Inflation Gone Wild | Bond-Market Vigilantes Back?
 

[b]"Inflation Gone Wild": China[/b]

[url=http://money.cnn.com/2008/08/11/markets/china.ap/index.htm]China shares fall to 19-month low[/url]: [i]Benchmark Shanghai Composite Index tumbles 5.2% on economic fears.[/i]
[quote]SHANGHAI, China (AP) -- China's benchmark Shanghai Composite Index fell 5.2% Monday following the release of economic data showing wholesale price inflation jumped to its highest level in 12 years in July.
...
[b]The government reported Monday that the producer price index rose 10% in July over a year earlier[/b], its highest rate of increase since 1996 and a jump over June's 8.8% rate. Such increases, fueled by rising energy and raw materials costs, add to pressure on consumer prices, complicating Beijing's effort to rein in politically sensitive inflation.

Chinese investors have become increasingly jittery over the economic outlook amid signs that the malaise afflicting the U.S. and Europe might be spreading to Asia, with corporate earnings bound to suffer. Analysts said the start of the Beijing Olympics last week had quashed any lingering hopes for a games-related rally.[/quote]
The skyrocketing producer prices in China, in addition to greatly-increased fuel costs to ship Chinese exports overseas, have also made [url=http://money.cnn.com/galleries/2008/fsb/0808/gallery.china_cost.fsb/index.html]outsourcing to China[/url] dramatically more costly.

[b]"Inflation Gone Wild": Argentina[/b]

[url=http://www.bloomberg.com/news/index.html]Argentina to Buy Back Bonds in Bid to Stem Rout Sparked by Inflation Surge[/url]: [i]Argentina will buy back dollar- and peso-denominated bonds in a bid to halt a tumble in prices sparked by mounting concern that President Cristina Fernandez de Kirchner will fail to curb an inflation surge.[/i]

[b]Auction-Rate Bond Probe Costs Will Be "Historic"[/b]

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=a4cdAHpcUJYs&refer=news]Auction-Rate Bond Probe Costs May Rival Spitzer, Mutual Fund Settlements[/url]: [i]Wall Street's costs to end federal and state investigations of the auction-rate bond market's collapse may wind up exceeding the sanctions from abuses of mutual funds and analyst research in the past decade.[/i]
[quote]"These are developments of gigantic, historic proportions," James Cox, a securities law professor at Duke University in Durham, North Carolina, said of the auction-rate agreements. "Never have we witnessed defendants, who created a product that isn't inherently illegal, being required to buy back such a large market."[/quote]

[b]Bond Markets May Have Final Say On Next President`s Budget Proposals[/b]

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=ayrMJ4R.bmLY&refer=news]Bond Vigilantes May Ambush Obama or McCain After Giving Bush a Free Ride[/url]: [i]The bond vigilantes who've been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.[/i]
[quote]Investors and former policy makers predict that the same market forces that torpedoed President Bill Clinton's ``putting people first'' spending initiatives at the start of his presidency are gathering again at the prospect of McCain's tax cuts and Obama's health-care and education programs.

``Though times are different and a lot of the government spending is necessary, we're going to see rates rise in a saw- tooth pattern over the next few years,'' says E. Craig Coats Jr., the head of Salomon Brothers' government securities desk when it was the world's biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.[/quote]
This clears up a seeming conundrum that`s been puzzling me for years - namely why Alan Greenspan was such a "budget hawk" during the Clinton years and then turned in Mr. Hyde-like fashion into a deficit-spending advocate under Bush. Apparently I was giving the man too much credit for fiscal prudence under Clinton - seems it was the bond markets doing the talking. So one conundrum is replaced by another, namely: why have the bond markets given Bush a free pass? Misguided patriotism in the wake of 9/11?

SEC Finds "Smoking Gun" In Bear Options Trading
 

[b]SEC Finds "Smoking Gun" In Bear Options Trading[/b] - It will be interesting to see whose finger squeezed the trigger:

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=aM3K1AiyyN.E&refer=news]Bringing Down Bear Began as $1.7 Million Options Pointing to Rigged Market[/url]: [i]On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street's devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.[/i]
[quote]Aug. 11 (Bloomberg) -- On March 11, the day the Federal Reserve attempted to shore up confidence in the credit markets with a $200 billion lending program that for the first time monetized Wall Street's devalued collateral, somebody else decided Bear Stearns Cos. was going to collapse.

In a gambit with such low odds of success that traders question its legitimacy, someone wagered $1.7 million that Bear Stearns shares would suffer an unprecedented decline within days. Options specialists are convinced that the buyer, or buyers, made a concerted effort to drive the fifth-biggest U.S. securities firm out of business and, in the process, reap a profit of more than $270 million.

Whoever placed the bet used so-called put options that gave purchasers the right to sell 5.7 million Bear Stearns shares for $30 each and 165,000 shares for $25 apiece just nine days later, data compiled by Bloomberg show. That was less than half the $62.97 closing price in New York Stock Exchange composite trading on March 11. The buyers were confident the stock would crash.

``Even if I were the most bearish man on Earth, I can't imagine buying puts 50 percent below the price with just over a week to expiration,'' said Thomas Haugh, general partner of Chicago-based options trading firm PTI Securities & Futures LP. ``It's not even on the page of rational behavior, unless you know something.''

The 57,000 puts that traded March 11 at the $30 strike price and the 1,649 that traded at $25 were collectively worth about $1.7 million, Bloomberg data show. Each put is equal to 100 shares of stock.

