Global Financial Crisis (Was: Subprime Meltdown)

[xilman]

Originally Posted by KriZp

Substitution can work for such things as public transportation, but the fact remains, liquid fuel is superior for many applications. It contains approximately 10 kWh per liter, and you could pump several liters per second through a thin hose as seen at a gas station. It can be safely stored in simple containers.

Let me, for the sake of argument, agree completely and without reservation with that statement.

Now explain why a liquid fuel needs to be derived from crude oil.

Originally Posted by KriZp

An engine running on gasoline can be made smaller and lighter than a comparable electric engine.

Please justify that statement. I'm not saying you're wrong, only that I'm not convinced that you are right. As part of your justification, explain why wristwatches and trains (modern ones at least) are powered by electric motors and not by gasoline engines.

Originally Posted by KriZp

I suppose the point I'm trying to make is that oil as an energy carrier is so useful to us and has so many advantages that we will be willing to pay alot more than we currently are paying to get it.

Now there we are in complete agreement! Not least because European motorists already pay a lot more than do their US counterparts.


Paul

[KriZp]

Originally Posted by xilman

Now explain why a liquid fuel needs to be derived from crude oil.

Now we're getting somewhere xilman. Ofcourse we all know a liquid fuel needn't be derived from petroleum. It's just that it's been so incredibly easy to get it that way. The alternatives include fermenting and distilling various starchy and/or sugary foodstuffs, dry distilling of coal or wood, and making it from methane (natural gas). None of these alternatives can scale to the level of replacing petroleum.

Originally Posted by xilman

Please justify that statement. I'm not saying you're wrong, only that I'm not convinced that you are right. As part of your justification, explain why wristwatches and trains (modern ones at least) are powered by electric motors and not by gasoline engines.

Hmm, I should perhaps have qualified that statement a little bit more. I had in mind engines of chainsaw-size and up. There is probably a minimum size for petrol engines, bigger than would be practical for a wristwatch. A wristwatch needs very little energy anyway.

Trains. Notice I said small and light. A locomotive needs to be heavy in order to pull thousands of tons of cars. Notice that even in the UK only 40% of the rail network is electrified. The rest is presumably served by diesel-electric locomotives. In the case of diesel electric locomotion, the advantage of the electric motor is getting rid of the gearbox.

For stationary equipment an electric motor is preferable, provided that the grid can handle the load, and the power supply is reliable. gasoline or diesel engines have the advantage of being mobile. For an electric motor to be mobile it needs a battery, wich is a serious drawback.

Originally Posted by xilman

Now there we are in complete agreement! Not least because European motorists already pay a lot more than do their US counterparts.

And that's perhaps the USA's biggest disadvantage at the moment; they aren't used to the high oil prices.

[ewmayer]

Bank failures to surge in coming years

[Quoting a MarketWatch article]
At least 150 banks will fail in the U.S. during the next two to three years, according to a projection by Gerard Cassidy and his colleagues at RBC Capital Markets.

If the current economic slowdown deteriorates into a recession on the scale of those from the 1980s and early 1990's, the number of failures will be much higher this time around -- probably as high as 300 of them, by RBC's reckoning.

Cassidy and his colleagues have developed an early-warning system for spotting future trouble at banks called the Texas Ratio.

The ratio is calculated by dividing a bank's non-performing loans, including those 90 days delinquent, by the company's tangible equity capital plus money set aside for future loan losses. The number basically measures credit problems as a percentage of the capital a lender has available to deal with them.

Cassidy came up with the idea after covering Texas banks in the 1980s. Until the recession hit that decade, many banks in the state were considered some of the best in the country. But as problem assets climbed, that view was cruelly challenged, Cassidy recalls.

The analyst noticed that when problem assets grew to more than 100% of capital, most of the Texas banks in that precarious position ended up going under. A similar pattern occurred in the New England banking sector during the recession of the early 1990s, Cassidy said.

Texas Ratios From the Article

* UCBH Holdings (UCBH) Texas Ratio jump to 31% at the end of the first quarter from 4.7% in 2006, according to RBC.
* Colonial BancGroup (CNB) Texas Ratio jumped from 1.5% in 2006 to 25% at the end of March.
* Sterling Financial Corp. (STSA) had a Texas ratio of 1.9% in 2006. It was nearly 24% at the end of the first quarter.
* National City Corp. (NCC) had a Texas Ratio of 40% at the end of March though the bank did raise $7 billion in new capital in April.
* IndyMac Bancorp (IMB) has a whopping Texas Ratio of 140%

And now for the moral-hazard aspect to the equation:

Liquidity challenged banks offer some of the highest rates on CDs. IndyMac actually tops the list on one one year CDs according to the article. The irony is that money flows to the weakest banks taking the biggest risks instead of the strongest ones taking minimal risks, all because of government guarantees. This is one of the perverse "moral hazard" effects of FDIC.

