Ander's Market Theories (AMKTH)

[AnderL]

here is the rss feed from his blog.

http://feeds.bizradio.com/mikenorman

for what it is worth I can't find the list he is talking about either.

http://www.newyorkfed.org/newsevents/news/index.html

[Stock]

Does it seem like somebody is ignoring the secondary market in this "debate?"

I heard Mike Norman (again, sorry -- it's just the TOD I am in the car) on the radio going ballistic over a Bloomberg story being "destructive" to the economy...
was it this story?

He said people are complaining about the Fed not being transparent, when the list is on the internet?

I can't find the guy's blog, but he says it's all on his blog.

[AnderL]

Fed Defies Transparency Aim in Refusal to Disclose (Update2)

By Mark Pittman, Bob Ivry and Alison Fitzgerald

So when id the Treasury and Fed going to give up some of their opaqueness? Maybe they will show you their when you show us yours Bernanke\Paulson

Nov. 10 (Bloomberg) -- The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

``The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. ``In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

``It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

Treasury, Fed, Obama

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn't respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama's economic adviser, Jason Furman, also didn't respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to ``make our government open and transparent so that anyone can ensure that our business is the people's business.''

The Fed's lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan -- without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank's purchase of Fannie Mae and Freddie Mac bonds.

Sept. 14 Decision

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the ``lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,'' according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

`We Need Transparency'

``We need oversight,'' Paulson told lawmakers. ``We need protection. We need transparency. I want it. We all want it.''

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. ``Transparency is a big issue,'' he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''

The nation's biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed's disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

``I talk to Geithner and he was pretty sure that they're OK,'' said Frank, a Massachusetts Democrat. ``If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market'

Frank said the Fed shouldn't reveal the assets it holds or how it values them because of ``delicacy with respect to pricing.'' He said such disclosure would ``give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D'Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

``I'd love to hear the methodology, how the Fed priced the assets,'' D'Vari said. ``That would unclog the market very quickly.''

TARP's $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks' troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists ``are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.''

The Fed has lent at least $81 billion to American International Group Inc., the world's largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

``As a taxpayer, it is absolutely important that we know how they're lending money and who they're lending it to,'' said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank's rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody's Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed's collateral ``absolutely should be made public,'' said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed's moves.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Mark Pittman in New York at [e-mail]; Bob Ivry in New York at [e-mail]; Alison Fitzgerald in Washington at [e-mail].
Last Updated: November 10, 2008 15:08 EST

[AnderL]

Deflation and Disinflation. What they really mean and where we are int he Secular Market.


Deflation. based on the contraction of the global money supply. started with the asian currency crisis and then the dot com bust. lot of money invested on development stage companies with no revenue. that was borrowed money on future revenue that did not appear. When it all busted the global money supply contracted.

Deflation is what you call disinflation when the disinflation goes from slowing positive growth down to below the zero line. its still the slowing of growth but its gone inverse and starts eating at the existing economy. the IT industry contracted severely in 2000 and resulted in a massive industry wide contraction, or targetted deflation. That reverberated through the global economy slowing inflation. That is one of the reasons that Greenspan lowered rates. To dislodge a lot of foreign bank money in US treasuries and get it circulating through the world economy to jump start inflation again.

Let me explain. The difference between disinflation, deflation, depression, recession, contraction, is a matter of point of view. In an period of positive inflation, defined as growth in an economy's GDP and money supply any event or action that reduced the growth rate of that supply or the size of the economy as defined by those two metrics is disinflationary. It is also defined as a contraction of growth. It can also be defined as any targetted deflationary pressure in a section of an economy that is in overall inflation.

So say that there were not any deflationary effects on the economy until now is a mistake in the understanding of the secular market we are in. If you only want to look at the 2002-2007 bull market and look at it as an inflationary period I'll agree with you. It was an inflationary cycle but a cyclical one inside of a secular contraction that has been on going since 2000. There will always be periods of inflation inside the secular one that run counter to the overall trend.

It is usually through monetary policy devoted to countering or preventing the severity of the contraction. In the short term it's effect is successful and over inflate but over the course of the secular trend it only results in lowering potential\future expansion for the sake of a short term recovery or "soft landing". This reinforces that the next contraction will be more severe. You think you are looking at THE big picture but there is an even bigger picture that spans generational trends. Let me repeat that.... Generational.

Picture a balloon that an economy of 10 people are blowing up. Each of 10 men are an inflationary pressure. If 1 of the 10 men decides to stop blowing, he is disinflationary. He is not contributing but not hampering the other 9 who are inflationary. If another of those men decides to instead to poke a hole in the balloon then he is deflationary. He has the impact of not only stopping his contribution, but to also hinder the inflationary of 1 of the others. The economy is still in net inflation because you have 8 men inflating but 1 who is not working and 1 who is counter productive. So your net inflation is 7 men.

You see over the period of the secular market the 15-20 contraction will need to have a massive generational shift in sentiment on the participants of that economy. The tulip bulb mania that we had in 1990-2000 was the culmination of a secular trend. That mania of daytrading and speculation does not easily get weeded out as survivors have not learned their lesson. They only see the next contraction as a new opportunity to profit on the next big run up. Instead of reducing risk exposure then instead leverage up, take more risk to counter the losses in the previous contraction. They become more speculative and the effects of following contractions become more severe. More participates are punished. Over the course of the secular cycle the survivors and most successful are those who took the least risk and focused on capital preservation.

We are now at the lows of the cyclical contraction inside of a secular contraction. This is the second one in the secular trend since 2000. We may be in for 1 or 2 more depending on how how it is managed and how severe the damage was from the recent credit contraction. The inflationary pressure of dumping trillions of dollars into the banking system to shore it up is helping again in the short term but the money supply growth was so tremendous that I think this next cyclical recovery (?2009-2013?) will be the weakest of all. It potential is lost. We borrowed the money supply that would be produced in that expansion to pay for the recovery today. So when we get to 2012, 2013, 2014 a portion of growth in GDP, money supply will be used to pay that money borrowed. And it is a lot of money. So when that next cyclical contraction (?2014-2016?) comes after the cyclical expansion (?2009-2013?) we are going into ends its going to hit hard... very hard. Its gong to so a lot of damage to the bond markets that will run interest rates like it ran volatility this past year. I only hope Volker is around and in charge of the Treasury when that happens again.

But don't worry, as we muddle through the contraction in 2014-2016 the following recovery will probably lead to a new secular expansion. We will not realize it because by that time everyone will have excepted we are in some kind of deflation or depression and will be griped with financial fear. Those who are ahead of the curve will ignore the media and the sentiment of participants and engage in long term investment despite the multitude of recessions and high unemployment that will exist through out the 2020s.

[Stock]

? - Treasury Calls On Financial Cos To Report Tsy Note Positions

Last update: 11/7/2008 9:19:06 AM

By Maya Jackson Randall
Of DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--The U.S. Treasury is calling on financial firms that hold $2 billion or more in certain Treasury notes to immediately report their positions to the government.

Specifically, Treasury is calling for so-called Large Position Reports from entities whose reportable positions in either the 2% Treasury notes of September 2010 or the 3 1/8% Treasury notes of September 2013 equaled or exceeded $2 billion as of Thursday.

This is the first time Treasury has called for large position reports on two securities. Last year, Treasury conducted a test of large position reports for holdings of Treasury notes to guage {sic} the ability of companies to report their holdings to the government.

Treasury Friday said reports must be sent to the Government Securities Dealer Statistical Unit of the Federal Reserve Bank of New York before noon on Nov. 14.

[AnderL]

Business cycle is still alive and well, lol

note 2005-2006 was supposed to be the end of the previous business cycle which peaked in 2004. The artificial expansion of credit and delayed monetary tightening resulted in extending the cycle and thus causing an even greater contraction going forward.

[AnderL]

so I'm reading a Conversation with Ben Graham,

http://www.bylo.org/bgraham76.html

one of the last interviews with the father of value investing, and I'm surprised to find that he discarded his whole methodology that he wrote in Security Analysis

excerpt:

In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?

In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

40 years ago was 1936. He has jumped on the band wagon of indexing because you can't outperform the market. You have to wonder what he would have be able to say if he were still alive. If he would have held fast to his original principles if he lived 5-25 more years. I am of the camp that most humans cannot fathom what exists before or beyond their lifetimes. The baby boom generation never lived through the depression era. They barely lived through the 70s as investors. They only started to actively pursue investment and business in the 1980 when they came down off their drug induced highs and realized they need to get a life. The peak of the boomers where born in the 1950s. At 30 is when most people actively accelerate investment.

It is sad to see what the current generations X and Y have to go through when they saw how easy it was for their parents to generate wealth and as they enter the markets they find that they are suffering heavy losses as the carpet is pulled out from underneath them. The peak of generation X births occurred in the 1970s and they would be actively accelerating investment at the start of 2000. They will probably look back some 20-30 years from now and see how they only were able to capitalize about 4-5% year over year and no social security system to support them and not the 15-20% their parent received.

Generation Y may fair better because they will be putting their money into the market actively by the turn of this decade. Births in that generation peaked in 1990s so they will be investing heavily in 2020. They are also called the echo boomers.

Maybe if Ben was alive today he could have received his confirmation that his Security Analysis did work and that we are now going 3 for 3 with value opportunities going forward from here. I just hope this new generation shakes off the day trader mentality and really tries to invest their money going forward. There are incredible opportunities to fire and forget letting your money run for the next 25-35 years.

[AnderL]

Clearing houses in UK and US agree link
By Jeremy Grant

well there is one good thing about this contraction, centralizing everything on one world market. The closer these two organizations come to merging would mean that we get faster clearing of transactions between the US and Europe. That means cheaper and broader access to each others markets for everyone. I'm sure that as it stands right now. the intermediaries on these transactions are getting killed in this highly volatile market.

Published: October 22 2008 20:24 | Last updated: October 22 2008 20:24

Consolidation of the back-office industry that underpins most stock and derivatives trading took a big step forward on Wednesday when The Depository Trust & Clearing Corporation of the US and Europe’s LCH.Clearnet signed a preliminary agreement to combine their businesses.

The deal – if consummated as expected by early next year – promises to deliver significant cuts to the overall cost of trading multiple kinds of assets, ranging from shares to derivatives.

It would create the world’s largest clearing house and the first transatlantic one.

The plan comes as the role of a clearing house and settlement systems have been thrust to the forefront of regulators’ concerns amid the financial crisis.

A clearing house stands between two parties to a trade and protects against one of the parties being unable to pay in the case of default.

Under the proposed deal – codenamed Bicycle – DTCC will take over LCH.Clearnet by acquiring, over a three-year period, all of the European clearer’s ordinary shares. LCH.Clearnet shareholders will receive up to €10 a share, funded by LCH.Clearnet’s revenues over the period, implying a value for LCH.Clearnet of €739m (£574m).

LCH.Clearnet is owned 73.3 per cent by investment banks, brokers and other market participants, 10.9 per cent by exchanges, including Euronext, and 15.8 per cent by Euroclear, Europe’s largest provider of settlement services.

The combined group will cover equities, fixed-income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and over-the-counter products such as interest rate swaps, credit default swaps, carbon emissions and freight contracts.

Clients served globally would include several thousand broker-dealers, banks, institutional investors, hedge funds, trust companies, mutual funds and insurance carriers and other third parties that market financial products.

DTCC offers clearing and settlement of almost all US equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives.

Don Donahue, its chief executive, said the deal would create “very meaningful synergies between the two organisations” so both could “take costs for clearing in our respective markets down further”. The US and Europe would for the first time, be “supported by a common infrastructure”.

Merrill Lynch advised LCH.Clearnet, while Goldman Sachs acted for DTCC.

On Wednesday Eurex, the derivatives arm of Deutsche Börse, was among exchange and clearing groups meeting Charlie McCreevy, EU internal markets commissioner.

Copyright The Financial Times Limited 2008

[AnderL]

Deleveraging and forced selling make market unsafe

By Neil Hume

Published: October 24 2008 23:07 | Last updated: October 24 2008 23:07

City traders did not need to wait for the release of third quarter gross domestic product figures at 9.30am on Friday to get an idea of how quickly the domestic economy was shrinking. A quick look at the performance of the FTSE 250 told them all they needed to know.

Following Friday’s 5.5 per cent slide, the mid-cap index, which is considered a better reflection of the domestic economy than the FTSE 100, has now halved from its May 2007 record high.

Of course, it hardly needs saying that such a decline reflects fears that the UK is heading for an economic recession. But what sort of downturn will it be? A short, sharp recession or a long and painful downturn. And how far will corporate earnings fall?