`Lottery Ticket'

``That trade amounted to buying a lottery ticket,'' said Michael McCarty, chief options and equity strategist at New York-based brokerage Meridian Equity Partners Inc. ``Would you buy $1.7 million worth of lottery tickets just because you could? No. Neither would a hedge fund manager.''
...
Evidence of any scheme to bring down Bear Stearns is most likely buried in options data, according to former government investigators. Options, contracts to buy or sell shares by a certain date at a specific price, can offer forensic evidence of market manipulation and insider trading, said Brent Baker, a former U.S. Securities and Exchange Commission Enforcement Division lawyer who helped prosecute Anthony Elgindy, the stock- picker convicted in 2005 on 11 counts of securities fraud, wire fraud, extortion and racketeering.[/quote]
Curiously, various independent financial bloggers have been writing about the extremely suspicious Bear put activity [url=http://boombustblog.com/component/option,com_myblog/show,Bear-Stearns-conspiracy-theories.html/Itemid,20/]for months[/url] - I wonder what took the SEC so long to get off their collective butts. I see "conspiracy theorist" Olagues [author of the preceding "for months" linked article] gets s prominent mention in the Bloomberg article:
[quote]...on March 14, the CBOE listed a series of put options with less than five days to expiration. The lowest strike price, $5, was more than 90 percent out-of-the-money in what options traders refer to as a ``bankruptcy put.'' Bear Stearns slumped 47 percent that day to $30 in NYSE trading.

The out-of-the-money Bear Stearns puts point to a raid, said Baker, who's now a securities lawyer whose clients include companies that have filed complaints over naked short selling.

The $25 Bear Stearns puts, and others obtained March 14 involving the right to purchase 630,000 shares at a strike price of $5 by March 22, were ``bizarre,'' according to Haugh, the PTI partner who spent 18 years as a CBOE options-market maker.

John Olagues, who started trading options 30 years ago, said he has never experienced anything like it. Olagues, who runs a New Orleans consulting company called Truth in Options, also manages more than $1 million for a client who had a stake in Bear Stearns, which plummeted 94 percent in value on March 17. The drop prompted Olagues to start poring over options trading records and call officials at the CBOE.

``In just one tick, the company's share price lost nearly all its value, a steeper drop than Enron's right before its de- listing in 2001,'' said 63-year-old Olagues, referring to the bankruptcy of Houston-based energy trading company Enron Corp. ``I've never seen a stock perform like that in my life.''

Olagues, who was an options market maker at the Pacific Exchange and then the CBOE from 1976 to 1984, said he knows all about so-called time decay, implied volatility, arbitrage and the complexities of options trading. The former all-conference pitcher at Tulane University, who started Truth in Options in 2003, said he has found options transactions that convince him Bear Stearns was the victim of insider trading.

``I would stake my reputation on that,'' he said.[/quote]

Karl Denninger`s [url=http://market-ticker.denninger.net/archives/537-Mauling-Monday.html]latest[/url] also discusses the Bear Put action, and the SEC's flagrant bias in allowing fraudulent stock manipulation *upward*, and only taking note of the negative rumormongering. How many false "Imminent monoline bailout!" rumors did CNBC's Charlie Gasparino spout back in March and April? One never heard the SEC complain about that.

Prime Loan Defaults Way Up | Dear Investor...
 

[url=http://money.cnn.com/2008/08/12/real_estate/prime_defaults_price_drops/index.htm]Prime mortgage defaults soar[/url]
[quote]NEW YORK (CNNMoney.com ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance. [/quote]
Even for a very-bearish-on-housing person like me, those figures are simply startling. "Prime" jumbo loan defaults nearly quadruple in one year. The key thing driving this would seem to be that borrowers who are deeply underwater in terms of their loan-to-current-home-value balance have a powerful incentive to [url=http://market-ticker.denninger.net/archives/538-Price-Inflation-Home-Deflation.html]just walk away[/url]. Even chief NAR shill Lawrence Yun [who I credit with sounding like a grim realist, at least relative to his lunatic-rose-colored-counterfactual-embracing predecessor] gets the negative feedback loop at work here:
[quote]...there's a strong inverse correlation between home prices and defaults, according to Lawrence Yun, chief economist for the National Association of Realtors.

"It's a feedback loop," he said. "Price declines lead to more defaults, which leads to more price declines."[/quote]


[url=http://www.time.com/time/business/article/0,8599,1831424,00.html]Time.com | The Credit Crisis Spreads to Europe[/url]
[quote]For banks across Europe, as for their U.S. counterparts, 2008 is proving painfully difficult. Globally, banks could write down as much as $450 billion more over the next three to four years, according to research from Deutsche Bank. Lenders, it says, are short of funds equivalent to 4% of their balance sheets, with those in Ireland, Spain and Britain finding fund-raising particularly tricky. As the U.S. sputtered over the past year, Europe's economies initially drew praise for motoring on. But housing markets in Ireland, Spain and the U.K. have turned down fast in the past few months and food and fuel bills have soared. Europe, it seems, has finally caught America's cold.
...
In an attempt to shore up the housing market, British lenders have in recent weeks begun squeezing their fixed-rate mortgages to lure buyers in. The government, meanwhile, is examining a temporary suspension of the tax paid by new buyers. What's really needed, though, is an interest rate cut. That's unlikely. On August 7, the Bank of England opted to hold rates at 5% because it's scared a cut will allow inflation to balloon further.