Goldman Sachs: Bank-Proposed Relaxed Writedown Rules are "Alice In Wonderland Accounting"

Goldman Sachs said it was likely to sever its links with the Institute of International Finance after the association of leading banks and insurance companies called for a relaxation of controversial accounting rules on asset valuation.

Goldman, one of the IIF’s 370-plus members, said it did not agree with the IIF’s proposals, which have been circulated to regulators and politicians over the past month, and opposed any changes in “fair value” accounting.

“The proposals are extraordinary,” a Goldman official said on Thursday. “This is Alice-in-Wonderland accounting.”

He said that Goldman had a representative on the IIF’s committee responsible for the proposal but she was not directly involved in its drafting. Goldman would almost certainly leave the IIF following the report.

Under the IIF plan, revealed by the Financial Times this week, banks would be allowed to use historical, rather than market prices, to value illiquid assets – a change that could help to reduce the negative impact of the crisis on their strained balance sheets.

"Historical Pricing" here is of course a huge scam -- what it translates to is "We can't unload this garbage at our buy/ask price, and it's probably worth less than 50 cents on the dollar, so let's just keep it on our books at the full fake valuation at which we have no prayer of selling it." Now don't get me wrong - the vultures at Goldman are some of the greediest, most self-serving finance scumbags in the galaxy - but because they are quite possibly the Masters of the Universe when it comes to Short-Selling and hence have no need to pretend things are rosier than they are in order to make money - I consider their take on this particular matter to be quite credible. Of course Goldman themselves are up to their ears in the not-dissimilar fictitiously-valued-Level-3-asset-scam, so maybe this is just an example of them calling bullshit in an area where they happen to be in better shape than most of their competitors.


And, I do believe that it's high time for us to check up on the latest doings in the mortgouge industry: Aha, it appears that those Masters of Spin at the NAR are hard at work as always, this time calling a loss a win:

Realtors settle case with U.S.: Real estate agents were accused of illegally blocking posting of home listings and limiting competition from online brokers.

WASHINGTON (AP) -- The Justice Department gave online real estate brokers - and potentially their clients - a boost Tuesday by forcing a new industry policy opening access to home listings the agents were previously denied.

In a court settlement, government attorneys said the National Association of Realtors could no longer discriminate against Internet-based agents by blocking them from the group's multiple listing service, a database of for-sale properties.

Online agents often charge lower fees and allow consumers to review listings at their own pace.

"When there is unfettered competition from brokers with innovative and efficient approaches to the residential real estate market, consumers are likely to receive better services and pay lower commission rates," said Deborah A. Garza, deputy assistant attorney general for the Justice Department's antitrust division.

The National Association of Realtors eased some of its policies against online brokers when the Justice Department filed suit in September 2005. The group called Tuesday's settlement a "win-win" and noted that it will neither pay a fine nor admit any liability as part of the agreement.

So "no fine" is a win, and "admit no liability" - another win. Potential "losses" due to loss of ther monopoly starnglehold on the MLS? Not deserving of mention. [Perhaps they're too busy figuring out ways to subvert that part of the settlement.]
But, back to the "There are no infidel U.S. tanks in Baghdad! Never!!" stuff:

"Today I can say with the clear knowledge - reinforced and underscored by DOJ's settlement compromise - that the real estate industry is dynamic, entrepreneurial and fiercely competitive," NAR President Richard F. Gaylord said in a statement. "Thanks to Realtors, consumers can access detailed information about millions of properties for sale across the country."

Right, except I think Tricky Dick Gaylord really meant to say, "Thanks to a series of successful lawsuits against the monopolistic cabal of Realtors which I head...". Probably just a typo, leaving that extra verbiage out.

[ewmayer]

Forgot to mention in yesterday's posting: the Wall Street Journal has a detailed 3-part examination of the the collapse of Bear Stearns running this week - Part 1 was yesterday, Part 2 is today, Part 3 tomorrow. Highly recommended for folks who receive either the print or online edition.


Speaking [as I did yesterday] of "the price of oil in China", we have an interesting situation there: the government is artificially keeping prices low, but that obviously costs them a lot money, and not even they can pull oil out of thin air - so you increasingly have a "artificially low price on something that's not available for purchase anyway" situation. Kinda like in the old Soviet Union, government announces "sausage is on sale this week", but nary a sausage to be found on a store shelf anywhere. Obviously not quite as dire yet in China, but the trend is clear.