They are good reasons for thinking the slowdown is going to be much more severe than anything in the past 40 years

Fortunately, there are several rough and ready ways to measure what is being reflected by current share prices. One method is to take the current forward price/earnings ratio of an index such as the FTSE 100 or FTSE 250 and compare it to its average forward p/e over history. The difference between the two, expressed as a percentage, is a calculation of the expected decline in earnings. James Montier, of Société Générale, undertook this exercise this week and found US market levels were implying a 20 per cent fall in earnings and Europe a 34 per cent drop. He says this decline is in line with the most recent of recessions.

Merrill Lynch has come to a similar conclusion. It has compared the trailing p/e for European equity markets to their 36-year average, adjusted to exclude the dotcom bubble years of 1999 and 2000. The difference between the two implies a 38 per cent drop in earnings, four percentage points more than in the previous four recessions.

However, they are good reasons for thinking the current slowdown is going to be much more severe than anything in the past 40 years. Indeed, history shows that slowdowns that follow periods of financial and banking distress are longer-lasting and deeper than normal.

The International Monetary Fund found that the average recession in developed countries since 1980 had lasted for just longer than three quarters. However, downturns preceded by financial stress have lasted for an average of almost seven quarters.

Robert Buckland, of Citigroup, thinks the current earnings downturn could be among the worst in the past four decades. In his view, global corporate profits will fall by as much as 40-50 per cent over the next two years.

A peak-to-trough fall of that size is by no means outlandish, given the recent credit binge that inflated the sales, earnings profits and earnings of companies.

Mr Buckland thinks this fall is fully discounted by the market. Over the long term, he says the global equity market p/e has been 17. Current valuations are closer to 10, which means investors are discounting a 40 per cent fall in earnings. Add on the 9 per cent fall already seen in this bear market and it means investors are pricing in a peak-to-trough fall of 50 per cent. So, whichever way one cuts it, a lot of bad news is now “in the price”. But what is not “in the price” is a depression such as that seen in the US in the 1930s or Japan in the 1990s. During the 1930s, US listed companies’ earnings plummeted by 75 per cent in just over three years, while in Japan they slumped 130 per cent into loss in a downturn that lasted a decade, according to Citigroup.

Of course, there are people, such as Nouriel Roubini, the New York University economics professor, who believe this could happen. He thinks it is possible that the S&P 500 index could fall from its current level of 875 points to 500-600 points.

Clearly, anybody selling at the moment has to believe that such an economic doomsday scenario will come to pass.

Unfortunately for those who do not, this is still not the time to be wading into the market. There is still too much forced selling and deleveraging by hedge funds, banks and other investors for the market to be considered anywhere near safe.

Until that process is complete – and nobody has any idea how long it will take – the only safe place to be is on the sidelines, preferably with a large pile of cash.

Copyright The Financial Times Limited 2008

[AnderL]

Heed the harsh lessons of history to find value

By John Authers, Investment Editor

Published: October 10 2008 18:48 | Last updated: October 10 2008 18:48

“A day like today is not a day for, sort of, soundbites, really – we can leave those at home – but I feel the hand of history upon our shoulders, I really do.”

It is easy to see how Tony Blair felt as he responded to the agreement that led to peace in Northern Ireland.

It is now plain that we are living through what history will almost certainly call the second great crash in stock markets. The hand of history is so heavy on our shoulders that it is hard to respond with more than soundbites, or to see any opportunities that this appalling loss of wealth may have given us.

My life with Benjamin Graham over the past month illustrates this.

Graham was an academic at Columbia University in New York. In the worst days of the 1930s, he worked out a way to invest profitably in the stock market, now known as “value investing”. Rather than attempt to time the market, he said investors should look at exactly what a company was worth, and how much it would be worth if the worst came to the worst.

This meant you should look at a company’s assets on the balance sheet, and also look at its ability to produce cash. If the company is so cheap that its value would scarcely be less if it were to go out of business, then you have what Graham called a “margin of safety”. And if the company looks cheap compared with a conservative forecast of the cash it will generate, then the chances are that “Mr Market”, as Graham would say, has mispriced it, and that you will make a lot of money once that mispricing is corrected.

Thus you have an asymmetric bet; heads you win a lot, tails you do not lose much.

This was a great way to profit in the Depression. Confidence had collapsed, but in the process it had brought down the prices of many companies that were still healthy.

Value investing still has many adherents, but also detractors. The most common line against the strategies Graham, and his colleague David Dodd, laid out in a classic tome called Security Analysis, is that the measures he uses worked in the extreme conditions of the 1930s, but were no longer relevant.

To address this, a sixth edition of Security Analysis came out last week. Each chapter had a preface by a current-day investment manager on how to apply Graham’s insights today.

It was a big publishing event, but I could not get along to the launch. The book remains unread on my desk. The “hand of history” – watching the historic collapse in share prices – kept me at my desk.

This is ironic. The very extremity of last week’s crash made it hard to keep an eye out for bargains in the methodical way Graham laid out 75 years ago.

A deeper irony is that there may not have been any need to update the book. Stock market conditions look ever more like the 1930s.

The noughties are much more similar to the 1930s than commonly thought. In morning trading on Friday, the S&P 500’s fall for the decade was almost identical to its fall for the decade on the same date in 1938. The pattern of the two decades is freakishly similar, with a big sell-off followed by a prolonged rally and then a fresh bear market. The key difference is that the sell-off in this decade before the “fools’ rally” began was far less severe than in the 1930s.

This, we can now see, was because cheap credit had inflated a new bubble.

This is what followers of Graham had argued. They said the market during the twin lows of the WorldCom crisis in 2002 and the invasion of Iraq in 2003 was still not cheap. Dividend yields, for example, were still barely half their level of the mid-1990s, before the tech bubble took hold.

But the similarities between the market tops in 1929 and 2000 are compelling. Both saw wildly overvalued stock markets and economies that were still in decent shape.

Measures based on cash, such as dividend yield or cash flow multiples, show that the market is now much cheaper than it was during the false bottom of 2002-03, even if overall indices are still higher.

We are not, therefore, in a new 1929. Our position is more similar to that of the late 1930s. That is not so encouraging: in the decade after October 10 1938, the S&P gained 5 per cent.

But at least we have a clear historical comparison, and a clear guide for how to proceed. Providing you are not using borrowed money, and you can afford to wait a matter of years for Mr Market to thrash out his problems, then Security Analysis is all you need.

Do not try to work out how long the market will take to recover or when it will hit bottom – that task is impossible. Use basic balance sheet methods to work out how much a stock is worth and how much it would be worth if the worst came to the worst. If that calculation leaves you with a margin of safety, then buy it. Don’t let the hand of history gripping your shoulder stop you.

Copyright The Financial Times Limited 2008

[AnderL]

I'm wondering what the onset of this was in the markets. financials don't report audited filings until after January. This is when this all started and why earnings collapsed for the S&P at the end of 07 and recovered the following quarter.

[AnderL]

Baltic Dry Index continues fall, but signs of recovery are

Wednesday, 22 October 2008

Although not at the freefall pace of last week, the Baltic Dry Index (BDI) has continued its dropping sessions both yesterday and Monday. It is now at levels as low as six years ago, standing at 1,292 points, since yesterday marked another plunge by 63 points or 4.65 percent. It is the lowest level since October 2002 and the index is fast approaching the levels of the Asian “Tigers” financial crisis, back in the years 1997-98. Among the reasons for this fall, at least according to analysts has been the deteriorating health of the Chinese steel market, where output fell 9% year-on-year in September and was down 7% from August. In addition, slowing Chinese demand for Brazil iron ore has contributed to the weakness in the Baltic index.

It’s obvious to many that global trade has come to a halt with effects noticed in other markets as well, particularly in container trade. Traders and importers have all become increasingly wary of the global financial crisis, putting a deadlock on almost all shipments. Also, the few active traders are facing problems receiving the necessary letters of credit.

Letters of credit assure a shipper of payment for a cargo after it is loaded on a ship, but before the buyer receives it. Banks all over the world are cautious and limiting their activities, placing different priorities. The squeeze on trade credit is also restricting commodities shipments. Around 90% of the world’s $14 trillion trade is handled via trade credit.
Of course, this situation can’t be continued for long, with psychology playing a major role in the recovery. Once a more positive sentiment is cemented, cargoes are expected to flow again, especially with the holiday’s season coming soon.

Already, some market sources have indicated that things are bound to get better on the banking sector area, with recent activity indicating that interbanking rates are falling. This will allow more banks to achieve better financing, besides the huge amounts that are granted by Central Banks worldwide. This in turn will help trade, as well as financing for shipbuilding orders. Recovery is expected for other reasons as well, with rates cut playing a major role. When trade will begin again, many will be benefiting from these lower rates, thus speeding the process of the global economy’s healing.

[AnderL]

S&P500 PE historical + forward

based on the numbers put out by S&P. First chart is earnings per quarter from 88 to projected 2009

second chart is P/E through the same time frame.

moral of the story, don't trust price to earnings in a secular bear market. its going to mess with your head trying to find the right price to buy. prices are falling faster than earnings so P/E goes up. While investors are panicking out of stocks the economy is recovering and earnings start to climb resulting in a falling P/E.

maybe there is something to be said for the spread between reported and operating earnings. Seems when they reach an extreme seems to be a time to buy. But what defines that extreme.

also of note writeoffs are considered in the reported and not the operating. could they be that much of an impact in the spread going forward. I think companies are still being overly optimistic. I'm waiting for that high P/E relative to reported earnings.




What's the Real P/E Ratio?
http://online.barrons.com/article/SB121158260488318589.html?mod=9_0031_b_this_weeks_magazine_main
By CHARLIE MINTER and MARTY WEINER | MORE ARTICLES BY AUTHOR
The bearish view on earnings makes the most sense.

IF YOU WATCH OR READ OR LISTEN TO BUSINESS NEWS, you must be getting very confused about whether the stock market is undervalued or overvalued. The bulls who appear on the financial shows assert that the stock market is inexpensive: "This market is as cheap as it has been for the past two decades -- or the past 18 years." They also may state that the price-earnings ratio, at 13 to 16 estimated earnings for 2008 or 2009, is below the long-term norm.

Their statements are correct.

At other times during the same day, you may hear a bearish market maven try to convince the interviewer that the market is substantially overvalued and has a long way to go on the downside before it gets to fair valuation. The bearish interviewee will either discuss why the P/E ratio at over 21 times 2008 earnings estimates or 24 times the latest 12-months earnings is closer to valuations found near market tops, rather than market bottoms.


These analysts are also correct.

Interviewers seldom if ever question the disparities in the various market analysts' approaches to valuation. But we will try to clear it up.

Few stock-market research organizations are equipped to estimate the earnings of every company in the Standard and Poor's 500. It would require having analysts in every sector to study each individual stock and come up with the best guess possible. Virtually no institution or money-management firm does this. We generally rely on organizations such as Standard & Poor's to do the work for us.

Standard & Poor's has done more than enough work. Visit its Website and you will find a myriad of different earnings estimates from which you can choose. S&P shows reported earnings, operating earnings, core earnings, earnings with pension-interest adjustment, and other formats.

There are two main earnings numbers that Wall Street uses when discussing valuations -- "reported earnings" or "operating earnings." Typically, the bulls use "operating earnings," and the bears use "reported earnings" because operating earnings are higher and reported earnings are lower. Also, it makes sense for the bears to use the past 12 months of earnings because they are usually lower, and for the bulls to use forward operating earnings to help make their case. Using the last 12 months is much more consistent, since it avoids dependence on estimates of earnings.

Operating earnings exclude write-offs, while reported earnings include write-offs. That is the only difference, but it's a difference that is getting much more important. As recently as the early 1990s, operating and reported earnings were virtually the same. But then we entered the greatest financial mania of all time, and the earnings numbers diverged.

There were so many write-offs by companies making unwise investments and then undoing them that operating earnings grew much faster than reported earnings. The write-offs that had been sporadic and unusual became common for many companies.

Using operating earnings is now like playing in a golf tournament that doesn't count any penalty strokes for hitting the ball into a water hazard or out of bounds.

Look at the numbers. Reported earnings for the S&P 500 for 2007 were just over $66. The operating earnings for 2007 were $84.54. The estimated numbers for 2008 are about $69 for reported earnings and about $90 for operating earnings.

By the way, these reported numbers have just recently been revised downward drastically, due to the slowdown in the U.S. economy.

Now you can see why there is such discrepancy in the market mavens' points of view. If you are a bull, you will say that the market is trading at a very reasonable 16 multiple on the $89.44 of earnings in 2008 and 13 times the 2009 estimate of $110.44. On the other hand, if you are a bear or just a reasonable person you can see the market is trading at 24 times trailing earnings and about 21 times the estimate of 2008 reported earnings.

