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Weekend Notes

I don’t normally make market calls, but I believe the market was set up to tank Friday, based on the liquidity factors I described in that day’s blog. Then, almost on cue, the Fed showed with a very large coupon pass, and the markets stabilized and turned on dime.  Just like using a charcoal light to stop a forest fire, and maybe just noise at this point. Looking at COTs, the commercials are very heavy short both notes, and stocks. Something is brewing.



Spotted this vivid example in regards to the players behind US Ponzi units. Recalling my earlier blog on “doing a Kara”, we see a Ponzi financier emerge to loan homebuilder Kara “operating” money as their bankruptcy unfolds. The Risklove involved in this transaction is an odd duck indeed. The following boilerplate description speaks for itself:

Medical Capital Group was started by the former DVI Director of Portfolio Management, Mr. Robert M Bauersmith in 2004 to provide equipment financing and leasing to the outpatient Imaging, Radiation Therapy and Surgery market.

Through his many years in the leasing business he developed excellent working relationships with a number of top notch lenders. Today he uses these relationships to bring his clients financing and leasing packages tailored to their specific needs. Whether your needs are ?small ticket? (we can do leases as small as $5K) or a major project or acquisition involving millions, you receive the same personalized, confidential service. Our quotes are all one rental in advance, no smoke and mirrors, no hidden charges or fees.



Shifting Sands and Signals

This bombshell really caught my eye last night. The US Wizards (Fed) actually conducted a $2.32 billion drain (sold securities from it’s holdings, pulling money out of the economy) from it’s SOMA or permanent account last week. Further, they conducted the drain in the T-Notes, not Bills. The timing didn’t strike me as technical, as the huge TIO operations conducted by the Treasury are abating. On top of it, the Treasury is going to market to raise $21.5 billion (plus or minus, the to be announced four week bill ) in new money next week. Therefore, for a SOMA drain to make sense from a timing point of view, it should have occurred a month ago, not now. The Fed hasn’t really been friendly with liquidity at all of late, and to me this suggests they are stepping aside of any operation to keep longer rates down. Their cronies, the foreign central banks (FCB), have not been friendly either.  In the last six weeks they have sold $8 billion in US Old Maid Cards from their custodial accounts.

The rationale for this approach is long overdue. The Wizard’s clients, the Pig Men, especially the banking wing of the enterprise, is now being badly squeezed by the inverted yield curve. Banks have already milked all the time deposits they captured in 2004-2005. Nearly all of those have now rolled off, and with little, if any deposit growth, banks must compete for funds, and cost for new time deposits are solidly over 5%. Therefore it doesn’t make sense for banks to borrow new money at 5.5%, and purchase what to my mind are longer term, high risk, low yield securities like agencies, or mortgages, mortgage back securities (MBS) or asset backed securities (ABS; car loans, etc). 

Indeed, one big player, Bankamerica, said as much in their conference call yesterday, announcing that they are going to gradually unload $100 billion in securities (MBS represent 80% of what BAC has for sale), presumably to Riskloves and FCBs. I say presumably, because this ASSumes that hedge funds are willing to be the last ones standing when the music stops. The Riskloves in turn are ASSuming the FCBs will take these Old Maid Cards as well, but in reality the FCBs have actually sold $1.6 billion in agencies in the last four weeks. Gee, ya think these rocket scientists have finally connected the dots about rising foreclosures, and ghost neighborhoods in the US?  On the later score, this story out of Las Vegas even blew my cynical mind, especially this part. Do vacant houses with big mortgages, really make sense for a central bank reserve holding?

Right now there are about 22,000 existing homes on the market across the valley and 9,800 of them are vacant.

Apparently, some foreign entities philosophically just don’t buy into this scam? Russia, seems to be one, they are just reluctant to play the game. They announced this week that they would shift $35 billion in USD out of their holdings, and into Yen. The Yen carry trade Riskloves dismissed this one too, but one by one the Ponzi daisy chain is breaking up. Adding insult to injury, China conducted the largest IPO in history. That’s $19.1 billion in capital flows coming from “somewhere” back into Asia, to support Chinese, rather than American plutocrats.