Rating Agencies Face New Standards; Cannot Recommend Deal Structure

Standard & Poor’s Ratings Services, Moody’s Investors Service, and Fitch Ratings will need to make some strong adjustments covering how their structured finance ratings businesses operate, according to new standards published by regulators today.

The new rules include provisions that will prohibit analysts from “making proposals or recommendations regarding the design of structured finance products” that the agency rates, according to a new code of conduct for credit rating agencies published Wednesday by the International Organization of Securities Commissions, an international conglomerate representing more than 100 securities regulators.

Among other rules in the code of conduct, rating agencies must also differentiate their ratings of structured financial products — such as residential mortgage-backed securities and CDOs — from other rated debt, a proposal that has been hotly-debated in the States and largely supported by internal proposals from both Moody’s and Fitch.

Yes, yes, it all sounds very nice - but a couple of quick cold-water points:

1. I see nothing about eliminating the practice of "bundling a small percentage of allegedly high-rated debt in with 99% horsepucky and labeling the whole thing 'prime'." That was of course the modus operandi for the now-busily-imploding trillions of dollars of subprime and Alt-A-style mortgage debt.

2. The "rules" are nonbinding as far as the U.S. operations of the major rating agencies are concerned.


Right on cue in the wake of my recent posts describing the problems facing regional banks:

U.S. Stocks Retreat, Led by Banks; KeyCorp, AIG Shares Tumble

May 28 (Bloomberg) -- U.S. stocks retreated as concern increased that regional banks face more writedowns, overshadowing better-than-forecast orders for durable goods.

KeyCorp, Ohio's third-largest bank, tumbled the most since 1987 after doubling its outlook for bad loans. Marshall & Ilsley Corp., Wisconsin's biggest bank, and Regions Financial Corp., the largest in Alabama, each plunged more than 4 percent, sending financial shares to the lowest level since March 17. American International Group Inc., the world's largest insurer, fell to a nine-year low after Citigroup Inc. said it may need to raise additional capital.
...
``You're seeing the problems spread from the large banks to the small banks,'' said Walter Prendergast, a New York-based money manager at Paradigm Capital Management Inc., which oversees $2 billion. ``There is going to be a credit-led recession that will be deeper than most people recognize and that's a problem.''

BTW, a major part of the "better than expected" durable-goods numbers appears to have been due to higher material and transportation costs for the producers. Price inflation masquerading as "growth".

U.S. Driving Plummets in April

The U.S. Department of Transportation said Monday Americans drove 11 billion miles less in March 2008 than a year earlier, marking the first time estimated March travel on public roads fell since 1979. That 4.3% decline is the sharpest year-on-year drop for any month in the history of the agency's reporting, which dates back to 1942.

According to the Energy Information Administration (EIA), a unit of the U.S. Department of Energy, U.S. gasoline demand has fallen 0.6% so far in 2008. The trend began in October of 2007, and gas consumption has trailed year-ago levels in every month since, except for a very slight bump up in November. As a result, the EIA is forecasting the first year-over-year decline in U.S. gasoline demand since 1991.

Home prices plunge 14.1% in first quarter: Standard & Poor's/Case-Shiller study shows record decline for housing prices in first three months of 2008.

NEW YORK (AP) -- U.S. home prices dropped at the sharpest rate in two decades during the first quarter, a closely watched index showed Tuesday. It's a somber indication that the housing slump continues to deepen.

Standard & Poor's/Case-Shiller said its national home price index fell 14.1% in the first quarter compared with a year earlier, to its lowest level since its inception in 1988. The quarterly index covers all nine U.S. Census divisions.

Bush: Stimulus starts to kick in: Tax rebate checks are set to make a 'positive contribution to economic growth,' says President Bush.

MESA, Ariz. (AP) -- President Bush said Tuesday the stimulus package Congress passed in February is just beginning to kick in and will make a "positive contribution" to the economy.

A report released on Tuesday puts consumer confidence at its lowest level in almost 16 years. Soaring gas prices and gloomy job prospects were chiefly to blame for the sinking consumer mood. A separate index showed U.S. home prices dropped at the sharpest rate in two decades during the first quarter of 2008, another sign of the deep housing slump.

At this point we need to clarify the seeming glaring discrepancy between paragraph 1 in the above quote box [a.k.a. "the spin"] and paragraph 2 ["the ugly facts"]. See, what G.W. meant by "kick in" is: it was a real "kick in the pants" for most Americans, watching that stimulus check go straight into their car's gas tank, thus helping to stimulate "the economy" - by "the economy" Dubya of course meant collectively "the Arab economy," "the Iranian economy," "the Venezuelan economy," and so forth.