Unless you believe that we will be trading at a "permanent plateau," as did the noted economist Irving Fisher in 1929, you might want to consider some more distant peak and trough multiples.

Over the past 75 years, most market peaks topped at around 20 times reported earnings, and the troughs occurred at around 10 times earnings. The financial mania of the late 1990s pushed P/Es to over 40 times reported earnings, and the following bust never brought P/Es below 18 times reported earnings.

There's more we can do to make sense of earnings: The best way to measure present earnings and future earnings is to smooth them out over long periods. Earnings can grow at only approximately 6% a year over the long term. The trend is limited by the growth in real GDP plus inflation. And long term, real GDP cannot grow faster than the increase in the labor force plus the increase in productivity.

If you don't accept this, look at a long-term chart and draw a 6% growth line through the earnings. It is clear that earnings sometimes rise above the line and sometimes fall below it, but earnings always revert to the 6% mean.

Going back to 1950, every instance where actual earnings rose above trend-line earnings was followed by a period where actual earnings went well below trend-line earnings.

Comstock Partners believes that we have entered such a period now, and that the market is trading at such a high multiple of trend-line earnings that it will be difficult to make money.

You could even lose a lot of money.

CHARLIE MINTER and MARTY WEINER are the chairman and president of Comstock Partners, investment managers in Yardley, Pa. Website: www.comstockfunds.com

Barron's welcomes submissions to "Other Voices". Essays should be about 1,000 words in length, and sent by e-mail to the Editorial Page editor at [e-mail].

[Stock]

there is a lot to not like at the moment

[AnderL]

So you either get credit or you don't. I dunno, i think that people should be allowed to take on as much risk as they are willing to as long as they are aware that that is what they are doing.

never likes usury laws, they are like price fixing products. it also hurts those that are trying to start credit because it is a catch 22. you can get credit without having credit.

we are helicopter parenting the economy right now and I don't like it.

[Stock]

THE CASE FOR DEREGULATING
INTEREST RATES ON CONSUMER
CREDIT

MICHAEL E. STATEN, PH.D.
DIRECTOR, CREDIT RESEARCH CENTER
KRANNERT GRADUATE SCHOOL OF MANAGEMENT
PURDUE UNIVERSITY

ROBERT W. JOHNSON, PH.D.
SENIOR RESEARCH ASSOCIATE, CREDIT RESEARCH CENTER
KRANNERT GRADUATE SCHOOL OF MANAGEMENT
PURDUE UNIVERSITY

November 1995

PART IV: CONCLUSIONS

This study has explained the theories underlying the discussion of how credit markets work and the
effects upon consumers of government intervention in those markets. Again and again, the data drawn from
studies of credit markets with and without restrictive rate ceilings support the theories that have been
advanced and accepted by economists over the centuries. The basic conclusions of this study are
summarized below.

· The U.S. experience of the past 25 years has validated the faith of the National Commission on
Consumer Finance in the power of free and competitive markets to regulate and moderate the price
of credit. The legal ability to raise rates does not correspond to the economic ability to
sustain higher rates. Rates for various types of consumer credit do not necessarily rise to a
regulatory ceiling and are less likely to do so, the higher the ceiling. Instead, knowledgeable
consumer and unrestricted entry are the economic forces that make credit available at prices
commensurate with the costs and risks of providing the credit.

· In the absence of restrictive rate ceilings, competition expands the range and variety of
credit products available to consumers and broadens the risk spectrum of consumers that
can benefit from these products. For example, deregulation of bank credit card rates over the
past 15 years spurred entry into the industry and expansion of credit card offers. As a result, both
high- and low-risk consumers are now being served within a highly competitive environment where
prices adjust to reflect customers' costs and risk.

· Risk-based pricing, which is difficult or impossible under binding rate ceilings,
substantially broadens consumer access to credit. This is nowhere better demonstrated than in
the bank card industry. Deregulation of bank card rates over the past 15 years spurred entry into
the industry and expansion of credit card offers. For millions of households who were too risky for
bank cards in the 1970s, the rate deregulation of the 1980s gave them access to the most powerful
payment mechanism on the planet. Entry spurred dramatic innovations in card features, and
ultimately brought us cards that pay us to use them.

· Risk-based pricing removes the hidden subsidies of high risk borrowers by low risk
borrowers, which occurred when all borrowers were charged a rate equal to the average risk of
the entire group. Both groups are served more efficiently when creditors can charge rates
commensurate with risk.

· Restrictive rate ceilings are most harmful to the citizens they were apparently designed to
protect. Regardless of where a ceiling is set, some higher risk consumers needing cash credit are
rationed out of the market because the cost of serving them is too high for the creditor to absorb or
to pass on as higher rates to lower risk customers. Excluded customers are typically young, have
short-time-on-the-job or at their residence, are relatively unskilled workers, have relatively low
incomes, or poor credit histories because of past illness or unemployment.

· Restrictive ceilings on sales credit (credit offered by merchants for purchase of goods or
services) are basically a sham. Denied an adequate return for their credit services, retailers push
shortfall into higher cash prices. Higher cash prices affect not only customers who borrow, but
those who have been unable to get credit, presumably a group who are less able to afford higher
cash prices than the more affluent credit buyers.

· In the end, consumers obtain the credit they need from sources that are inconvenient and
at higher prices that do not efficiently reflect cost and risk.

In short, rate ceilings that are thought to "protect" consumers do not protect consumers and do clear
harm to those who are generally at the bottom of the economic ladder. The most reliable way to protect
higher risk borrowers is to ensure that they have alternative sources of financing from which to choose. This
is accomplished by facilitating the unrestricted entry of new competitors into a market in which the price of
credit is free from artificial constraints.

http://www.gwu.edu/~business/research/centers/fsrp/pdf/Mono31.pdf


I post here for entertainment. Apparently, many people post here to promote their business. I am entertained by making fun of your business. Seriously.

[Stock]

V. PRACTICAL IMPACT: WHETHER STATE LEGISLATURES ARE
WELL SERVED BY RETAINING STRICT USURY LAWS

Federal preemption of state usury laws has long been a
source of disagreement and debate.96 Scholars have noted that
“[c]onflicts inhere in permitting a meaningful role to fifty state
governments despite a constitutionally mandated supremacy of
federal law.”97 Traditionally state governments have regulated
usury laws with the intent of protecting consumers from high
interest rates, but the modern trend has favored federal
preemption.98 As a result of this preemption, banking rules are
becoming more standardized and there is movement towards a
uniform nationwide banking system.99 Therefore, in light of the
current banking market, it may be necessary for state legislative
bodies to reexamine whether strict usury laws are actually
beneficial, burdensome, or inapplicable to their citizens.100

While many bankers and economists recognize that strict
usury laws can be harmful to state economies, citizens perceive the
state usury limitations as protective.101 Often it is difficult to
educate millions of voters who are unfamiliar with banking and
business practices about the unintended consequences of
restrictive usury limits.102 This public perception makes it
politically difficult for elected officials to recommend removing
restrictive usury limits.103 Additionally, depending on the climate
in a state, it can be detrimental to a political career to advocate for
less restrictive usury laws.104

Prior to the level of federal preemption that exists today,
national (and some state) banks were disadvantaged regarding
interstate branching and interest rates that could lawfully be
charged.105 Disadvantaged banks were unable to compete with
their dual banking system counterparts because they were
competing against other banks that had imported more lenient
usury restrictions.106 Today, however, preemption has reached a
level in which the various banks operate on a more even playing
field.107 The question remains, however: are usury laws meeting
their purpose of consumer protection?

For example, usury laws do not apply to all financial
transactions.108 Payday lenders and other non-traditional lenders
circumvent usury laws and charge customers outrageous amounts
of interest by forming partnerships with banks that hold national
charters.109 The loans are technically issued through the national
bank; therefore, state usury laws are largely avoided.110

Consumers with less than desirable credit and a lack of financial
knowledge are the primary customers of nontraditional banking
services; therefore, usury laws are not meeting the goals of
protecting the disadvantaged.111 Perhaps the current emphasis on
predatory lending practices and proposed legislation to regulate
sub-prime lending practices would help to protect the public;
however, this must be done in a manner that does not restrict
credit availability or unduly burden the financial community.

The usury laws, however, are not altogether inapplicable.
In-state lenders that are not banks, such as Household Finance
Corporation, are still required to follow state usury laws and are
not part of the group of banks covered under GLBA.112 This
means that these non-bank lenders are unable to compete on a
level playing field with traditional lenders and may be forced out
of business.113 Ultimately, competition among various lenders is
suppressed and the market suffers.

Therefore, even though State legislatures have a noble goal
in protecting their citizens, strict state usury limits have not
actually achieved this intended goal. Moreover, states with strict
usury limits have seen capital and jobs leave their states.114 For
example, the North Carolina Deputy Commissioner of banks
estimated that the state has experienced a loss of several thousand
jobs over the years as state legislators refused to loosen credit card
regulations.115 In 1997 alone, Branch Banking and Trust Company
(BB&T) (a bank based in Winston-Salem) moved its credit card
business from North Carolina to Georgia, and Raleigh-based First
Citizens Bank opened their credit card operations in Virginia.116

These observations suggest that state legislatures may be
well served to reevaluate the current laws and reconsider their grip
on usury limits. Unfortunately, there are no simple solutions to
the complex problems that have surrounded usury limits for
decades. Furthermore, the difficult challenge of reforming usury
laws would be most effective if each state participates. Ultimately,
in light of the current economy, it might be advantageous for state
legislatures to revisit usury laws in search of an ideal system that
would strike a balance between serving the public policy goal of
consumer protection and allowing businesses to make a fair profit.

AMANDA KATHERINE SADIE HILL
NORTH CAROLINA BANKING INSTITUTE

http://studentorgs.law.unc.edu/documents/ncbank/volume6/amandahill.pdf

[Stock]

Outsourcing Patient Bills Benefits NLR Firm
By Mark Friedman
1/21/2008

http://arkansasbusiness.com/article.aspx?aID=102385.82176.114520&view=all

In an attempt to handle the rising accounts of the uninsured and underinsured, many hospitals are outsourcing their billing chores the moment the patient walks out of the building.

That's good news for companies like CompleteCare Inc. of North Little Rock, which handles the billing for 60 hospitals and 1,000 physician groups nationwide.

"For the first time, we're getting hospitals calling us ... looking for information," said CompletCare's president and CEO, Steve Owen.

He wouldn't release revenue figures, but the company is growing at about 25 percent in revenue and clients annually as hospitals are becoming overwhelmed by underinsured and uninsured patients.

The medical bills are getting higher and patients can't pay the balances all at once, Owen said. So the hospitals turn to CompleteCare for help.

CompleteCare's success rate for collecting on the hospitals' accounts is between 35 and 40 percent. "And that sounds low, but the industry average for hospitals is around 20 percent," Owen said.

As a way to motivate patients to pay faster, CompleteCare charges a 5.75 percent interest rate on about 10 of the 60 hospitals. (CompleteCare couldn't charge more than 17 percent interest under any circumstance because of Arkansas' usury law.)

Owen said the hospitals are the ones that decide if interest is going to be charged. But, he said, hospitals are moving away from charging interest.

During the last two years, about 15 hospitals that had charged interest stopped because patients were being pinched by high gasoline prices and the sluggish economy.

One of those hospitals that started charging interest but then stopped was Hot Spring County Medical Center of Malvern, which had signed a contract with CompleteCare in June.

Owen said HSC Medical Center asked CompleteCare to quit charging interest sometime in November. HSC Medical officials didn't return calls for comment.

In a news release on Nov. 28, the hospital said collecting money is vital to the financial health of the hospital.

"Since HSC Medical Center receives no tax assistance and operates solely off our collections for services, it is important that we assist our patients in identifying payor sources for their hospital accounts," Phillip Gilmore, the hospital's CEO, said in a November news release.

The hospital said it would work with patients to help them pay their bills and it could refer the account for charity consideration.

'Medical Debt Revolution'

In a Dec. 3 article, Business Week magazine called CompleteCare "one of the many small firms fueling the little-known medical debt revolution." It said financial institutions are now getting into the medical collection industry.

But CompleteCare has been around for nearly 25 years.

In the early 1980s, CompleteCare did studies that showed paying off medical bills were a low priority for patients. Higher priorities included rent or mortgage payments, utility bills, car payments and credit cards.

Only after those obligations were met would patients pay doctors and hospitals. Most of the time, however, medical bills were blown off because the amount due was more than the patient anticipated.