Grappling with rising inflation at a time of weakening expansion is a challenge for the European Central Bank, too. Figures released on August 6, for instance, showed a shocking 2.9% fall in German manufacturing orders in June. The country, fuelled by a booming market for its exports, has lately helped drive growth in the 15 nations that use the euro. Rendered more costly by the recent strength of the currency, those exports are under pressure. The result: though inflation within the euro area stands at 4.1% — more than double the ECB's goal of 2% — the region's central bank announced earlier this month it, too, would keep rates on hold. "Both the ECB and Bank of England have been caught between a rock and a hard place," says Matthew Sharratt, an economist at Bank of America in London. "The best they can do is to leave rates where they are until they see some signs that inflation has peaked or started to come down."[/quote]


[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=a4A3yRSaEHRA&refer=news]Wall Street Mortgage Losses Cut Tax Bills to Zero, Reduce New York Revenue[/url]
[quote]Wall Street's mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.[/quote]


In a rare bit of positive news:

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=a0rWVG6wnNWY&refer=news]U.S. Trade Deficit Unexpectedly Narrows as Exports Grow Most in Four Years[/url]: [i]The U.S. trade deficit unexpectedly narrowed in June as the biggest jump in exports in more than four years overwhelmed record imports of petroleum.[/i]
[quote] Aug. 12 (Bloomberg) -- The U.S. trade deficit unexpectedly narrowed in June as the biggest jump in exports in more than four years overwhelmed record imports of petroleum.

The gap shrank 4.1 percent to $56.8 billion from $59.2 billion in May, the Commerce Department said today in Washington. Shipments to Germany and the U.K. rose more than 4 percent, exports to Italy jumped 9.7 percent, and sales to Argentina and Brazil also climbed.

Rising international demand is helping manufacturers like Caterpillar Inc. withstand a slowdown in U.S. sales, and today's figures may lead the government to lift its second-quarter economic growth estimate. The boost from trade may wane later this year as expansions in Europe and Japan stall. [/quote]


And on a humorous note:

[url=http://nihoncassandra.blogspot.com/2008/08/dear-investor.html]Dear Investor...[/url]
[quote]This letter is to inform you that the wheels have come off of the proverbial wagon at ACME Systematic Leveraged Macro Momentum Fund LP...[/quote]

US Corps: 2/3 Tax-Free | Chain Restaurant Meltdown
 

[i][b]"Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works"[/b][/i]
-- John Stuart Mill


[url=http://www.nytimes.com/2008/08/13/business/13tax.html]GAO Report: 2/3 of U.S. Corporations pay no income tax[/url]
[quote]Two out of every three United States corporations paid no federal income taxes from 1998 through 2005, according to a report released Tuesday by the Government Accountability Office, the investigative arm of Congress.

The study, which is likely to add to a growing debate among politicians and policy experts over the contribution of businesses to Treasury coffers, did not identify the corporations or analyze why they had paid no taxes. It also did not say whether they had been operating properly within the tax code or illegally evading it.

The study covers 1.3 million corporations of all sizes, most of them small, with a collective $2.5 trillion in sales. It includes foreign corporations that do business in the United States.

Among foreign corporations, a slightly higher percentage, 68 percent, did not pay taxes during the period covered — compared with 66 percent for United States corporations. Even with these numbers, corporate tax receipts have risen sharply as a percentage of federal revenue in recent years.[/quote]


[url=http://www.wsj.com/article/SB121859719364035879.html?mod=psp_whatsnews]WSJ | Pizzeria Uno chain misses bond payment[/url]
[quote]The parent of Uno Chicago Grill, a chain of 200-plus pizzeria-themed restaurants, will skip a bond payment on Friday as it tries to negotiate more financial breathing room amid increasingly difficult times for sit-down eateries, according to two people familiar with the matter.
...
Other chains, such as Chevys Fresh Mex and the home-style Perkins and Marie Callender's chains are also in talks with their lenders, say several people familiar with the companies. These chains, which combined have about 1,000 sites across the country and 40,000 employees, also face difficulties. All have had earnings slow as diners cut back on eating outside their homes. At the same time, the companies are managing heavy debt loads placed on them by private-equity funds.[/quote]
Looks like the private-equity corporate-looting business model pioneered in the 1990s may finally be on ropes due to the drying-up of the cheap credit which made it viable. Good riddance, but taking this rubbish out is going to come with some serious collateral damage to the companies currently operating in indentured servitude under its umbrella.


[url=http://money.cnn.com/2008/08/12/news/companies/taylor_nissan_gm.fortune/index.htm]Fortune: Why GM passed up the chance for an extra $10B per year[/url]
[quote]NEW YORK (Fortune) -- General Motors' directors let it be known last week that they are closely watching deteriorating conditions at the automaker. They gave CEO Rick Wagoner a vote of confidence and publicly disclosed that they are monitoring the company's performance on a week-to-week basis.

Before applauding their greater involvement, though, it is worthwhile to revisit a decision the directors made two years ago, under Wagoner's guidance, to scuttle a proposed alliance with Renault-Nissan.

According to recent interviews with parties involved in the discussions, as well as a confidential analysis prepared for the deal that was obtained by Fortune, the tie-up could have produced as much as $10 billion in operating earnings per year for GM (GM, Fortune 500) by 2011. That's a pretty attractive number for a company that has rung up $18.7 billion in losses in just the first six months of this year and needs to borrow $10 billion to $15 billion just to stay in business until 2010.
[b]
But the alliance's savings might have come at a steep price for GM's senior management[/b]. One proposed strategy called for a "repopulation" of GM's executive ranks with outside talent. That presumably would have forced some incumbent managers out of their jobs - a shocking development at a company where executives seem to enjoy lifetime employment regardless of their performance. [/quote]

Hello Cleveland! | Little Green Men Sighted in WSJ
 

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=aiCKiR.6xDtI&refer=news]Housing Rebound in Cleveland Means Bad News for U.S.[/url][quote]Aug. 14 (Bloomberg) -- The good news in the worst housing slump since the Great Depression is that the market in Cleveland is recovering. That's also the bad news.[/quote]
It's a bit weird to contemplate that for the price of a nice but by no means opulent home in my part of the Bay Area, one could literally buy a mansion in the Cleveland suburbs. Maybe my ex-girlfriend's family's place in Shaker Heights is on the market ... "Would you like to supersize that snowblower, sir?"