Indonesia Pulls out of OPEC: Indonesia is pulling out of OPEC because it is no longer a net oil exporter, the Minister of Energy and Mineral Resources said Wednesday.

The country of 235 million people is Southeast Asia's only member of OPEC. But it has had to import oil because of decades of declining investment in exploration and extraction due to corruption and a weak legal system, which make oil companies wary of doing business in the country.

Last month, President Susilo Bambang Yudhoyono said Indonesia needed to concentrate on increasing domestic production, which has dropped to less than 1 million barrels a day even as consumption rises.

In still-way-off-at-the-margins-of-most-people's-radar-screens finance news:
Banks to link dark liquidity pools

Goldman Sachs, Morgan Stanley and UBS are to link their private stock trading operations to improve liquidity and better compete with the increasing number of alternative exchanges. The move, to be announced Tuesday, will give clients of each bank access to the others’ so-called dark liquidity pools – the private interbank or intra-bank platforms widely used to trade stocks away from exchanges.

The pools are used by clients such as hedge funds to buy and sell large blocks of shares in anonymity and without the danger of moving the public price of a stock on an exchange.”

The development of dark pools is considered a potential threat to established exchanges. Some analysts suggest the various pool providers could eventually join together, combining their individual ones and then applying for exchange status.

Tuesday’s move stops short of combining the banks’ respective dark pools. “These are access arrangements,” said Will Sterling, managing director of UBS’s electronic trading. “These agreements should offer clients access to additional high-quality liquidity without making their trading process more complex.”

Why do I get a strange uneasy feeling when I read the phrase, "high-quality liquidity"? After all, the aforementioned major playahs are probably only doing this because the major indices simply aren't sufficiently rigged for their tastes.

[ewmayer]

Fed Governor Mishkin Resigns

WASHINGTON (AP) -- Federal Reserve Governor Frederic Mishkin will leave his post at the end of August and return to teaching at Columbia University, the central bank announced Wednesday. His departure means yet another empty seat on the Fed as it battles housing, credit and financial debacles.

Mishkin, a Fed board member since Sept. 5, 2006, submitted his resignation to President Bush. His exit leaves the Fed with just four of its seven board seats filled.

"Rick's contributions to the intellectual underpinnings of monetary policy at the Federal Reserve have been invaluable," said Fed Chairman Ben Bernanke. "His keen insights, deep analysis and humor have enriched our deliberations."

The mass media reporting of this makes it all sounds quite benign ... "Having totally rescued the U.S. economy from imminent peril, Professor Mishkin looks forward to the far-more-daunting challenge of motivating bored undergraduate students..." Of course some of the wags in the blogosphere have a slightly different take on the matter.

There is also a link to a very scary talk given last night by Dallas Fed President Richard "Don't call me Rick, Benny Boy" Fischer in the latter article, in which he lays out the "frightful storm" brewing in the form of out-of-control government spending and Federal deficits. Highly recommended - unless you like sleeping at night, that is. Of course it's quite disingenuous for Fischer to blame out-of-control Government entitlement spending for the problem, since although that is certainly one of the major causes, the "debauching of the credit markets" he mentions in his speech was a direct result of his employer's irresponsible monetary and credit policies over the past decade-and-a-half. Pot calling kettle black...


Dow Chemical to raise prices up to 20 percent: CEO blasts Washington for 'true energy crisis'

MIDLAND, Mich. (AP) -- Dow Chemical Co. will raise product prices by up to 20 percent almost immediately to offset the soaring cost of energy and raw materials, and the CEO of the chemical giant lashed out Washington on Wednesday for failing to develop a sound energy policy.

The price increases take effect Sunday and will be based on a product's exposure to exorbitant costs. Dow said it spent $8 billion on energy and hydrocarbon-based feedstock, or raw materials, in 2002 and that could climb fourfold to $32 billion this year.

"For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy," Chairman and Chief Executive Andrew Liveris said in a statement.

"The government's failure to develop a comprehensive energy policy is causing U.S. industry to lose ground when it comes to global competitiveness, and our own domestic markets are now starting to see demand destruction throughout the U.S."

Liveris said soaring costs for Dow are "forcing difficult discussions with customers."

Dow Chemical makes a broad range of chemical, plastic and agricultural products that are sold in 160 countries.

Telegraph UK | Phase 2 of the Credit Crisis Imminent?

The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

"The steep rise in swap spreads this week is ominous," said John Hussman, head of the Hussman Funds. "The deterioration is in stark contrast to what investors have come to hope since March."

Lehman Brothers took writedowns of just $200m on its $6.5bn portfolio of sub-prime debt in the first quarter even though a quarter of the securities had "junk" ratings, typically worth a fraction of face value.