"Most hospitals are not set up with payment plans, so they would send out another bill a month later for payment in full," Owen said. When the payment didn't arrive, the hospital might send another bill before turning the account over to a collection agency.

In stepped CompleteCare.

CompleteCare can combine all of a patient's bills from the doctor to the hospital - all that have contracts with CompleteCare, at least - into one bill in an attempt to make payments easier. CompleteCare also tried to make paying the medical bill less painful by setting up payment schedules. The standard payments are $35 a month or 10 percent of the account balance, whichever is higher.

Most of the patients CompleteCare deals with are middle-income individuals who didn't plan on having a medical emergency and might need some help with handling a payment, Owen said.

If the patients don't pay, the account is handed back to the client or in some cases turned over to CompleteCare's collection division, Mayfair Solutions.

The patients pay CompleteCare, which then hands the money over to the hospital or physician group, minus a fee that ranges from 5 to 9 percent.

As an incentive to get patients to pay faster, some hospitals authorized CompleteCare to charge interest on the accounts. Owen said the interest payment is split between the hospital and CompleteCare.

In the late 1990s and early 2000s, CompleteCare noticed more hospitals outsourcing their health care receivables.

"Historically, hospitals only would outsource the bad debt side of it," Owen said. "But they are realizing to really be able to work with the patients ... they need to outsource."

CompleteCare's typical clients are the independent community hospitals.

Owen said CompleteCare's staff can review the patient's account to determine if the claim could qualify for charity care or Medicare or Medicaid payments.

"You have to do everything that you can to work with those patients," Owen said.

http://arkansasbusiness.com/article.aspx?aID=102397.54928.114520&view=all&link=perm

[Stock]

Arkansas has usury laws. I'm in favor of that debate coming back.

Peg everything prime + 2% and the bankers will have less to work with. This would be very unpopular right now with the banks.

"Blank" Lincoln is a shill:

http://www.arkansasnews.com/archive/2008/07/11/WashingtonDCBureau/346996.html

http://www.arktimes.com/blogs/arkansasblog/2008/07/lincolns_usury_bid_dead.aspx

http://www.arkansas.gov/bank/MemorandumOpinion.htm

...19. Arkansas is the only State of the United States which has a constitution which contains a provision which sets a maximum lawful annual percentage rate of interest on any contract at not more than 5 percent above the discount rate for 90-day commercial paper in effect at the Federal Reserve Bank for the Federal Reserve district in which such State is located...

http://www.arkattorneys.com/questions

Usury: What is an illegal interest rate in Arkansas?
September 8th, 2008

Usury is defined by Black’s Law Dictionary as “…the charging of an illegal rate of interest.” In Arkansas, Courts have held that usury occurs when a lender charges more than the legally permissible maximum rate of interest, defined by Article 19, section 13 of the Arkansas Constitution, as amended by Amendment 60. Amendment 60 provides that the interest rate on “general loans” could be a maximum of five percentage points (5%) above the federal discount rate.


Further, under Arkansas law, for an agreement to be usurious, it must be so at the time it was entered into. The party asserting usury has the burden of proof, and the proof must be sustained by clear and convincing evidence. The intention to charge a usurious rate of interest will never be presumed, imputed, or inferred where the opposite result can be fairly and reasonably reached.


The penalties under Arkansas law for violating the above-referenced usury provisions are rather harsh. Specifically, usurious contracts are void as to the amount of usurious interest, and a party who has been subjected to usurious interest is entitled to recover double the amount of such interest.


However, the applicability of the above usury restrictions as applied to Arkansas State-Chartered Banks has recently been severely constricted by federal legislation. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (also referred to as the “Financial Services Modernization Act”). Section 731 of the Gramm-Leach-Bliley Act (codified at 12 U.S.C. § 1831u(f)) (“Section 731”) Section 731 functions to permit Arkansas banks to import the interest rate from other states in certain circumstances.


Section 731, as applied in Arkansas, states that the highest interest rate allowed in Arkansas will be the greater of either: (a) the maximum rate allowed by the home state of any branch bank located in the Arkansas or (b) the rate established by Arkansas’s usury law. Thus, if an out-of-state bank opened a branch in Arkansas and the home state of the out-of-state branch bank had no capped interest rate limit, there would, in effect, be no usury limit in Arkansas.


The Eight Circuit Court of Appeals has had a couple of opportunities to interpret the effect of Section 731 on Article 19, section 13 of the Arkansas Constitution, as amended by Amendment 60. In the lender-friendly opinions of Johnson v. Bank of Bentonville, 269 F.3d 894 (8th Cir.2001) and Jessup v. Pulaski Bank, 327 F.3d 682 (8th Cir.2003), the Eight Circuit affirmative ruled that Section 731 preempted the Arkansas Constitution as to defining the legal interest limits charged by Arkansas banks. Going one step further, the Jessup Court permitted an Arkansas bank to charge a an 18.5% interest rate as non-usurious because an Alabama bank (Regions Bank) maintained a branch in Arkansas and because Alabama law permits an interest rate at any rate agreed to by the parties.


While Courts have interpreted Section 731 to permit greater freedom in the usury rates charged by Arkansas banks, it should be noted that the usury limits in the Arkansas Constitution survive and remain in full-effect as to other institutions and retailers (e.g. used-car dealers).


The attorneys at KMBSP have significant experience in consulting financial institutions in the applicability and interpretation of Arkansas usury laws. If you have any questions about the current state of usury law in Arkansas, we encourage you to contact us.





I post here for entertainment. Apparently, many people post here to promote their business. I am entertained by making fun of your business. Seriously.

[AnderL]

Wow everyone is jumping on the bandwagon to point fingers now.

I don't see how a trade can be in a bubble itself without some underlying factors. All BDI did was show that there was a tremendous amount of money flow regardless of there that money was coming from, if it was asset backed or borrowed it wasn't the trade that was the problem. The real bubble? The dependency on credit to fund operations. There was a time when the need for assets required actual capital. When we went down the road of borrowing to manage our operations we became entirely too dependent that the credit would always be there. That interest rates would always stay low offering large sums of cash to move business forward with nothing but the faith of the credit borrower.

I don't think we are done yet. These secular credit cycles take about 15-20 years to resolve and we are only in the second of three major contractions in this secular cycle. The next one in about 5-7 years is going to be the one that seals the deal on credit. Layaway plans will come back as the best way to buy products as retailer will not trust their consumers anymore.

[Stock]

`Biggest Bubble of Them All' Is Globalization: Chart of the Day

By Michael Patterson

Oct. 24 (Bloomberg) -- The 90 percent tumble in the global benchmark for commodity shipping costs since May exceeded the Dow Jones Industrial Average's plunge during the Great Depression, signaling globalization is ``the biggest bubble of them all,'' Bespoke Investment Group LLC said.

The CHART OF THE DAY shows the rise and fall of the Baltic Dry Index, a measure of freight costs on international trade routes, along with three other bubbles during the past decade identified by Bespoke: The Nasdaq Composite Index of technology stocks, the Standard & Poor's Supercomposite Homebuilding Index and the CSI 300 Index, a benchmark for Chinese equities.

The Baltic Dry Index's drop from its peak just five months ago surpassed all of those, along with the Dow's 89 percent retreat from 1929 to 1932, according to Bespoke.

``The Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the `globalization' trade,'' Paul Hickey, co-founder of the Harrison, New York-based research and money management firm, wrote in a report yesterday. ``It now appears that like any `new thing,' the globalization trade went too far.''

The Baltic Dry Index fell yesterday for a 14th straight session as the freeze in money markets curbed traders' ability to buy cargo on credit.

The Nasdaq plunged 78 percent from 2000 to 2002 as investors concluded high-priced Internet stocks weren't supported by profits. The S&P index of homebuilder shares has dropped 82 percent from its 2005 peak as the U.S. suffers its worst housing slump since the 1930s. China's shares have fallen in the past year as slowing economic growth and new regulations prompted traders to shun stocks that had climbed to the most expensive valuations among the world's 20 biggest markets.

To contact the reporter on this story: Michael Patterson in London at [e-mail].

Last Updated: October 24, 2008 09:02 EDT

http://www.bloomberg.com/apps/news?pid=20601109&sid=asRq2L_zxsS0&refer=home

[AnderL]

CDS auctions for 2008

Notice the gap down in the market son Oct 6ht when FNM and FRE auctions were held. Markets swung deep that day and going forward.

Quebecor - 19th February 2008 - COMPLETED

Tembec - 2nd October 2008 - COMPLETED

Fannie Mae and Freddie Mac - 6th October 2008 - COMPLETED

Lehman Brothers - 10th October 2008 - COMPLETED

Washington Mutual - 23rd October 2008 - COMPLETED

Landsbanki - 4th November 2008 (TBC)

Glitnir - 5th November 2008 (TBC)

Kaupthing Bank - 6th November 2008 (TBC)

[AnderL]

The Beginning of the Middle

The suspected U.S. recession is increasingly confirmed by the data

Hussman Funds is spot on. Looking at employment numbers to gage recessions. After all if you notice your paycheck is getting smaller don't you think you are going to start cutting some of those expenses and consumer spending. Simplest solution is usually right.

William Hester, CFA
August 2008
All rights reserved and actively enforced.

Investors may soon learn that the economy is officially in recession. That's because since 1980, the arbiter of that decision – the NBER – has marked the economy's peak publicly an average of 7 months following each contraction's start. The group has marked recessions as early as 5 months from the economy's peak, and no later than 9 months after. Looking at the data most clearly exhibiting recession-like behavior implies that the economy entered into recession late last year or early this year. That suggests an announcement from the NBER may come sometime over the next couple of months.

The actual announcement will matter less than how deep the recession turns out to be, and how long it lasts. In some ways this recession is atypical. House activity turned down long before it typically has prior to previous economic contractions. Corporate earnings – mostly as a result of write downs in the financials – have also turned down earlier than usual. But other indicators are on time when compared to previous recessions.

Below I've updated a few of the charts that I've written about in previous research pieces. The first set of charts is from a March report titled Recession and the Duration of Bad News. The charts show the average change in this set of economic indicators around the peaks of the business cycle. The blue line in each chart represents the average change in the data series over a five-year period, beginning 36 months prior to the beginning of each past U.S. recession. The light blue lines represent one standard deviation above and below the change in the data series. The red line shows the change in the data for the current cycle, assuming the economy entered into recession in January. In the first chart the average and current cycle lines are cumulative changes from a base of 100. The second chart shows the average unemployment rate. The vertical black line marks the start of a recession. The last 9 recessions are included, where data for the economic series is available.



If we date the beginning of the recession in January, Jobless Claims data are a few weeks behind schedule, but they've been rising quickly of late (dating the beginning of the recession in March overlaps recent data with the average nearly perfectly). After rising gradually through the first part of the year, the data have now jumped above 400 thousand for four straight weeks. Jobless claims may slow the rate of their ascent from these levels and begin to level off. If the data matches the typical behavior during previous recessions , jobless claims may stay elevated through the beginning of next year.



The unemployment rate is also sticking close to history. After bottoming early last year at 4.4 percent, the unemployment rate rose to 5.7 percent in July. If the data continues to match previous recessions, the rise is only about a third of the way through. This poses risks to the outlook of consumers and business executives (both with already fairly dismal expectations). This is because the peak in the unemployment rate expected by economists differs substantially from the trends of previous recessions. In Bloomberg's survey of more than 70 economists the median forecast for next year's second quarter unemployment rate is 5.9 percent. If the unemployment rate continues to trace history, a 7 percent rate is implied.

Economists are coming around to the idea that the economy is in recession, or will soon be heading into one. This week the Philadelphia Federal Reserve released its quarterly Survey of Professional Forecasters which collects forecasts from a diverse - and importantly, anonymous group of economists. The question in the survey that tracks the forecasted probability of negative growth in the next few quarters – colloquially named The Anxious Index - showed an important change in this week's release. The survey reported that forecasters believe that there's a 47 percent chance of negative growth in the fourth quarter of 2008, up from just 30 percent in the last survey. The probability has never been this high outside of a recession. (Data is courtesy of the Philadelphia Fed.)



It's difficult to make the case that stock analysts are anywhere near as anxious. In the fourth quarter of 2008 – the same 3-month period for which economists are expecting the economy to contract – stock analysts are forecasting that S&P 500 Index earnings will grow by 46 percent, according to Bloomberg data. A bulk of that is derived from an expected rebound in earnings from the financials group. But even ex-financials, earnings are expected to grow 14 percent in the fourth quarter, and then by 16 percent in the first quarter of 2009.