When one adds all this up, the Fed is trying to impact the longer end of the curve higher for several reasons: 1. keep the waning capital flows coming  to support this (see Chart) 2. get a normal “profitable” yield curve in place for their banking cronies, who incidentially are also short a slew of note futures, how convenient, umh. 3. slow down runaway credit demand into nonsensical speculative ventures, such as Ponzi finance to support more vacant properties. 4. actually slow imported consumption some (see chart again), and put up a further token inflation fight.  Perhaps, though this ASSumes, the Wizards are even capable of promoting this kind of sound policy? Stay tuned.




Washington Mutual reported results that can only be described as being sandpapered. We are now in a strange brew of continued Ponzi finance, combined with steadily worsening credit conditions, and squeezed financial margins. In WM’s case, nonperforming assets increased to 0.69%, from 0.52% a year ago, and 0.62% in June. 30 day plus delinquencies in credit cards popped to 5.53% from 5.23% in June, and 5.18% in March. Moreover the following item was in the footnotes: ”Without the impact of the planned sale of $403 million of higher risk accounts, managed receivables at period end and the 30+ day managed delinquency rate would have been approximately $22.32 billion and 5.99 percent“. WM also seems to be motivated to get rid of higher risk credits, although gain on sales generally on $30.24 billion in mortgages securitized was down to only $119 million. More color on credit card conditions was also reported by Capital One,  as delinquencies rose to 3.24% in the quarter, up from 2.92% in June. Charge offs rose a similar amount to 2.36% from 2.01%. Bankamerica cards “held 90 days delinquent”: March: 1.94%, June: 2.37%, Sept: 2.50%.

WM indicated that net interest margins fell to 2.53%, down from 2.65% in June, and 2.75% in March. The cost of their total interest bearing liabilities increased to 4.48% from 4.12%. Time deposit costs at 4.77% (from 4.39%) are finally approaching three month t-bill rates, as the cheap rates on older CDs roll off. WM suggested that margins should stabilize as they are “nicely” positioned to pass higher borrowing rates on to Joe Soccer Mom (JSM).  We were also offered generic clues about employment conditions in the financial sector, as WM has eliminated 9,300 jobs in the last six months. They also sent 3,800 jobs to India.  Not much was offered in the conference call about JSM’s ability to absorb the higher pass through rates, fees, and job losses that are so important to WM’s (and others) strategy. . Clues on that are coming from other sources though, as California home-loans defaults are now the highest in four and a half years. A couple key items in this article:

About 19 percent of homeowners who were in default earlier this year lost their homes to foreclosure in the third quarter. That’s up from 6 percent a year earlier, DataQuick said.  The median age of the home loans that went into default in the third quarter was 14 months. More than half the loans were originated in 2005.

Adding fuel to this sticky wicket, aggressive late cycle debt enabler Accredited Home Lending warns this morning, citing “increasing turbulence in the market for home loans to less-creditworthy buyers”.  A few obvious hints mentioned, and I await with baited breath for the details. A glance at this chart from San Diego County, is starting to look like the early parabolic lift off in housing prices up to a year ago.


More now routine “cows already out of the barn” butt covering commentary from the apparatchiks, in this case John Dugan. I would refer you back to the California foreclosure numbers as to who is in trouble first. Answer: 2005 originations, loans made while Mr. Dugan’s agency and others were “monitoring” the situation, and being lobbied and delayed by Pig Men. 

Dugan told members of the American Bankers Association that a recent underwriting survey showed a “significant easing” in residential mortgage lending standards.  The survey showed lenders are doing the opposite of what regulators would expect them to do in a cooling housing market: allow longer interest-only periods, more piggyback loans, higher loan-to-value ratios, and more reduced-documentation loans.  “Frankly, that concerns me.”

This $19-22 billion mutha IPO out of China, ought to suck a lot of hot money out of the western Godfather racket tonight. Proceeds will largely be used to line the pockets of Chinese, not western plutocrats. Perhaps marks the peak of the financial sphere mania and Bubble? On the general topic of developing a Chinese Pig Man to compete with, and pull their own capital back from the West, Australian Treasurer Costello all but calls for it .

Peter Costello has called on East Asia’s central bankers to “telegraph” their intentions to diversify out of American investments and ensure an orderly adjustment. He said underdeveloped financial markets were to blame for the emerging economies of East Asia sending 94 per cent of outward portfolio investment to “ageing” countries outside the region.