[b]Little Green Men Sighted in the [i]Wall Street Journal[/i]![/b]

[url=http://themessthatgreenspanmade.blogspot.com/2008/08/bad-on-so-many-levels.html]The WSJ Greenspan story: Bad on so many levels[/url]
[quote]Today's front page story in the Wall Street Journal which carries excerpts from an interview with Former Fed chairman Alan Greenspan is bad on so many levels that it's almost sad to have to write this up, but, here goes.[/quote]

Foreclosures 17% of RE listings | Essays on 1929
 

[url=http://money.cnn.com/2008/08/13/real_estate/sellers_suffering_huge_losses/index.htm]25% of home sales result in loss[/url]: [i]In the 12 months that ended June 30, nearly 25% of all homes sold nationwide fetched less than sellers originally paid | Up to 75% loss-sales in some CA, FL markets[/i]

And here are a few more recent-story links on the U.S. housing market:

[url=http://money.cnn.com/2008/08/14/real_estate/quarter_three_home_prices/index.htm]Home prices down 7.6%[/url]: [i]Record foreclosures continue to drive prices down[/i]

[url=http://money.cnn.com/2008/08/14/real_estate/foreclosures_up_in_july/index.htm]Nation's foreclosure plague widens[/url]: [i]More tough times in the housing market: 8% monthly jump in foreclosures and 55% year-over-year. 'Bloated inventory' of homes owned by banks, expert says.[/i]


[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=aRUCk9E6jfOc&refer=news]Bank Funds Lure Most Money, Post Steepest Declines[/url]
[quote] Aug. 14 (Bloomberg) -- Funds that invest in banks and brokerages are luring the most money this year even as the shares they buy post their biggest declines in almost five decades because of mounting credit-market losses.

Exchange-traded funds linked to baskets of financial shares raised $8.67 billion during the first seven months of the year, the most of 94 investment categories tracked by research and investment firm Birinyi Associates Inc. More than $500 billion of subprime-related losses pushed banks in the Standard & Poor's 500 Index down 54 percent from their 2007 record, the biggest drop since at least 1962, Birinyi data show.

Investors were rewarded in the last month after the government agreed on a plan to rescue Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, while curbs on short selling spurred a rebound in banks. The Financial Select Sector SPDR Fund has surged 20 percent since sinking a month ago to the lowest level since its 1998 creation.[/quote]
So it was only drastic government intervention into the functioning of the "free" markets which made this a "good" investment for a few weeks? [Most of those gains have since evaporated - look at the one-month charts for FNM and [url=http://chart.finance.yahoo.com/c/3m/f/fre]FRE[/url], for example]. Oh yeah, that`s definitely a characteristic of a sound value investment.

[b]"The Converse Need Not Hold"[/b]:

[quote]``It goes completely counter to what you read, that everybody is selling, everybody is bearish, everybody is shorting financial stocks,'' said Birinyi's Robert Leiphart, who helps manage $350 million in Westport, Connecticut. ``When people say, `It's the worst it's ever been,' it's usually the bottom and the time to start to buy.''[/quote]
Uh, not quite. The correct phrasing here is "The best times to buy have usually been times when people say, `It's the worst it's ever been'." The Converse Need Not Hold.
[quote]Financial shares in the S&P 500 are this year's worst performers just as they were in 2007. Since last March, the world's biggest banks and brokerages have been forced to raise more than $350 billion to replenish capital, diluting existing shareholders, according to data compiled by Bloomberg.[/quote]
This is the very definition of the so-called "value trap". Credible estimates put the total-writedowns-to-come at over 1 trillion dollars, so there is a good chance of lots more pain yet to come.
[quote][i]Cheapest Since 1995[/i]

Investors in the ETFs are wagering the shares are inexpensive after the retreat left S&P 500 financial companies with a price-to-book value ratio as low as 0.97, the cheapest since at least January 1995, and a dividend yield exceeding 5 percent for the first time in that span, Bloomberg data show.[/quote]
Given the staggering quantities of nonperforming assets the banks are hiding off their balance sheets [for example in Level-3 "marked to fantasy" land], you can throw "the book" out for most financial institutions. The real book for most is so deeply underwater that a deep-diving submersible would have a hard time finding it.

Getting back to the above "value trap" theme, here`s a fitting description of how the stock market lemmings fell for it repeatedly during the last financial crisis of similar magnitude:
[quote][i]"The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable."[/i] - Extracts from [url=http://www.amazon.com/Great-Crash-1929-Kenneth-Galbraith/dp/0395859999]The Great Crash: 1929[/url], John Kenneth Galbraith, First Published 1955, Page 130.[/quote]

Better than Expected! | Wunch of Bankers Update
 

On the Ministry of Truth "better than expected" econo-propaganda front:

[url=http://money.cnn.com/2008/08/15/news/economy/industrial.ap/index.htm]July industrial output better than expected[/url]: [i]Federal Reserve says a slight rebound in auto industry makes up for plunge in other sectors.[/i]
[quote]The Federal Reserve reported Friday that industrial production edged up 0.2% last month. That was half the pace of the 0.4% gain in June, but it did surpass analysts' expectations for flat production in July.
...
These gains were not seen as signaling a sustained rebound, however, given the problems facing the auto industry this year. Instead, the rebound in auto activity was viewed as a temporary improvement because a strike ended at parts supplier American Axle.