Earnings may not trough until the first quarter of next year, if this recession matches the average change in earnings around recessions. Other indicators are pointing in the same direction. The graph below is from Record Profits Don't Excite Corporate Executives and it shows that there is a correlation between the outlook of executives and subsequent profit growth. Corporate executives (blue line, left scale) haven't been this downbeat since the last recession. Based on the scales in the graph, corporate profit normally overshoots executive pessimism on the downside.



Recession-induced Bear Market Update

Even though some of the economic data is closely following traditional recessionary patterns, the stock market has historically demonstrated more variation from one recession to the next. Even so, it can be helpful to put the current decline in context by comparing it with previous recession-induced bear markets. The bar charts below update the data from September's research, Recessions and Stock Prices .



Since the market's top in October, 224 days have passed. This makes the duration of the current bear market shorter than the average recession-induced bear market, which tend to be longer in duration than ‘stand alone' declines. If this decline runs the average duration of past recession-induced bears, we could observe the bottom in October. It would be in good company, as a third of all recession-induced bear markets since 1953 have ended in October, but of course, there is far too much variation to place much faith in that outcome.

Recession-induced bear markets not only tend to last longer, but the average decline is also greater. The decline during the current bear market thus far is still well short of the average loss for prior bears.

The last bar chart is the least encouraging, especially for investors who assume that the market's July low represented a favorable valuation for a bear market bottom. If July turns out to be the low point for this bear market, it will then mark the second highest level of valuation that a cyclical bull has ever started from (the highest starting valuation level was in 2003). The risks are material if this bear market was to end at the average price-to-peak earnings multiple of past recessionary troughs. For the price multiple on peak earnings to touch the long-term average of 10.4, the S&P would need to fall to 885.



Overlaying current trends in economic data with past recessions implies that the economy is entering the beginning of the middle stages of an economic contraction. Weak job-related data should be expected until at least early next year. Also, earnings may be slower to rebound than analysts expect, putting pressure on stock valuations that are better, but are still uninspiring.

[AnderL]

WAMU is today and 10 business days to settle that one I think. Just after the election?

The fear is still there because this is not a very transparent process. Everything is still being done in a a less than public market with only select information begin leaked out. Plus no word as to who is up next after WAMU and when the next auction date is.

[Stock]

so, we are on to the next fear of "incident"

[AnderL]

Tracking Firm Says Bets Placed on Lehman Have Been Quietly Settled
By MARY WILLIAMS WALSH
October 23, 2008

saw it thanx.

http://www.nytimes.com/2008/10/23/business/23lehman.html?_r=1&oref=slogin&pagewanted=print

Hundreds of traders who placed bets on Lehman Brothers’ creditworthiness before it went bankrupt have settled their positions “without incident,” according to a company that tracks derivatives contracts.

The company, Depository Trust & Clearing Corporation, processes large numbers of investment transactions. It said that only $5.2 billion had to change hands for all the traders to close out their positions, a much smaller amount than had been predicted a week ago.

The settlement process had been seen as a major test of the market for credit-default swaps, and whether it could handle the unprecedented stress of a big Wall Street firm going bankrupt. The overall system appears to have borne the shock successfully, although individual firms might have taken painful losses they have not yet disclosed.

At the same time, the contrast between this week’s orderly settlement process and last month’s financial turmoil, which also involved credit-default swaps, raised anew policy questions over the market for credit derivatives and its failure to limit systemic risk. Because the swaps are private contracts between two parties, there is still almost no information in the public domain over who holds which positions, or who might be left teetering the next time there is a major default.

The lack of information is thought to have fueled the general panic in mid-September, when Lehman Brothers went bankrupt and the American International Group came to the brink of collapse before being rescued by the Federal Reserve.

As if to underscore the opacity of the market, American International said this week that it had to pay only $6.2 million to settle all of its credit-default swaps on Lehman’s debt. The amount was much smaller than had been expected, given A.I.G.’s big presence in the market for credit-default swaps, and given that A.I.G. required an emergency line of credit worth $85 billion from the Fed.

A spokesman for A.I.G., Nicholas J. Ashooh, said that the company had needed the big loan from the Fed because of its high level of exposure in other areas, but not on its derivatives trades on Lehman’s debt. He said that A.I.G. had written many derivatives contracts on Lehman’s debt, but because they took opposing trading positions they almost completely canceled each other out during the settlement process.

“Lehman was not the source of our problem,” Mr. Ashooh said. “Our issue really preceded that. We were already having problems when Lehman went under.”

He said most of A.I.G.’s problems with the credit derivatives involved swaps that covered the financial strength of complex debt securities linked to the housing market.

Credit-default swaps are similar to insurance, providing coverage to investors who hold a company’s bonds or other fixed-income instruments. In the event of a default, the one who sold the protection has to pay the one who bought it.

In Lehman Brothers’ case, Depository Trust & Clearing calculated the amount of payments each trader would pay or receive, based on the price of Lehman Brothers’ bonds, which was set in a special auction on Oct. 10.

[Stock]

There's a CDS thread on iHub now #board-12804

Corporate Debt CDOs Head South As Global Banking Cracks Up Oct. 22nd, 2008 @ 06:13 am

CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic (Update1)

By Neil Unmack, Abigail Moses and Shannon D. Harrington

Oct. 22 (Bloomberg) -- Investors are taking losses of up to 90 percent in the $1.2 trillion market for collateralized debt obligations tied to corporate credit as the failures of Lehman Brothers Holdings Inc. and Icelandic banks send shockwaves through the global financial system.

The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

``We'll see the same problems we've seen in subprime,'' said Alistair Milne, a professor in banking and finance at Cass Business School in London and a former U.K. Treasury economist. ``Banks will take substantial markdowns.''

The collapse of Lehman Brothers, Washington Mutual Inc. and the three banks in Iceland prompted Susquehanna Bancshares Inc., a Lititz, Pennsylvania-based lender, to lower the value of $20 million in so-called synthetic CDOs by almost 88 percent last week.

KBC Groep NV, Belgium's biggest financial-services firm, which had 377.4 billion in assets as of June 30, wrote down 1.6 billion euros ($2.1 billion) after downgrades on company- and asset-backed debt. Brussels-based KBC had 9 billion euros in CDOs as of Oct. 15, primarily linked to corporate debt, according to an investor presentation.

10 Cents

Some synthetic CDOs, tied to credit-default swaps on corporate bonds, are trading at less than 10 cents on the dollar, according to Sivan Mahadevan, a derivatives strategist at Morgan Stanley in New York.

CDOs parcel fixed-income assets such as bonds or loans and slice them into new securities of varying risk, providing higher returns than other investments of the same rating.

The synthetic variety pools credit-default swaps, which are derivatives based on bonds and loans and used to protect against or speculate on defaults. Should a borrower fail to meet debt agreements, the contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent. An increase in the agreement's cost indicates a deteriorating perception of credit quality.

About $254 billion of CDOs tied to mortgages for borrowers with poor credit histories have defaulted, according to Wachovia Corp. Tracking defaults on those linked to corporate bonds will be difficult because the market is largely private, said Mahadevan.

Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

`Severe' Recession

Downgrades of corporate CDOs will force investors to boost capital, according to an Oct. 17 report from Barclays Capital analysts led by Puneet Sharma in London.

Buyers of deals graded AA by Standard & Poor's and Aa2 by Moody's Investors Service, the third-highest rankings, may have to increase cushions against losses to cover the full amount of the investment, up from 1.2 percent now, Sharma said. His estimate is based on the world economy entering a ``severe'' recession.

Demand for synthetic CDOs pushed the cost of default protection to record lows in 2007, driving down company borrowing expenses. Sales surged to $503 billion in 2006, from $84 billion five years earlier, according to Morgan Stanley.

High Return

Bankers loaded the securities with bonds and swaps offering the highest return for a given credit ranking, indicating additional risk. An AA rated European issue offered an average yield of 50 basis points over money-market rates when sold in 2006, according to UniCredit SpA analysts in Munich. Similarly rated corporate bonds paid 9 basis points. A basis point is 0.01 of a percentage point.

``The maths ended up driving the way CDO portfolios were put together,'' said Nigel Sillis, a fixed-income and currency analyst at Baring Asset Management Ltd. in London.

The banks that structured the securities and investors both failed to do ``fundamental credit analysis,'' said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. ``They were using correlation models, they were using spread models, but they weren't doing analysis on the underlying corporations.''

Fitch downgraded 422 classes of CDOs on Oct. 13 after seven financial companies defaulted or were bailed out since September. The company didn't disclose the total number of classes it rated.

The downgrades force payment of the credit-default swaps packaged in the debt, causing losses for investors or eroding capital.

``The same kind of shudders that went through the asset- backed CDO market will probably go through the corporate CDO market,'' said Sillis. ``We'll see a pickup in default rates.''

Lehman, WaMu

Barclays Capital estimates that 70 percent of synthetic CDOs sold swaps on Lehman. Swaps on Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf were included in 376 CDOs rated by S&P. The company ranks almost 3,000.

About 1,500 also sold protection on Washington Mutual, the bankrupt holding company of the biggest U.S. bank to fail, according to S&P. More than 1,200 made bets on both Fannie Mae and Freddie Mac, the New York-based rating company said.

The collapse of Lehman, WaMu and the Icelandic banks, as well as the U.S. government's seizure of the mortgage agencies, will have a ``substantial'' impact on corporate CDO ratings, S&P said in a report Oct. 16.

The government in Reykjavik seized Kaupthing Bank, the country's largest lender, earlier this month. Assets and liabilities from Landsbanki Islands and Glitnir Banki were transferred to state-owned entities, triggering default swaps.

`Marking Down'

Nonpayment on speculative-grade corporate bonds may rise to 7.9 percent worldwide in a year, from 2.8 percent at the end of the third quarter, as the credit crisis deepens, Moody's said Oct. 8. Those in the U.S. may rise to 7.6 percent, said S&P.

``As there are credit events, you'll have losses in portfolios and marking down of other assets,'' said Claude Brown, a partner at law firm Clifford Chance LLP in London.

Investors may sell the CDOs back to banks, which will unwind protection they wrote to hedge swap transactions, Barclays said. The chain of events will push up the price of default protection and company borrowing, according to Barclays.

Doubling Cost

Banks unwinding hedges helped double the cost since April of default insurance on the lowest-ranking equity portion of the benchmark Markit CDX North America Investment Grade Index, to 75 percent upfront and 5 percent a year. That equates to $7.5 million in advance plus $500,000 annually on $10 million of debt for five years.

For European investment-grade company debt, as shown by the Markit iTraxx Europe index of credit-default swaps, the price for protecting against nonpayment may climb 55 basis points to a record 200 next year, Barclays forecasts.

Some investors are choosing to buy protection and determine their losses now, according to Edmund Parker, head of derivatives at law firm Mayer Brown LLP in London.

National Australia Bank, the country's biggest lender by assets, paid A$100 million ($67 million) this year to hedge the risk of loss on six company-linked CDOs totaling A$1.6 billion. It will pay a further A$60 million annually for the next five years, according to company filings.

`Drawn a Line'

``The upside is that you've now drawn a line on those assets and you know you're not going to lose more than your hedging costs,'' Parker said. ``Unless, of course, your counterparty goes under.''

Companies most frequently referenced in synthetic CDOs include Philadelphia-based Radian Group Inc., the third-largest U.S. mortgage insurer, whose stock fell 68 percent in New York trading this year. Another is CIT Group Inc., an unprofitable commercial lender in New York that dropped 83 percent. The company faces about $2.4 billion in debt repayments by the end of 2008, according to data compiled by Bloomberg.

``We feel very strongly that we have adequate claims-paying capabilities for both our financial-guarantee business and our mortgage-insurer business,'' said Radian spokesman Richard Gillespie.

CIT spokesman Curtis Ritter declined to comment, pointing to the company's statement last week that it will meet funding needs for the next 12 months.

Forecasts for ratings downgrades are ``going to force a lot of activity'' in unwinding CDOs, said Rohan Douglas, former director of global credit derivatives research at Citigroup Inc. He now heads Quantifi Inc., a provider of valuation models for the debt. ``Buy-and-hold investors suddenly find themselves in a situation where they will have to sell these assets.''

[Stock]

These auctions are setting market prices for derivatives.

Fear.

Banks have been hoarding cash to bid in auction and pay off obilgations.

Greed.

Today is October 22nd.

Lehman Swap Sellers Probably Paid Up to $8 Billion (Update1)

By Shannon D. Harrington

Oct. 21 (Bloomberg) -- Sellers of credit-default protection on Lehman Brothers Holdings Inc. probably paid out between $6 billion and $8 billion to settle bets on the bankrupt company's debt, the International Swaps and Derivatives Association ( http://www.isda.org/ ) said.