Willem Sels, a credit analyst at Dresdner Kleinwort, said the banks are beginning to face waves of defaults on credit cards, car loans, and now corporate loans. "We believe we're entering Phase II. The liquidity crisis has eased a little, but the real credit losses are accelerating. The worst is yet to come," he said.

The jump in corporate bankruptcies has not yet been picked up by the usual indicators, which tend to lag the market, lulling investors into a false sense of security. The true losses are already known to specialists in the business, said Mr Sels.

And if you thought the issue of commodities speculators possibly being responsible for a major portion of the recent run-up in oil prices, that is far less serious than allegedly similar manipulation of the price of a crucial commodity near and dear to my heart:

Candy Companies Blame Higher Prices On Hedge Funds' Chocolate Cravings

Of course the commodities hedge funds respond with a loud "We didn't do it!", and point the finger right back at the candymakers:

80 chocolate price fixing cases to be combined



Mish Shedlock comments on Standard & Poors' "Hey - We finally pulled our heads out of our asses, and did not at all like what we saw!" announcement about their first mass downgrade of Liar-Loan-backed securities [a.k.a. Alt-A, which is considered a separate category from "subprime" but is proving to be similarly rotten, and even bigger in terms of size]:

S&P Downgrades $34B in Alt-A Mortgage Securities

Happy Birthday, WMALT 2007-0C1

I have been tracking a particular Washington Mutual (WM) Alt-A mortgage pool for 5 months. The pool is known as WMALT 2007-OC1 A1. It is a securitized mortgage-backed security issued in May, 2007. It is also the poster child for what's wrong with Alt-A.

The pool is now one year old. Happy Birthday. Let's see how the pool is doing as we light one candle on the cake to celebrate. Click here to see the WMALT 2007-0C1 May Picture.

Facts and Figures

* The original pool size was $513,969,100.
* 92.6% of this cesspool was rated AAA.
* 22.89% of the whole pool is in foreclosure or REO status after 1 year.
* 31.17% of the pool is 60 days delinquent or worse.

[ewmayer]

One of the Wall Street Examiner bloggers weighs in on the price of oil, including the skyrocketing tanker rents recently noted in this thread. This particular WSE blogger can be a bit odd-sounding because his English ain't the greatest - I quote him as much for the 2 articles [the first by Minyanville's John Mauldin, the 2nd from an oil-industry website] he links to as for his own take:
So what's up with oil?

Someone noticed first that Iran has oil sales declines. And apparently so is Russia. The “peak oil” argument will be that they have some problem with producing oil, but it seems it’s wrong. The problem is that Iranian and Russian oil are of lower quality, needing special refineries. And it seems that currently oil production is surpassing the demand, which immediately affects the demand on low-quality products. It’s very easy to mistake falling demand with falling supply. All blogs are arguing about falling output of russian oil for a while, but it seems they all are mistaken.
So Iran is renting tankers and parking them, full of oil it cannot sell. Apparently some hedge funds had decided that someone is trying to corner the market and they jumped in. It’s a complex operation, some swaps are involved, but the net result is that the tanker rent price jumped 3x this month. There is a lot of tankers full of oil parked somewhere far away in hope that the price will go up and away, like Nasdaq in 2000.

John, it’s more interesting than that. It is not just Iran. Today we started checking on how many tankers Iran had, and soon discovered that there is a serious tanker shortage. Lease prices have soared in the past few weeks. It is clear there are a lot of speculators betting that oil is going to rise to $150 or so and are willing to pay very high prices for keeping the oil on the seas waiting for higher prices. It is a speculative boom

It seems that all is simple. More and more of countries cannot afford oil subsidies anymore and consumer energy prices are jumping all around the world, creating almost immediate demand destruction. Add here hedge funds and sovereign wealth funds hoarding years of supply of various base metals and you have the recipe for a perfect storm. It is classic that commodities must fall somewhere in the early recession phase, and it’s quite possible that the bubble finally popped

Off-topically: the first of the 2 articles linked in the above quote also mentions that the author has ties to an International relief organization which seems to be able to get some positive stuff done in Myanmar without being ripped off and stymied by the crooked, criminal government there. Here's a link to their website - I notice it currently only mentions Darfur, but apparently you can just specify "Myanmar relief" on your check or PayPal payment if you want the money to go to Myanmar relief.