Even with the recent gains, production at auto plants remained 10.4% below where it was a year ago.[/quote]
So in the span of 3 sentences we move from "better than expected" to "Tis only a post-strike blip folks" to "still really awful year-over-year." Not that the headline would convey the "still sucks" import of the story - but hey, that`s *my* job. :smile:

But wait, there`s another loud "better than expected!" headline this morning, courtesy of Bloomberg:

[url=http://www.bloomberg.com/apps/news?pid=20601103&sid=akkJZGtYOP6Y&refer=news]J.C. Penney, Abercrombie Shares Rise as Profits Beat Estimates[/url]
[quote]Aug. 15 (Bloomberg) -- J.C. Penney Co., the third-largest U.S. department-store chain, and teen-apparel retailer Abercrombie & Fitch Co. reported second-quarter profits that fell less than some analysts' estimated, causing the shares to rise in New York trading.[/quote]
Sounds pretty good - think I`ll back up the truck and buy a metaphor-mixing "boatload" of shares in these 2 fine companies. But wait - what`s that you say?
[quote]J.C. Penney jumped to a two-month high on the New York Stock Exchange after it curtailed spending to counter a fourth straight drop in sales. Abercrombie & Fitch said it will resist lowering prices to compete for customers increasingly reluctant to visit U.S. malls.[/quote]
"Drop in Sales"? "Increasingly reluctant"? The headline didn`t mention any of that...
[quote]Second-quarter net income at Plano, Texas-based J.C. Penney dropped 36 percent to $117 million ... Sales fell 2.5 percent to $4.28 billion from $4.39 billion a year earlier.[/quote]
Profit *way* down means they are cutting prices to try to lure shoppers [and/or selling less high-margin stuff] - and despite that, sales are down. OK, think I`ll just un-back-up the truck and put the tarpaulin back on the boat ... nothing personal, J.C., just call me chicken.

[b]Wunch of Bankers Update[/b]: Two stories of interest today:

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=a6h1pur72rok&refer=news]Wall Street's Jobless Bankers Try Cupcakes, Cheap Haircuts, Maybe Omaha[/url]: [i]Jessica Walter didn't go to Harvard University to study cupcakes, but they're what she does since losing her job as a vice president in credit strategy at Bear Stearns Cos.[/i]
[quote]About 33,300 finance jobs in New York City, or 7.1 percent of the 2007 peak, will be cut by June 2009, the Independent Budget Office, a non-partisan monitor of city finances, estimated in a May report.

Expansion Plan

``The job market is in the worst, most chaotic state I've ever seen it in fixed income,'' said Michael Maloney, who recruits finance professionals for Maloney Inc. in New York. ``I've been doing this for over 30 years and I've never seen anything like this.''

Half the people working in debt sales, trading or research in New York at the beginning of 2007 will have been fired by the end of this year or won't get a bonus, Maloney estimated. [/quote]
Poor wunch of bankers ... whatever *shall* they live on? Their salaries were, after all, quite meager to begin with, making it hard to save up for those proverbial rainy days:
[quote]Traders and bankers who leave finance can expect to earn a fraction of what they used to make. Compensation for employees on Wall Street averaged $399,360 in 2007, compared with $62,390 for New York City jobs outside the securities industry, according to the state comptroller's office.

Goldman Sachs Group Inc., which has cut 1,500 jobs, paid its employees an average of $661,490 last year, company filings show. [/quote]

Similar hard times have befallen bankers and hedge fund managers in the UK:

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=ah.H2xr8CZ.4&refer=news]`Braying' Bankers Rebuffed by London Clubs Favoring Style More Than Wealth[/url]
[quote] Aug. 15 (Bloomberg) -- Jonathan Downey, the owner of the East Room club on the edge of London's financial district, says bankers are the last people he wants as members.

``We don't want the archetypal City idiot, waving his cash about at the bar and braying like a buffoon and annoying women,'' said Downey, 42, whose club charges men an annual membership fee of 350 pounds ($655). Women pay 150 pounds.

Financial workers, who make up 85 percent of employees in London's City square mile, are being shut out of the most exclusive clubs. Passed over by centuries-old establishments such as White's and Brooks's, which prefer nobility, military officers and politicians, bankers aren't welcome at the newest venues either. They're not cool enough, said Mark Wakefield, U.K. head of clubs at the Quintessentially concierge service.[/quote]
What do you mean, "*like* a buffoon"? But I nitpick ... let`s examine the spiritual desolation the poor discriminated-against bankers must feel as a result of this social shunning:
[quote]``I feel hurt, well not hurt, but I just feel brought down to earth,'' said Daniel Hernandez, 24, who works in equity derivatives sales at Commerzbank AG. He said he's considered applying for membership of Shoreditch House, operated by Soho House Group. ``It's a club so I guess everybody has the right to decide which clients they want to have. They'd rather have a client that's more into arts than money.''[/quote]
Trying to attract a clientèle which can actually hold a conversation about something other than derivatives trading - how very narrow-minded of the club owners. And speaking of scintillating conversational skills:
[quote]``To reject only on the point that they're coming from a banking background, it's like discrimination,'' said Georgios Ouzounis, 24, hedge fund analyst at Kyte Capital Advisors LLP.[/quote]
Like, totally, dude. Especially since I know for a fact that you can speak with equal ease about not just derivatives trading, but also currency hedging and the Yen carry trade. Dude, they are going to be so sorry they wouldn`t admit you.