More than 350 banks, hedge funds, insurers and others in the derivatives market had until the end of today in New York to settle most contracts, which were used to hedge against losses or speculate on Lehman's ability to pay its obligations, ISDA said in a statement.

Some analysts at banks including BNP Paribas had expected a payout of more than $270 billion, based on an estimated $400 billion in outstanding contracts. The Depository Trust and Clearing Corp., which runs a central registry for credit-default swap trades, said last week that there were about $72 billion in Lehman contracts outstanding.

ISDA Chief Executive Officer Robert Pickel, who earlier this month said concern that investors may be unable to come up with the payments was overblown, today said the settlement is a sign the market is weathering the global financial crisis.

``Today's settlement demonstrates that the industry infrastructure for CDS clearly works,' Pickel said in the statement.

Since the end of August, the market has been dealing with the bankruptcies of Lehman and Washington Mutual Inc., the failure of Iceland's three biggest banks and the U.S. government seizure of Fannie Mae and Freddie Mac. Each triggered a settlement of credit-default swaps linked to the companies' debt.

Sellers of default protection on Lehman were required to pay 91.375 cents on the dollar after an Oct. 10 auction that determined the value of bonds eligible to settle the derivatives.

To contact the reporter on this story: Shannon D. Harrington in New York at [e-mail]

Last Updated: October 21, 2008 19:04 EDT

====

NEW YORK, Oct 21 - Tuesday's deadline to settle an estimated $400 billion in credit default swaps on Lehman Brothers failed to trigger feared havoc in the market, and derivatives analysts said the concerns had reflected misunderstandings about the process.

Tuesday is the final day credit default swaps on Lehman's <LEH.N><LEHMQ.PK> debt can be paid out.

"It seems like a non-event," said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California. "There's a couple of hedge fund rumors but I am sure they are more general redemption issues than Lehman specific."

Speculation had mounted in recent sessions that banks, hedge funds and other sellers had been hoarding cash to pay out a massive 91 percent loss on the contracts.

But experts say the fears were exaggerated and in any case, losses may not be made public until companies post their next quarterly earnings in the months to come.

"There's been a lot of talk about this but I don't think it's that material, there has been a lot of misunderstanding," said Sivan Mahadevan, head of credit derivative and structured credit research at Morgan Stanley in New York. "I think it's been overdone."

Credit default swaps are insurance-like securities that protect against the risk of a borrower defaulting on debt.

The $55 trillion market has created concerns that it may pose systemic risks as its private nature makes it impossible to know who holds what risk, and the size of any exposures.

Part of the worry about the Lehman swaps is the $400 billion in insurance outstanding, although the figure overstates the amount of money that will actually be transferred.

The Depository Trust and Clearing Corporation, which clears the vast majority of trades in the over-the-counter market, said this month only $6 billion may actually change hands.

This is because large players in the market, such as dealers and some hedge funds, have both bought and sold protection, subsequently taking both gains and losses on Lehman's default that will offset each other.

For companies with net exposure to pay out protection, much of the pain of settling the swaps has also already been taken.

"If you were the seller of protection, you had to pay collateral and that collateral was changed on a daily basis, based on where Lehman's bonds were trading," Mahadevan said.

"The money's already in the system. The loss is already in the system. I don't think of it as a big deal in terms of losses exchanging hands," he added.

LOW RECOVERY

The price of Lehman's bonds dropped to about 12 or 13 cents on the dollar after the investment bank filed for bankruptcy in September, meaning sellers of protection needed to post collateral to cover a loss of 87 percent to 88 percent on the contracts at the time.

Some buyers of protection would have used these bonds to settle their contracts. Others participated in an auction on Oct. 10 to determine the value of the contracts.

When a borrower defaults on debt, sellers of protection pay buyers the full sum insured and, in return, receive the defaulted debt or a cash payment, which is determined by auction.

The Oct. 10 auction involved 358 market players and determined the swaps were worth just 8.625 cents on the dollar, meaning sellers needed to pay out 91.375 cents on every dollar of insurance sold.

"The auction for Lehman CDS was successful and the amount that was paid out on this credit event is significantly lower than what has been mentioned in the press," analysts at Barclays said in a report.

An auction to settle credit default swaps on Washington Mutual's <WM.N> debt is scheduled for Thursday, with payments on those contracts due by Nov. 7.

Analysts expect that WaMu's swaps will recover a high value, leading to fewer losses by protection sellers than those seen on Lehman.

Meanwhile, of the companies that have so far announced exposures to Lehman's default swaps, none has indicated any threat to the viability of the firm.

Genworth Financial <GNW.N>, for example, said it had only $5.4 million in credit default swap exposure to Lehman credit default swaps, and Hartford Financial Service Group <HIG.N> said it had $30 million in exposure to Lehman's swaps.

[AnderL]

it's also a leading indicator of economic health. Problem is that a lot of bulk shippers went overboard and orders too many newbuilds. There was a flood of ships into the fleet in 2008 and crushed the market.

I'm waiting to the BDI to bottom. It may take a few weeks but it is always ahead of a major market bottom.

[Stock]

Baltic Exchange Chairman Says Fall In Dry Index Unprecedented

Last update: 10/22/2008 9:53:48 AM

LONDON (Dow Jones)--The chairman of the Baltic Exchange, Michael Drayton, Wednesday told BBC World Service radio that the fall in shipping's Baltic Dry Index was unprecedented.

"I think in the history of shipping, there's not been such a rapid decline. If I put it in dollar terms, you mentioned May as the peak point - $240,000 a day for a Capesize bulk carrier, which today is $9,000 a day," Drayton said.

The Baltic Dry Index covers shipping costs for freight such as iron ore, coal and grain.

He added that the index was one of the best indicators of economic health because it reflected world trade, and that iron ore shipments from Brazil to China seemed to be worst affected.

Web site: http://www.bbc.co.uk/worldservice

-London bureau, Dow Jones Newswires; [phone]; [e-mail]

[AnderL]

Lehman CDS auction obligations are due today, from last weeks auction. WAMU auction starts tomorrow. Not sure when bidders have to come up with the cash for that one yet. I expect it might be 10 days.

Since it is still mark to market the LEH auction did not get us out of the woods. When the bids are in for WAMU CDSs it will reprice them again. Hopefully the Fed funded the banks enough to get them to bid them up.

[Stock]

Is there a CDS auction or something tomorrow? Or was it today? Lehman?

[AnderL]

Government is out panhandling.

http://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm

Gift Contributions to Reduce Debt Held by the Public

The Bureau of the Public Debt may accept gifts donated to the United States Government to reduce debt held by the public. Acting for the Secretary of the Treasury, Public Debt may accept a gift of:

* Money, made only on the condition that it be used to reduce debt held by the public.
* An outstanding government obligation, made only on the condition that the obligation be retired and the redemption proceeds used to reduce debt held by the public.
* Real and personal property, made only on the condition that the property be sold and the proceeds used to reduce debt held by the public.

Gifts to reduce debt held by the public may be inter vivos gifts or testamentary bequests.

[AnderL]

Start with the big picture today.

We are in a secular bear market since 2000. In 2003 we started a cyclical bull that was supposed to end in 2005 when the real estate market slumped. Unaware to everyone the fed started a massive liquidity injection by discontinuing M3 and running M3 at 16% annually along with banks increasing leverage and risk. This extended the cyclical bull by 2 years exacerbating the credit bubble. The economy needed to contract but it was prolonged and now the contraction is doing more damage.

We are in the middle phase of the late cyclical bear in a secular bear. So all downside movements are amplified. The bottom will be long and painful and will extend at least into 2009.

We should get another cyclical bull in 2009-2010 (optimistically ) and that should lead into a secular bull is this was a normal secular bear and we are able to resolve all the credit expansion problems of the previous secular bull 1980-2000. those problems are trade and budget deficits, a services heavy national economy, an missing manufacturing base, too little regulation, and inappropriate risk taking.

The secular bull has to start with the acceptance that a 5-7% return from the equity markets are generous, and value investment and holding stock for the long term (3-5 years) is the best practice.

If that doesn't' happen by 2012 then we are in for an extended secular bear that will go out to 2020.

[AnderL]

I picked up some old books to review what is going on right now. Economic stagflation since 2000. This past recover through 2003-2007 was just a bear market bounce in a long running secular bear market.

Second recession is usually the worst but not necessarily the last in a a secular bear market.

Fed could have exacerbated this recession simply by enacting changes that were designed to try to get the economy out of the secular bear. The cyclical bull in this secular bear was supposed to end around 2005-2006. It was the same time that the Fed discontinued M3 and ran up money supply by 16%. All that extra cash flooded the market and helped support the influx of money from overseas into our CDS market. The dollar plunged due to demand but at the same time the CDS market collapsed.

It was like one last big push to end the secular bull but failed. Now we are suffering through it worse than it could have been because of intervention and maybe not so much because of free market capitalism.

Its about time for another cyclical bull but it will be weaker and will take longer to muddle through. My bet is long term interest rates will be running up soon.

[AnderL]

Bank Failures: Number 14 and 15

almost forgot about these

by CalculatedRisk

It's Friday. From the FDIC:

Main Street Bank, Northville, Michigan, was closed today by the Michigan Office of Financial and Insurance Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Main Street Bank, by Monroe Bank & Trust, Monroe, Michigan.
...
Main Street Bank had total assets of $98 million in total assets and $86 million in total deposits as of October 7, 2008.

Monroe Bank & Trust has agreed to pay a total premium of 1 percent for the failed bank's deposits. In addition, Monroe Bank & Trust will purchase approximately $16.9 million of Main Street's assets, and have a 90-day option to purchase approximately $1.1 million in premises and fixed assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to its Deposit Insurance Fund will be between $33 million and $39 million. Monroe Bank & Trusts' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives because the expected losses to uninsured depositors were fully covered by the premium paid for the failed bank's franchise.

Main Street Bank is the first bank to be closed in Michigan since New Century Bank, Shelby Township, Michigan, on March 28, 2002. This year a total of fourteen FDIC-insured institutions have been closed.

And also:

Meridian Bank, Eldred, Illinois, was closed today by the Illinois Department of Financial Professional Regulation-Division of Banking, and the Federal Deposit Insurance Corporation (FDIC) was named receiver. To protect the depositors, the FDIC approved the assumption of all the deposits of Meridian Bank by National Bank, Hillsboro, Illinois.
...
Meridian Bank had total assets of $ 39.18 million in total assets and $ 36.88 million in total deposits as of September 25, 2008. National Bank will purchase approximately $7.55 million of Meridian's assets, and did not pay the FDIC a premium for the right to assume all of the failed bank's deposits. The FDIC will retain the remaining assets for later disposition.
...
The FDIC estimates that the cost to its Deposit Insurance Fund will be between $13 million and $14.5 million. National Banks' acquisition of all deposits was the "least costly" resolution for the FDIC's Deposit Insurance Fund compared to all alternatives.

Meridian Bank is the first bank to be closed in Illinois since Universal FSB, Chicago, Illinois on June 27, 2002. This year a total of fifteen FDIC-insured institutions have been closed.

[AnderL]

Short-term borrowing rates rise, overnight dollar rate falls
By William L. Watts

finally some good news. it isn't gettign talked about much... hmmm. we might get a gap down and bottom today.

Last update: 6:53 a.m. EDT Oct. 10, 2008
LONDON (MarketWatch) -- The cost of borrowing dollars overnight fell sharply Friday, but a key three-month rate continued to rise amid chronic tightness in global money markets. The London interbank offered rate, or Libor, for overnight dollar loans tumbled to 2.46875% from 5.09375% Thursday, news reports said. But three-month dollar Libor rose to 4.81875% from 4.75% on Thursday.

[Stock]

I took a chart from this link, and flipped it to switch from a bullish bias to a bearish one.

http://www.investopedia.com/ask/answers/05/andrewpitchfork.asp

Compare:

[ZavBar]

I used to use it a fair bit in the past, but kind of lost track of it. I've noticed there's been a resurgence of interest lately, perhaps because stockcharts.com draws it automatically now if you identify the three key points (i.e. start of trend, 1st pullback, and resumption of trend). not sure how long that function has been around.

[Stock]

All of this commentary has a bullish bias, but read it anyway:

Andrew's Pitchfork: Developed by Alan Andrews, this concept that uses three parallel lines drawn from three points that you select. The points selected to begin the pitchfork are usually three consecutive major peaks or troughs. The three parallel lines extending out to the right are used as normal support and resistance points.

