debit cards and checks.
However, customers will have no access to online and phone banking services this weekend, according to the FDIC. Service will resume on Monday. Loan customers were advised to continue making loan payments as usual."
With the timing of the IndyMac announcement and the restrictions imposed, what chance does a customer have of protecting their assets? Of all the remarks I have ever made, the one quoted from the 25th February is the most important for individual investors and savers. At the time I wrote it a reader left a comment that my bearish pronouncements might ignite a "theatre fire" type rush for the exits. My longer term readers may well have smiled at this, they know I look far enough ahead to issue warnings before the show starts.
On the 3rd March in the Weekly Report I wrote this:
For those who think a run on the $ would be inflationary, think again. The pressures placed upon the financial system would be overpowering. It would collapse, within hours. A fiat system without access to credit would result in instant depression. It doesn't matter how "expensive" assets are if you cannot buy them. For instance, taking account of Fed Pres Poole remarks, the opportunity has arisen were speculators can start to look at shorting GSE's and the $.
The Fed is playing an incredibly dangerous game and I suspect it is about to be called after going "all in".
Nuff said. We are now at the point in the present that my projections saw coming. I didn't see everything that was going to happen and a couple of calls are still waiting to happen but I don't think I did too badly.
But what of the future you say? Get another coffee and we will look forward to what I think maybe in store for us all.
To read the rest of this special Weekly Report click here to visit my free blog.
This will be the last full article that will be freely available for some months.