[b]Pound takes a pounding[/b]

[url=http://seekingalpha.com/article/90840-pound-sterling-falls-on-hard-times?source=yahoo]UK Pound takes a pounding on Eurozone stagflation fears[/url]

This 1-year chart shows the recent Acapulco-style cliff dive - of course the Pound Sterling and Euro still have a long way to fall against the dollar if they are to reach their levels of 2-3 years ago.

Ford Desperate for $ | Mrs. Fields Cookie Crumbles
 

[url=http://money.cnn.com/2008/08/15/news/companies/ford_stock.ap/index.htm]Ford to sell $500 million in share[/url]: [i]The automaker's financing arm struggles as used vehicle prices have dropped.[/i]
[quote]August 15, 2008: 4:22 PM EDT

NEW YORK (AP) -- Ford Motor Co. said Friday it will sell $500 million in common stock to pay off debt at its financing arm, according to a regulatory filing.

The Dearborn, Mich.-based automaker said in a filing with the Securities and Exchange Commission that it will sell the shares from time to time, then use the proceeds to buy Ford Motor Credit LLC outstanding debt securities in the open market or privately negotiated deals.

Ford Motor Credit has struggled in recent months, taking a $2.1 billion charge during the second quarter related to the drop in used vehicle prices.

The move also further dilutes Ford stock at a time when its price is already near record lows. As of July 29, the company had roughly 2.19 billion common shares outstanding, according to a filing with the SEC.

Ford shares have dropped 24% in the last year.

Goldman, Sachs & Co. will handle the sale, Ford said.[/quote]
At the current share price, $500 million represents roughly 100 million new shares, or roughly 5% dilution for existing shareholders. Printing more shares ... what a great scam, and best of all, it`s perfectly legal. Hey, if the government can print more fiat currency [mainly in the form of issuing U.S. Treasury notes] to paper over their deficits, why shouldn`t private companies get in on that kind of action? The automakers apparently just needed a few months longer to figure it out than the Wall Street banksters did.

[b]Downsizing of America Update[/b]: Another waistline-bloating comfort food chain goes belly up. I notice the CNN/Money writer couldn`t resist getting cute with the subtext to the headline:

[url=http://money.cnn.com/2008/08/15/news/companies/mrsfields_bankrupt.ap/index.htm]Mrs. Fields to file for bankruptcy[/url]: [i]The cookie company reveals its finances are crumbling, in a filing with the Securities and Exchange Commission.[/i]

Perhaps they should have gotten creative in their cash-raising efforts ... maybe a bake sale?

GSEs face "nationalization" | Ben says "Shalom!"
 

[url=http://www.reuters.com/article/newsOne/idUSN1747783620080817]New Fannie, Freddie fears hit shares[/url]: [i]Report suggests administration doubts mortgage giant firms will be able to raise needed capital, making government takeover inevitable.[/i]
[quote]NEW YORK (Reuters) - The U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime, Barron's reported in its August 18 edition.

The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.

An insider in the Bush administration told Barron's that Fannie and Freddie "are being jawboned" by the Treasury Department and their new regulator, the Federal Housing Finance Agency (FHFA), to raise more equity.

But government officials don't expect the agencies to succeed, Barron's reported.

If the government-sponsored enterprises fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the agencies, according to the Barron's source.

The paper reported the infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares "effectively would be wiped out, and their preferred shares left bereft of dividends."

The report called an equity injection by the government a quasi-nationalization -- without having to put the agencies' liabilities on the U.S. balance sheet, and thus doubling the U.S. debt.

After accounting for deferred tax assets and generous asset marks, Fannie and Freddie each may have a negative $50 billion in asset value, and little prospect of digging themselves out of the hole, Barron's reported.[/quote]


[url=http://money.cnn.com/2008/08/15/news/economy/Sloan_washingtons_solution.fortune/index.htm]Washington 'prays' for recovery[/url]: [i]How to solve the financial crisis? Play for time, pray for markets to turn.[/i]
[quote]Even though they're scurrying around like everyone else in this game, I think the crisis managers at the Federal Reserve Board and the Treasury have quietly adopted a technique that has helped us deal with previous financial crises - what I call the "play and pray" approach.
...
The theory is that if you give stricken financial institutions like Fannie Mae enough time, profits from their basic operations can help them dig out of the capital pit into which they've fallen. A few years of nice profits will help offset the big losses from past blunders, provided the company stays alive long enough.[/quote]
A few years might also simply allow them to dig themselves [url=http://market-ticker.denninger.net/archives/2008/08/16.html]deeper into a hole[/url], especially with no recovery, or better, "re-bubblization" of housing prices in sight. Excuse me if I am skeptical of such "faith-based initiatives", especially ones which put "ungodly" amounts taxpayer money at risk.


[url=http://www.bloomberg.com/news/index.html]Bernanke Struggles to Define What Financial Institutions Fed Can Let Fail[/url]: [i]Ben S. Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes.[/i]

[Aside: I found it slightly curious that Bloomberg used Bernanke`s middle initial in their subheading, and then found myself wondering what it stands for. Hmmm .. time to check the "Jewish Boy Names" section of the ol` memory bank ... Solomon/Shlomo? Samuel/Shmuel? Saul/Shaul? Simon/Shimon? Steve? No, no, no, no, no - Turns out it`s [url=http://en.wikipedia.org/wiki/Ben_Bernanke]none of the above[/url], but a very fine day to you as well, Mr. Bernanke-père and Mrs. B. Didn`t find many traditional Jewish male names starting with my middle initial "W" - disappointing, that. Not too many "Dubyas" in the old testament, apparently. But I digress...]
[quote]The Fed chairman`s decisions are a decisive break with Greenspan's aversion to government interference in markets, a conviction that even permeated the central bank's day-to-day operations.[/quote]
Uh, only if you characterize two successive half-decades of artificially low interest rates and the resulting pair or colossal speculative asset bubbles [dotcom-led-equities and housing] as "aversion to government interference in markets". Once again, Greenspan gets a free pass from his friends in the financial media. Disgusting.