----

Make Sharp Trades Using Andrew's Pitchfork
by Richard Lee (Contact Author | Biography)

Invented by and named after renowned educator Dr Alan H. Andrews, the technical indicator known as Andrew's pitchfork can be used by traders to establish profitable opportunities and swing possibilities in the currency markets. On a longer-term basis, it can be used to identify and gauge overall cycles that affect the underlying spot activity. Here we explain what this indicator is and how you can apply it to your trades using two different approaches: trading within the lines and trading outside the lines.

Defining the Pitchfork

Available on numerous programs and charting packages, Andrew's pitchfork (sometimes referred to as "median line studies") is widely recognized by both novice and experienced traders. Comparable to the run-of-the-mill support and resistance lines, the application offers two formidable support/resistance lines with a middle line that can serve as both support/resistance or as a pseudo-regression line. Andrews believed that market price action would gravitate towards the median line 80% of the time, with wild fluctuations or changes in sentiment accounting for the remaining 20%. As a result, the overall longer-term trend will (in theory) remain intact, regardless of the smaller fluctuations. If sentiment changes and supply and demand forces shift, prices will stray, creating a new trend. It is these situations that can create significant profit opportunities in the currency markets. A trader can increase the accuracy of these trades by using Andrew's pitchfork in combination with other technical indicators, which we'll discuss below.

Applying the Pitchfork

In order to apply Andrew's pitchfork, the trader must first identify a high or low that has previously occurred on the chart. The first point, or pivot, will be drawn at this peak or trough and labeled as point A (as shown in Figure 1).

Once the pivot has been chosen, the trader must identify both a peak and a trough to the right of the first pivot. This will most likely be a correction in the opposite direction of the previous move higher or lower. Turning to Figure 1, the minor correction off of the trough (point A) will serve nicely as we establish both points B and C.

Once these points have been isolated, the application can be placed. The handle of the formation begins with the pivot point (point A) and serves as the median line. The two prongs, formed by the following peak and trough pair (points B and C), serve as the support and resistance of the trend.



Figure 1 - Application of Andrew's pitchfork to a chart showing the price action of the EUR/USD. The pivot point (A) has been drawn at a previously occurring trough, and points B and C have been established to the right of the pivot. The line drawn from point A is the median line, while the two "prongs" serve as support and resistance.

When the pitchfork is applied, the trader can either trade within the channel or isolate breakouts to the upside or downside of the channel. Looking at Figure 2, you can see that the price action works well serving as support and resistance where traders can enter off of bottoms (point E) and sell from tops (point D) as the price will gravitate towards the median. As always, the accuracy of the trade improves when confirmation is sought. A basic price oscillator will be just enough to add to the overall trade.



Figure 2 - Application of the pitchfork on an uptrending GBP/USD. Notice the multiple opportunities offered to the trader inside and outside the boundaries.

Additionally, the trader can initiate positions on breaks of the support and resistance. Two great examples are presented at points F and G. Here, the market sentiment shifted, creating price action that strayed from the median line and broke through the channel trendlines. As the price action attempts to fall back into the median area, the trader can capture the windfall that tends to happen. However, as with any trade, sound money management and confirmation must play important roles.

Trading Within the Lines

Let's take a look at how a trader might profit from trading within the lines. Figure 3 is a good example, as it shows us that the price action in the EUR/CAD currency pair has bounced off of the median line and has risen to the top resistance of the pitchfork (point A1). Zooming in a little closer in Figure 4, we see a textbook evening star formation. Here, the once-rising buying momentum has started to disappear, forming the doji, or cross-like, formation right below the upper prong. When we apply a stochastic oscillator, we see a cross below the signal line, which confirms downside momentum.

Taking these indications into consideration, the trader would do well to place the entry at point X (Figure 4), slightly below the close of the third candle. Using sound money management and including an appropriate stop loss, the entry would be executed on the downward momentum as the price action once again gravitates towards the median line. Even better, here, the trader would be entered into a profitable position of close to 1000 pips over the life of the trade.



Figure 3 - Another great setup in the EUR/CAD cross currency: we see a prime example of an "inside the line" profit opportunity as price action approaches the 1.5000 figure.



Figure 4 - A closer look at the opportunity reveals textbook technical formations that aid the entry. Here, the trader can confirm the trade with the downward crossover in the stochastic and the evening star formation.

Trading Outside the Lines

Although trading outside the lines occurs considerably less frequently than within, they can lead to extended runs. However, they can be slightly trickier to attempt. The assumption here is that the price action will gravitate back towards the median, like wayward price action within the lines. But it is possible that the market has decided to shift its direction; therefore, the break outside may very well be a new trend forming. To avoid a catastrophic loss, simple parameters are added and placed in order to capture the retracements into the channel and, at the same time, filter out adverse movements that ultimately result in traders closing their positions too early.

Looking at Figure 5, we see that the price action at point A offers such an opportunity. The chart shows that the EUR/USD price action has broken through support in the first week of April. Once the break has been identified, we isolate and zoom in to obtain a better perspective.



Figure 5 - Notice how the price action gravitates once again towards the median. This is a great opportunity, but money management and strategy remain important in capturing the run-up.

In Figure 6, the trader is offered multiple opportunities to trade a break back into the overall trend as the underlying spot consolidates in ranging conditions. However, the real opportunity lies in the break that occurs later on in October. More specifically, the trader can see that the price action ranges or consolidates prior to the break, establishing the $1.1958 support level (blue line). Using a moving average convergence divergence (MACD) price oscillator, the individual sees that a bullish convergence signal is forming, as there is a large peak and a subsequently smaller secondary peak in the histogram. The entry is key here. The trader will see a potential breakout opportunity as the price rises to test the upper resistance at $1.2446.



Figure 6 - The convergence in the MACD, combined with the decline in the underlying spot price, suggests a near-term upward break.

How would you place the entry in this example? First, you need to make sure that the upper resistance is tested before you even consider a trade. If the resistance is not tested, it may mean that a downward trend is in the works, and by knowing this, you will have saved yourself from the trouble of entering into a non-profitable trade. You can see in Figure 6 that the price action breaks back into the prongs in early October, hitting a high of $1.2446. If the price action can break above this resistance, it will confirm a further rise in the price action, as fresh buying momentum will have entered the market. As a result, you should place your entry 30 pips above the target (red line), with your subsequent stop applied upon entry. Once your order is executed, the stop should be applied 5 pips below the previous session low. Given buying momentum, the assumption is that the low will not be tested because the price action will continue to rise and not spike downward.

Breaking It Down Step-by-Step

Although the two methods discussed here (trading within the lines and trading outside the lines) may seem somewhat complex, they are quite easily applied when you break them down step-by-step. Traders will find that the pitchfork method yields far better results when applied to major currency pairs such as the EUR/USD and GBP/USD because of their nature to trend rather than range. Cross currencies, although they do exhibit trending patterns, tend to be choppier and yield less satisfying results. (For further reading, see Make The Currency Cross Your Boss and Identifying Trending & Range-Bound Currencies.)



Figure 7 - Identifying two great opportunities in the NZD/USD currency pair.

Now, let's break the process down. The NZD/USD currency pair, seen in Figures 7, 8 and 9, presents a perfect example of both "within the lines" and "outside the lines" opportunities that traders can capitalize on. First we'll take the in-line approach, choosing example A in Figure 7:

1. Identify price action that has broken through the median line and that is approaching the upper resistance prong.

2. Testing the upper resistance prong, recognize a textbook evening star or another bearish candlestick pattern. Looking at Figure 8, we see a textbook evening star formation at point X. This will serve as the first signal.

3. Confirm the decline through a price oscillator. In Figure 8, a downward cross occurs in the stochastic oscillator, confirming the following downtrend in the currency. Also notice how the cross occurs before the formation is complete, giving traders a heads up.

4. Place the entry slightly below the close of the third and final candle of the formation. As little as 5 pips below the low will usually suffice in these situations.

5. Apply a stop to the position that is approximately 50 pips above the entry. If the price action rises after the evening star, traders will want to exit as soon as possible to minimize losses but still maintain a healthy risk measure. In this example, the entry would ideally be placed at 0.6595, with a stop at 0.6645 and a target of 0.6454 - an almost 3:1 risk/reward ratio.



Figure 8 - An evening star formation at point X suggests an impending sell-off that is confirmed by the downward crossover in the stochastic oscillator.

For breaks outside the trendlines, we take a look at the next example, point B in Figure 7. Here, the price action has broken above the upper trendline but looks set to retrace back to the median or middle line. Using the same NZD/USD currency pair, let's take another approach:

1. Identify the price action moving toward the median or middle line. What traders want to confirm is that the price is indeed falling and will break back through the upper trendline. In Figure 9, the currency spot falls through the trendline, confirming selling pressure.

2. Identify the significant support/resistance line. Here, traders will want a confirmed break of a significant support level in order to isolate sufficient momentum and increase the probability of the trade.

3. Place the entry order 30 pips below the support level. In our example (see Figure 9), since the support level is at the 0.7200 figure, the entry would be placed at 0.7180. The following stop would be applied slightly above the 0.7300 figure - the previous session's high - and give us an almost 2:1 risk/reward ratio when we take profits at the 0.7000 price.

4. Receive confirmation through a price oscillator. The downward cross that occurs when the stochastic oscillator is used gives traders ample confirmation of the break of support in the price.



Figure 9 - Taking a closer look, a great opportunity exists as the price action moves towards the median line.

Conclusion

Although it is primarily applied in the futures and equities forums and seldom used in the currency markets, Andrew's pitchfork can provide the currency trader with profitable opportunities in the longer or intermediate term, capitalizing on preferably longer market swings. When the pitchfork is applied accurately and is used in combination with strict money management and textbook technical analysis, the trader is able to isolate great setups while weeding out the sometimes choppier price action in the forex markets that may increase his or her losses. If all of the criteria above are applied, the trade will be able to ride its way to profitability compared to its shorter-term peers.

by Richard Lee, (Contact Author | Biography)

Richard Lee is a currency strategist at Forex Capital Markets LLC. Employing both fundamental models and technical analysis applications, Richard contributes regularly to DailyFX and Bloomberg. He has extensive experience in trading the spot currency markets, options and futures. Before joining the research group, Richard traded FX, equity and equity derivatives for a private equity consortium. Richard graduated from Pennsylvania State University with a Bachelor of Arts in economics and a Bachelor of Science in French with an emphasis in international business

http://www.investopedia.com/articles/forex/05/AndrewsPitchfork.asp

[ZavBar]

thank you

[Stock]

no. the point is that the top is in. For decades. The upper tine of the fork is now resistance. IF the Andrew's Pitchfork works.

Hold on, I'll post the explanation of the AP

[ZavBar]

spoonfeed me if you will Generic - is the implication here that Andrew's midline will hold?

[Stock]

I'm speechless on this one:

#reply-25048708

[AnderL]

Treasury may capitalize banks by end of October: source
Thu Oct 9, 2008 1:27pm EDT
By Karey Wutkowski

Everyone would be happy with this. It should have been the original plan. More than likely I can see this as a DRIp program for the Treasury where they reinvest the money into the banks common shares raising they capital. Banks survive and get liquidity. Money supply increases, although not as fast of a rate as fractional reserving and when the banks are stable enough and trust each other enough the Fed can unwind. I'm sure they will come out break even on the deal. They don't lose money but they don't profit the taxpayers.

WASHINGTON (Reuters) - The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

Using authority granted to it by last week's $700 billion market rescue legislation, Treasury would get common or preferred shares in the banks it capitalizes, the source told Reuters on Thursday. The government does not intend to seek seats on companies' board of directors in the voluntary capitalization program.

White House spokeswoman Dana Perino said later on Thursday that Paulson is "actively considering" capital injections into troubled U.S. banks.

"Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," she said.

A Treasury spokesperson declined to comment in detail but said: "Treasury has broad, flexible authorities under the financial rescue legislation to buy assets, provide guarantees and inject capital and intends to consider all of them."

If the U.S. Treasury does inject capital into banks, it would be following the playbook of the British government, which on Wednesday pledged up to $87 billion to shore up banks' capital in exchange for preference shares.

The source familiar with Paulson's thinking said Treasury was working "extremely fast" to put together a capital injection plan.

The effect of injecting capital would be to boost banks' capacity to lend, thus complementing the bailout bill's objective of removing soured mortgage-backed assets weighing on banks' balance sheets.

Some critics of the proposals for buying soured mortgage-related products have said the process would take so long that it would reduce its efficiency, whereas a capital injection through share purchases would immediately put more cash for lending into the banking system.

The question may be whether banks are willing to accept the government as a stakeholder in return for the new capital.

The source said the injections would likely be made public, possibly inducing some reluctance among bankers to use it for fear that they would be identified as vulnerable institutions.