Back on-topic: If there is a significant speculative-bubble component in recent runaway commodity prices [and I believe that there is], there's an interesting potential scenario there: If the speculative bubble in oil goes "pop" and the price quickly plunges back toward the $100-per-barrel mark, instead of recognizing that for what it is - i.e. the pricking of a speculative bubble - the markets instead take it as an "all is well with the world economy after all" sign. That would be shades of early 1930, when the stock markets rallied hugely as investors [even, or perhaps especially, the big so-called "smart money" institutional ones] deluded themselves in similar fashion, only to really get hammered when the second act of that great debacle unfolded.


In-house ratings disagreements at Moody's

Moody's Investors Service has created a new unit that surprises even its own director.

The team from Moody's Analytics, which operates separately from Moody's ratings division, uses credit-default swap prices as an alternative system of grading debt. These so-called implied ratings often differ significantly from Moody's official grades.

The implied ratings frequently show that swap traders think debt is in more danger of defaulting than Moody's credit ratings signify. And here's the kicker: The swaps traders are usually right.

"When I first saw this product, my reaction was, 'Goodness gracious, Moody's has got a product that is basically publicizing where the market disagrees with Moody's,'" says David Munves, managing director for credit strategy research at Moody's Analytics.

Using the CDS market, Munves's unit rates both MBIA and Ambac Caa1. That's seven notches below junk and 15 below the official Moody's rating.

Swap traders see there's a huge risk that Ambac and MBIA will default, hedge fund adviser Tim Backshall says. He says swap traders don't trust S&P's and Moody's investment-grade ratings for the companies

"The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it'll push them into default," says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC.

Ah, what's a measly little "15 investment grades" between friends, anyway? "Did we say 'Aaa'? We meant 'Caa1' ... sorry about that teensy typo there, folks. Anyway, like we always say [especially when we screw up big-time], 'don't rely on us [even though that's what you pay us for, either directly or indirectly] - always do your own due diligence.' Past ratings performance is no predictor of future returns, or something like that."

[only_human]

der Wunderdoktor has opened my eyes to dark pools. There are many crossing networks and dark pools -- looking around leads into a maze of twisty little passages, all alike.
What disturbs me is the dynamicly developing nature of them:
CBOE inks deal with 3D Markets on block trading(Reuters Wed May 21, 2008)

The advance of technology and the desire to keep trade strategies secret has fueled a proliferation of dark pool networks in the securities market.

They now number more than 40, up from a handful just two years ago, as investors seek to place larger orders without showing their hand to the market and risking adverse price movements.

But unlike the cash equity markets, option transactions must be completed or executed on an exchange.

The partnership between CBOE and 3D markets allows CBOE members and their customers to make "benchmark-priced trades" through 3D's Archangel trading software.

The likely customers would be large institutions such as asset managers who have not had the ability to use listed options markets to transact big orders.

[cheesehead]

Originally Posted by cheesehead

Therefore, I offer this prediction, which I've not yet seen anyone else mention:

Oil prices will drop back to lower levels starting about August 8, 2008 (or sooner if China ends its stocking-up sooner or oil traders start anticipating that event).

You read it here first, folks.

(Disclosure: My publicly-posted predictions in the past have had a lousy record -- almost all, other than a few in areas about which I had genuine expert knowledge, have failed.)

Ever since only_human reactivated (http://www.mersenneforum.org/showpos...3&postcount=39) the "The 'REAL' reason for the recent rise in U.S. gasoline prices ..." thread, I've shifted my oil-market comments to that thread (http://www.mersenneforum.org/showthread.php?t=2313).

As you can see there, now that I have additional information about the oil market, I consider my only-10-day-old prediction almost certainly dead, in keeping with (* sigh *) my past record on publicly-posted predictions. However, inspired by recent U.S. political events, I shall not officially withdraw that prediction before August of this year. (After all, who knows which way the supertankers will lean at that time?)

- - - - -

P.S. This is my 2001st posting at mersenneforum.org.

[ewmayer]

In oh-so-typical fashion, the prototypical long-term-strategy-challenged U.S. automaker, GM, finds itself hemorrhaging sales volume and cash and way behind the curve it's going to take them three years to increase car production [as opposed to guzzler-truck production] from just 50 to 60% of their fleet:

GM Will Close Four Truck Factories in Shift to Small Cars, May Drop Hummer: General Motors Corp., struggling to return to profit amid record gasoline prices, said it will close four truck plants, make more small cars, and may drop its Hummer brand of large sport-utility vehicles.

A doubling of U.S. gasoline prices since 2004, including a 31 percent surge this year, is forcing Wagoner to accelerate production of more fuel-efficient vehicles as he tries to end three years of losses. Cars will account for 60 percent of Detroit-based GM's North American production in three years, up from about 50 percent now, he said.

``It is significant, but this is a late reaction to changing market dynamics,'' said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. ``The plans really should have been in place a number of years ago.''