UK RE market seizes up | SEC vs Shorts, Round 2
 

[url=http://www.marketwatch.com/news/story/gm-brings-back-employee-pricing/story.aspx]GM To Bring Back Employee Pricing Promotion[/url]

In other words, pretty much the only way GM can sell its wares these days is by doing so at a loss. They`re like a crazy fruit seller on the corner who sells loss-leader bananas, but has nothing else to sell that anyone wants. So he sells tons and tons of bananas - which CNBC describes as "banana sales are soaring!" - and loses money on each and every one, until he goes out business.


[url=http://globaleconomicanalysis.blogspot.com/2008/08/uk-housing-market-at-standstill.html]UK Housing Market "At a Standstill"[/url]
[quote]The UK is facing price declines in both residential and commercial, as is the US. Expect this trend to continue for quite some time, with perhaps a temporary blip up if Chancellor of the Exchequer Alistair Darling suspends the tax on house sales to revive the property market.

I have a hint for Chancellor Darling: The cure for this mess is lower prices, not government "prop jobs".[/quote]


[url=http://www.iht.com/articles/2008/08/18/business/18bing.php] Investors shun rights offer by British lender[/url]
[quote]LONDON: Bradford & Bingley, the biggest buy-to-let mortgage lender in Britain, revealed Monday that its bankers have been left with more than 70 percent of its £400 million rights issue, confirming expectations of a poor take-up by investors.

B&B, which has been hit hard by the credit squeeze, also announced it has hired the former head of rival Alliance & Leicester as its new chief executive.

The B&B rights issue, in which a company raises fresh capital by creating and selling new shares to existing shareholders, was one of several by British banking institutions in recent months as they seek to shore up capital lost by the credit squeeze.

Although B&B's 27.8 percent takeup by investors of the new shares was better than the 8.29 percent achieved by the Halifax Bank of Scotland on its much larger £4 billion rights issue, the B&B offering still left underwriters with around 300 million, or $560 million, of shares.

The underwriters, UBS and Citigroup, now have until Friday to offload those shares or become owners.[/quote]
Once the dilutive-share-offering-to-raise-desperately-needed-capital scam stops working, it`s game over for the affected institution ... unless the government steps in. B&B is going to be just one of many large financial houses finding themselves in a similar bind, now that investors have started to realize that many of these outfits are bottomless money pits which will only survive by way of government intervention on a massive scale.


[url=http://www.reuters.com/article/marketsNews/idUKN1929265720080819?rpc=44]U.S. SEC to propose new short selling rule in weeks[/url]
[quote]WASHINGTON, Aug 19 (Reuters) - The top U.S. securities regulator plans to propose new short selling rules in the next few weeks.

U.S. Securities and Exchange Commission Chairman Christopher Cox said on Tuesday that the proposal "will focus on market-wide solutions" but is not intended to have any impact on the direction of prices.[/quote]
...As long as prices move in the federally targeted "ever upward" direction, that is. It`s truly a Free Market - free to move up, but not down. SEC-mandated bullish optimism, if you will.
[quote]Cox also said fails to deliver "were reduced substantially" for the stocks covered under the SEC's recent emergency short selling rule.

"It was a very effective order from that standpoint," Cox told reporters after a news conference.[/quote]
Well, of *course* fails to deliver were reduced - that`s because the emergency order acted as a major near-term short squeeze in the "Special 19" financials, thus all shorting activity was curtailed for those issues. Less shorting means less delivers, period, hence less possibilities for any of those to fail, period. That was of course part of the intended effect - you don`t think many of those special-designee companies have current and former executives in key regulatory positions in government by accident or "for the public good", do you? And as a near-term price prop for battered shares like those of Fannie and Freddie it was highly effective, though anyone who bought FNM or FRE shares during the month-of-July Federally sponsored Short Squeeze and didn't quickly sell is now deeply in the red. Did it change the fundamentals of those companies? Not one iota - FNM and FRE, for example, have given back all their government-manipulation-based price gains and more, and their balance sheets are looking more woeful by day, as scrutiny of them intensifies. But sounds like the strategy is to simply make the game so uncertain/difficult/costly for folks betting against financials that many would-be-shorters will simply quit the game. It`s only one small step removed from what was until recently considered a joke scenario, namely of the SEC issuing an emergency "no sell at a loss" order on various "special" stocks. [Or, hey, why stop there? Let`s disallow *any* stock being sold for less than it was purchased for.] Like I said, our markets are now officially more manipulated than the "communist Chinese" ones - have we seen the Chinese government leaping through hoops and putting much of their capital and taxpayer funding at risk in order to prop up their stock markets? We have not, despite the fact that e.g. the Shanghai Composite has plummeted far more from its historic high of last year than the major U.S. indices.
[quote]The SEC enacted an emergency rule on July 21 that required short sellers to pre-borrow stock in mortgage finance giants Fannie Mae and Freddie Mac and 17 Wall Street firms such as Goldman Sachs before executing a short trade.