Of course fellow uncompetitive Detroit-Dinosaur carmaker Ford is in a similar self-inflicted pickle. Let the calls for massive government bailouts begin... oh wait, that was the homebuilders, at the end of this posting. Sorry about that.


Some nice quotes about the current debt shell games being played the Banks, and the effect of the Fed liquidity spigot on the commodities markets at this blog [some of the same blogger's other posts are just a tad "out there" but this one is on-point]:

China Warns U.S. To Stop Global Inflation

Suddenly bubbles are popping up in all commodity markets like bubbly champagne on New Year's Eve. The authorities are now trying hard to scare the hell hounds and pirates who are merely taking advantage of endless Funny Money™ being pumped into the banking system via the Fed's new open windows to the Outer Darkness. Everywhere we look, we see some commodity after another suddenly shoot upwards and then just as swiftly, crashing. Some of the more obscure commodity markets in rare metals have seen several cases similar to the cotton, rice, wheat, oil and gold cases that are more famous. The point is, this is an ongoing process of translating the Treasuries picked up at this free window....another $225 billion will be offered this month alone...and trying to turn it into instant profits. The only way this can be done is in the commodity markets.

Reuters | April factory orders post surprising gain

Orders for costly durable goods - items like cars and refrigerators intended to last three years or more - declined by a revised 0.6 percent in April rather than the 0.5 percent drop previously reported. That followed a 0.2 percent decrease in March.

But orders for nondurable goods, goods like paper products and food items, climbed by 2.8 percent in April, building on an even stronger 3.1 percent jump in March.

You call it "surprising strength in factory orders" ... we call it "food price inflation."


Toll Brothers Swings To 2Q Loss On More Land Write-Downs

Luxury-home builder Toll Brothers Inc. (TOL) Tuesday said it swung to a fiscal second-quarter loss amid continued write-downs from the housing crunch.

The company also called on Congress to create tax incentives to spur home buying.

...

Revenue fell 30% to $818.8 million from $1.17 billion a year earlier. Last month, Toll Brothers said home-building revenue - essentially all of the company's total revenue - dropped 30% to $817.9 million.

At the same time, the firm noted net signed contracts declined 44% and cancellations fell 20%. Backlog was down 50% to $2.08 billion.

"Demand continues to be weak in most markets as our clients worry about selling their existing homes or entering the market before prices stabilize," Toll Brothers said Tuesday.

"We believe Congress should jump-start demand for new homes with an initiative that will bring buyers off the sidelines and into the market, and thereby stop the downward spiral of home prices," the company said, adding that it favors a tax incentive for those who buy homes within nine months of passage, which Toll said would create a sense of urgency.

Strange -- I don't recall hearing Toll's execs crying for government intervention during the decade-long "upward spiral of home prices" which so grossly distorted the normal market dynamics. Note to the biz-crypto-speak-challenged: "sense of urgency" approximates to "irrationally exuberant buying frenzy fueled by unsustainable levels of consumer debt expansion" on the part of the consumer and to "OMFG, we're totally screwed without a massive government bailout" on the part of the builders.

[cheesehead]

Originally Posted by ewmayer

GM Will Close Four Truck Factories in Shift to Small Cars, May Drop Hummer:

< snip >

and may drop its Hummer brand of large sport-utility vehicles.

Oh, rats ...

The universe's first Hummer dealership is a few miles down the highway from where I live. Magnificent view of it from the US 45 expressway.

It was originally intended to be even closer ... just walking distance (heh, heh) from my front door! But the vacant plot of land they originally considered was not quite the right size and shape. They needed to construct an obstacle course for demonstration drives, and that just wouldn't quite fit on the plot. (So, now there's a furniture superstore, a Best Buy, and a couple of lesser retailers there instead.)

It'll be a real shame to see that grand Hummer building, with its fancy upswept sorta-half-cylinder roof, quite dramatically unlike any vehicle dealership you've ever seen before, go vacant. There really isn't any suitable prospective replacement tenant. Jeeps would just look dinky there. Range Rovers might work, but their prospective buyers might be put-off by the ordinary-middle-classness of the neighboring Chevy place located in neither of this metro area's suburban upper-income nexuses (nexi?). It's a good eight-to-ten miles from the nearest Mercedes, or even Lexus, dealer.

Probably best to just tear it down, level off the lot, and pretend it never happened. (* sigh *)

... unless J. Paul Getty would buy it as a museum to the Crowning Glory of the Oil Age.