Investors who bet on falling stock prices also have been required to deliver the securities by the settlement date -- obligations that forced Wall Street to change the way they traded those stocks.

Short trading in those 19 stocks reverted to rules governing other shares on Aug. 13 as the SEC experiment against abusive short selling expired.[/quote]
This sounds quite reasonable to those not familiar with options, but it`s specious - putting this kind of procedural hurdle in place would be justified only of there were no reasonable expectation that short sellers could buy shares at any time [albeit possibly at a premium - e.g. during a "short covering rally"] to cover their positions. That is only the case for extremely illiquid securities. and of course the really glaring hypocrisy of the previous emergency short-sale order was that it allowed the "special 19" to continue to naked-short other companies [not of the 19] as they pleased, and the Special 19 include some of the biggest naked-shorting-traders in the world.

Similarly, the SEC has recently promised to crack down on spreaders of false negative rumors about companies - but does nothing about false positive rumors such as those continually spouted by the paid pumpers on CNBC, the most-watched financial "news" network in the world.


[url=http://blogs.wsj.com/marketbeat/2008/08/18/trading-in-a-dark-pool-watch-for-sharks/]WSJ | Trading in a Dark Pool? Watch Out for Sharks[/url]
[quote]Dark pools find matches for blocks of shares without publishing the orders or the identities of the institutions. But that anonymity can also give cover to sharp operators known as “gamers.” These traders sniff out large orders, and then try to use that knowledge to trade against the block at a profit.[/quote]

China Asks U.S. to Pass the Crack Pipe | Re: Re
 

[url=http://money.cnn.com/news/newsfeeds/articles/djhighlights/200808200027DOWJONESDJONLINE000006.htm]Asia Markets Bounce on Talk of Chinese Govt Stimulus Package[/url]
[quote]... Shanghai stocks soared Wednesday on speculation that the Chinese government was considering a fiscal stimulus package, triggering a recovery across the region.

...J.P. Morgan analyst Frank Gong wrote in a report Tuesday that the country's top leadership was "carefully considering an economic stimulus package" of at least 200 billion to 400 billion yuan ($29 billion to $58 billion), which could be in the form of tax cuts and aimed at stabilizing the stock markets and supporting the development of the housing markets. [/quote]


[url=http://money.cnn.com/2008/08/18/news/economy/Colvin_next_credit_crunch.fortune/index.htm]Fortune | Faking the Good Life to Get Harder[/url]
[quote]We made it through the bursting of the Internet bubble and now the bursting of the real estate bubble. Next we may be approaching the end of the most worrisome bubble of all: the standard-of-living bubble.

That conclusion comes from the latest data on credit card debt. It's growing fast...[/quote]


[b]Polyvalent Transition-Metal Markets Update[/b]: One of most popular segments here, folks.

[url=http://www.bloomberg.com/apps/news?pid=20601109&sid=aGR8uw5J7e7U&refer=news]Singing Rhenium Trader Knows Why $11,100 a Kilo Saves Lost Fuel[/url]
[quote] Aug. 20 (Bloomberg) -- For more than a decade, Anthony Lipmann led a life of trading metals such as indium, dysprosium and strontium while feeding his passion for the arts with singing lessons and the theater.

Nowadays, Lipmann is fighting off approaches from hedge funds battered by credit and equity markets that are eyeing his success in rhenium, a rare metal that helps jet engines save fuel. In three years, rhenium's price has jumped almost eightfold as airlines seek to rein in oil costs, enabling Lipmann's firm to triple its profit.

...Rhenium's high melting point enables jet engines to run hotter and burn fuel more effectively.

For more than 20 years, engine makers have used turbine blades with a rhenium content of 3 percent. New engines for commercial aircraft will probably contain as much as 6 percent[/quote]
[url=http://en.wikipedia.org/wiki/Rhenium]Wikipedia[/url] adds that
[quote]Rhenium is obtained as a by-product of molybdenum refinement, and rhenium-molybdenum alloys are superconducting. It was the last naturally occurring stable element to be discovered and is among the ten most expensive metals on Earth, at times exceeding US$ 11,000 per kilogram).About 35 kilograms of rhenium are required in the construction of a commercial jet engine.

Rhenium is a silvery white metal, lustrous, and has one of the highest melting points of all elements, exceeded by only tungsten and carbon. It is also one of the most dense, exceeded only by platinum, iridium and osmium [i][and by the author of this post][/i]. Rhenium has the widest range of oxidation states of any known element: -3, -1, 0, +1, +2, +3, +4, +5, +6 and +7.[/quote]
If anyone feels like gifting me with a nice heavy commemorative Re paperweight, PM me and I`ll give you the shipping address. Now, be aware that my workdesk at home is right next to a large window which is often open even when conditions are windy, so my typical paperweight needs to be 1 kg or more. Thanks!

Query to our chief resident chemist: Paul, the above article also notes that Lipmann graduated from Oxford University in 1978 with a degree in English literature. Perhaps you crossed paths? [Article notes his office is in Walton-on-Thames, in case you want to meet him for a pint].


[url=http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusecon119.xml]Sharp US money supply contraction points to Wall Street crunch ahead[/url]
[quote]The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.

Data compiled by Lombard Street Research shows that the M3 "broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
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On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March.

"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.

The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.[/quote]
The so-called deflationary spiral scenario ... Ben Bernanke`s worst nightmare. The Fed can make low-cost money available to banks, but it can`t force them to lend it out, an especially it can`t dictate the terms at which they do lend it - which are now becoming so conservative that lending is grinding to a halt. This is the "liquidity fallacy" illustrated.