[ewmayer]

S&P nears agreement with Cuomo: The ratings agency agrees to change some business practices amid pressure from the New York attorney general

NEW YORK (AP) -- Standard & Poor's said Tuesday it has tentatively settled with New York Attorney General Andrew Cuomo to overhaul some of its business practices in the aftermath of the subprime mortgage crisis.

Deven Sharma, the rating agency's president, said the deal that is still being negotiated "will help ensure our ratings process continues to be of the highest quality."

"Cotinues to be" .... you're bloody well kidding us, right? If your ratings process had been anything other than a gigantic fraud and racketeering enterprise for the past few decades, the NY AG wouldn't be threatening to sue your crooked asses into oblivion now, would he? But, not to worry - if things get too dicy for S&P, they'll just have the cronies in Washington and New York instigate another one of their patented sure-fire HEADLINE-GRABBING SEX SCANDALS™, like they did with the last troublemaker, Eliot Spitzer. Works every time, and afterward you get freebies from the high-priced hookers that were used. Sweet!


On the "Major 'Tempête du Merde' About to Hit the Proverbial Fan" front, the New York Times informs us that government - in this case state and local - is indeed the last bastion of the Profligate Spenders - "Coming soon to a massive tax hike near you":

NYTimes | State and city governments still spending despite plummeting tax receipts

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.

“We are looking at a $4 billion cut to public schools and deep cuts that will result in thousands of Californians losing their health care,” said Jean Ross, executive director of the California Budget Project, offering a preview of coming hardships. “But the reality is we have not pulled money off the streets yet.”

Quite the opposite, the states and municipalities have increased their spending in recent quarters, bolstering the nation’s meager economic growth. Over the past year, they have added $40 billion to their outlays, even allowing for scattered spending freezes and a few cutbacks in advance of July 1. Total employment has also risen. But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment — slowly at first and then quite noticeably after the next president takes office.

For more details, just do a websearch for "Vallejo, California", the national poster child for this kind of fiscal irresponsibility and political gutlessness. You do remember Vallejo, right? Here, a quick refresher [courtesy of Money Magazine]:

But the real nail in Vallejo’s coffin was the city’s labor costs. Under the current labor agreement, the average police officer walking the beat in Vallejo will be paid $122,000 this year before overtime, according to city documents. An average sergeant will make $151,000; a captain, $231,000. The average firefighter, meanwhile, will bring in $130,000 before overtime.

That’s just the salaries, though. The final budget-crusher was the city’s pension plan. Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.

Like I said, there *will* be many more bankruptcies in the next few years, and not just of cities but of entire states. And this will be accompanied by a predictable chorus of "We never imagined that revenues could fall this far, this fast..." - as if the cities and states in question had no advance warning, despite the fact that their own assessors set tax-basis home values, and they have regular numbers about foreclosures and tax receipts. Millions of underwater-on-their-mortgage homeowners aren't going to be buying it - it's going to be ugly, tax revolts happening all over the country, cats and dogs sleeping together...


Lehman's Shares Rebound as Bond Fund Buys Debt

Lehman Brothers Holdings [LEH] shares rebounded sharply on news that a big bond fund manager is buying the firm's debt and some positive comments from other Wall Street firms.

Investment manager Loomis Sayles, one of the biggest and most widely followed U.S. bond fund managers, has been buying Lehman Brothers debt over the past several days and is not shy about transacting with the investment bank, its vice chairman told Reuters.

"The credit is good at Lehman," said Dan Fuss, vice chairman of Boston-based Loomis Sayles, which oversees more than $100 billion in fixed-income securities.

Fuss added that he considers Lehman common shares , which fell 18 percent over three days, to be "dirt cheap."

"...Or at least they were when I bought them late yesterday and early this morning, before getting my buddies at CNBC to help me pump them, and my pals at Merrill to upgrade them:"

[Edit: Actually the bond fund only said it was purchasing the debt - likely at a juicy discount-to-par - but they way they're pumping the stock makes me suspect they're trying to get a nice short-term profit pop from manipulating that as well].

Lehman also got a boost after Merrill Lynch upgraded its shares to a "buy" from "underperform" and Lazard's CEO praised Lehman, saying "(CEO) Dick Fuld is very able."

"The Lizard CEO did not specify what -able he considered Mr. Fuld to be - whether he meant 'likeable', 'despicable' or 'incapable' remains unclear." Re. the MER "Did we say 'SELL NOW!!!' ... sorry, we meant, 'BUY! BUY! BUY!' ... sorry about the confusion, folks..." upgrade - I seem to recall them having upgrade another financial firm whose name escapes me now - I only recall that the name sounded like the "Berenstain Bears" of child-story fame - just a couple days before the Family Berenstain imploded financially. Could just be the Alzheimer's talkin', though.