In addition, it was unclear whether a bank that wanted to participate would have to agree to conditions like limits on executive pay and an end to "golden parachutes," or rich pay packets for departing executives.

While public fury remains high at what is perceived as excessive pay for financial firms, corporations are generally reluctant to cede control over compensation levels, perhaps especially so to the government.

Paulson made clear on Wednesday that he interprets the authority granted by the financial rescue package as sweeping and that he intends to make full use of it. He said most attention has focused on Treasury plans to buy distressed securities from banks but made clear that wasn't the extent of his new authorities.

"We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," he said.

(Additional reporting by Andy Sullivan and Glenn Somerville; Editing by Leslie Adler)

[AnderL]

The marekts are a terrific value right now. seriously there are tremendous deals out there and it is killing the investment banks to have to be selling these positions at these historic lows. especially when they were buying them 35% higher. everyone things that the institutional are smart investors, that they ply the markets in giant galleons raiding poor retailers and pillaging their 401ks.

the reality is that they know no better than you and me. they get caught up in the same problems and for all their facts and figures, statements and charts, here is where they are, dumping positions for large losses just to have cash available to pay off debts because the collection agency is knocking on the door.

so while the markets are a terrific value, the herd, which includes the "smart" money is selling. so the marekts will get cheaper still and they will not turn up until after they have paid their debts off and raise enough capital to put into the markets again. A lot of money was wiped out. Well borrowed from future production I should say. The economy has been reset by about a decade. That recovery we had from 2002 to 2007 is all but erased. We could have just stayed in a recession for that much longer because what ever growth we obtained is being contracted away.

[AnderL]

The Bailout triggers CDS pay outs.

Looks like the bailout was used to generate an event that would force the CDS market to unwind. So you want to know why the markets are roiling. well, there you go. Banks are raising capital to prepare for this event

Fannie, Freddie Credit-Default Swaps May Be Settled (Update3)

By Oliver Biggadike and Shannon D. Harrington
More Photos/Details

Sept. 8 (Bloomberg) -- Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market.

Thirteen ``major'' dealers of credit-default swaps agreed ``unanimously'' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

``This is a big deal,'' said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. ``The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.''

A settlement likely would be the largest in the market's decade-long history. Credit-default swaps on Fannie and Freddie have been among the most actively traded the past few months, according to reports from broker GFI Group Inc. Both companies also are among 125 companies in the benchmark Markit CDX North America Investment Grade Index, the most actively traded contract in credit markets, which investors use to speculate on corporate creditworthiness or to hedge against losses.

Money Exchange

The actual money exchanged may be limited, though, according to analysts at CreditSights Inc. Buyers of the contracts are paid face value in exchange for the underlying securities or the cash equivalent.

``If bonds rally and trade close to par, recovery could be close to 100 percent, with protection sellers having little to pay out despite a technical default,'' analysts Richard Hofmann and Adam Steer wrote in a note to clients.

Dealers today were quoting the CDX index contracts both with and without Fannie and Freddie. Contracts with the companies dropped 11.5 basis points to 133.5 basis points, according to broker Phoenix Partners Group. Contracts without the companies were trading about 2.5 basis points tighter, Phoenix prices show.

A Fannie and Freddie credit event also would be the biggest test to date of a process by which the market settles most contracts without an actual exchange of the securities. Under that process, dealers hold an auction to determine a recovery value for the securities, which is then used by investors to settle the contracts.

CEOs Ousted

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart yesterday placed Freddie and Fannie in a government-operated conservatorship, ousting their chief executives and eliminating their dividends. The Treasury may purchase up to $200 billion of stock in the firms to keep them solvent.

Today's conference call will determine whether enough dealers agree the Treasury's action constitutes a credit event, Louise Marshall, spokeswoman for ISDA, said in a phone interview from New York today.

``We believe conservatorship is a credit event,'' Barclays Plc analysts Vince Breitenbach and Jeff Meli said in a note to clients yesterday. Barclays is a member of the ISDA.

U.S. default protection costs as measured by the Markit CDX North America Investment Grade Index will also decline, they said. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt.

Default Protection Costs

Five-year contracts on Fannie Mae notes fell from a record high of 364 basis points on Aug. 20 and closed on Sept. 5 at 233, CMA Datavision prices show. The cost is equivalent to $233,000 annually to protect $10 million in notes from default.

ISDA, which sets standards for the global derivatives market and counts investment banks including Deutsche Bank AG and Lehman Brothers Holdings Inc. as members, will arrange any settlement of the default swaps, spokeswoman Marshall said. She declined to name any participants on today's call.

``Although the settlement effort will be massive, we do not see it as necessarily a negative,'' Gus Medeiros, credit analyst at Deutsche Bank in Sydney, wrote today in a research note. ``Write downs are potentially an issue for holders of preferred equity, but the Treasury said financial institutions exposed to these securities will work with regulators to restore capital positions.''

Treasury Control

Under the U.S. plan, the Treasury will get $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie Mae and Freddie Mac. The government will receive annual interest of 10 percent on its stake.

While common stockholders of Fannie and Freddie won't be eliminated, they will be last in line for any claims, Paulson said yesterday. Preferred shareholders will be second in absorbing losses, he said. Interest and principal payments will continue to be made on the companies' subordinated debt.

To contact the reporters on this story: Oliver Biggadike in Sydney at [e-mail]; Shannon D. Harrington in New York at [e-mail];
Last Updated: September 8, 2008 09:53 EDT

[AnderL]

Who's Got the Biggest Derivatives Exposure?

For years, I've heard rumors about which banks and Wall Street investment firms hold what amount of derivatives. Well, I've found the official numbers.

Specifically, the following table shows the top 25 American commercial bank and trust company holders by notional value of all derivatives:



The following table shows the top 25 American commercial bank and trust company holders by notional value of credit derivatives, including credit default swaps:

[AnderL]

$400 Billion Lehman CDS Unwind?
Thursday, October 09, 2008 | 09:54 AM
in Credit | Derivatives | Trading

What is roiling the markets...

so we should look forward to to a lot more than this in the near future.

I've heard concerns from various traders and hedge fund managers over the past few weeks that the Lehamn Brothers (LEH) derivatives unwind has been what's roiling markets.

Early October, Citi (C) credit analyst Michael Hampden-Turner estimated there is $400bn of Lehman credit derivatives that will be settled on Friday

Hence, some recent fear can now be attributed in part to jumbo losses caused by Lehman's derivative unwind . . . with JPMorgan (JPM) being the biggest potential collateral damage . JPM has the biggest derivative exposure on the Street (I have no opinion on how this impacts them or on their derivative exposure).

Here is the FT:

"At the moment, participants can't just extinguish credit derivatives contracts with Lehman, they can only offset them. That, in turn, puts pressure on some participants to buy more credit insurance and the cost of such contracts is rising.

Moreover, many counterparties to Lehman who believe it owes them money have joined the ranks of unsecured creditors. This increases the number of claimants and reduces the money available to bondholders and other creditors.

The exact amount of any claim is determined by the difference between the value of the collateral and the cost of replacing the contract. The cost has risen in line with fears about the health of financial institutions and the creditworthiness of counterparties."

While Fannie and Freddie CDS settled at between 91.5 and 99.9 cents on the dollar., expectations are for Lehman to settle at 10 cent on the dollar -- causing a few $100 billion in losses. The unwind comes Friday.

Banks prepare for CDS pay-outs:

Banks are hoarding cash in expectation of pay-outs on up to $400bn of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and -dealers.

This added pressure on the frozen financial system comes as authorities prepare to meet participants in the so-far unregulated $54,000bn credit derivatives market to speed up plans for the creation of a central clearing house.

The Federal Reserve will meet dealers, investors and exchange executives in New York today. Although big dealers had committed to setting up a central counterparty by the end of the year, urgency has increased in light of the collapse of banks around the world and as company bankruptcies loom.

"The New York Fed will hold a meeting [today] with a small number of banks and buyside firms to discuss the progress being made toward the creation of a central counterparty for credit default swaps," said a Fed official, adding that this would "help reduce systemic risk associated with counterparty credit exposure and improve how the failure of a major participant would be addressed".



Reuters explains how the process will work:

Twenty-two dealers will participate in the auctions, which will determine how much protection sellers will recover after paying out the insurance. The timeline for the auctions follows, according to JPMorgan.

9:45 a.m.-10 a.m. Auction participants will submit bids and offers for the debt backing the credit default swaps, which will be used to determine the initial recovery rate of the swaps.

10:30 a.m. Auction administrators Creditex and Markit will publish the initial recovery price and the open interest for the contracts will be published. The open interest reflects the amount of bids and offers that have been made, and will show if there are more buyers than sellers, or vice versa.

12:45 p.m. -1 p.m. Participating dealers will submit limit orders for the debt on behalf of themselves and their clients to fill the open interest

2 p.m. The final price of the auction will be published.

[Stock]

Proshares says SKF closed $2.66 discount today to NAV. But they aren't calculating a reliable NAV or IIV, according to their press release.

http://www.proshares.com/pdtool?fundID=5288071

"NAV"

NAV vs. Closing Price

--------------------------------------------------------------------------------
NAV vs. Closing Price | Performance | Understanding Long-Term Performance

Investors in any ETF, including ProShares, should be aware of potential differences between daily net asset value (NAV) and closing price. ProShares NAVs are calculated using prices as of 4:00 PM Eastern Time, when equity markets close. However, like many ETFs, ProShares trade on their respective exchanges until 4:15 PM Eastern Time, when the equity futures markets close.

The closing price of any ProShares, which is the recorded price of the last trade, can occur before or after 4:00 PM, when the NAV is calculated. Therefore, there may be a difference on any given day between a ProShares NAV and its closing price.

Investors should note that each ProShare is designed to track the 4:00 P.M. value of the index underlying its benchmark.

http://www.proshares.com/funds/performance/NAVvsClosingPrice.html

IV is supposed to be intraday:

Fund Snapshot
Ticker SKF
Ticker (IIV) SKF.IV Intraday Indicative Value
Cusip 74347R628
Inception Date 1/30/07
Expense Ratio 0.95%

=================

Announcements Re: SKF and SEF - October 2, 2008

--------------------------------------------------------------------------------


October 2, 2008 Announcement
On October 1, 2008, the Securities and Exchange Commission extended its emergency action prohibiting short sales of shares of certain financial companies to the third business day after the enactment of the pending federal legislation to stabilize the credit markets and financial system, but not later than October 17. We would view the cessation of this regulatory restriction as a favorable development toward allowing us to resume accepting orders to create new shares of ProShares Short Financials (SEF) and ProShares UltraShort Financials (SKF). As previously stated, the eventual decision to resume creating new shares will be based on the best interest of the ETFs in the market and regulatory environment at the time and no guarantees of future actions on this subject can be made. We will make a public announcement when we decide to resume accepting creation orders from Authorized Participants.

SKF and SEF, which have not created new shares since September 19, 2008, continue to be available for redemption by Authorized Participants as normal. The shares of these ProShares are expected to trade in the financial markets. As described in its prospectus, ProShares may at times trade at prices that are not in line with their intraday indicative values (IIVs) or Net Asset Values (NAVs).

Answers to Questions about SKF and SEF
Posted September 22, 2008
Due to the emergency action announced by the Securities and Exchange Commission on September 18, 2008, temporarily prohibiting short sales of shares of certain financial companies, Short Financials ProShares (SEF) and UltraShort Financials ProShares (SKF) are not expected to accept orders from Authorized Participants to create shares until further notice. Unless notified otherwise, shares will be available for redemption by Authorized Participants as normal. The shares of these ProShares are expected to trade in the financial markets. As disclosed in the prospectus, ProShares may at times trade at prices that are not in line with their intraday indicative values. Here are some commonly asked questions:

What did the Securities and Exchange Commission do on Thursday, September 18, 2008?
What action did ProShares take on Friday, September 19, 2008 with respect to SKF and SEF?
Why did ProShares decide not to issue new shares of SKF and SEF?
Can I still buy and sell shares of SKF and SEF?
When do you expect to resume creations?
Why did the American Stock Exchange temporarily stop trading in SKF and SEF on Friday morning, September 19th?
How will the market prices of SKF and SEF be affected by your decision to stop creating new shares?
Will trading be halted again?
How will the SEC restrictions affect SKF's and SEF's ability to track their indexes daily?
How does the SEC restriction affect your other ProShares?
What did the Securities and Exchange Commission do on Thursday, September 18, 2008?
On Thursday, September 18, 2008, the SEC issued an emergency order temporarily prohibiting short sales of certain financial companies. By its terms the order terminates on October 2, 2008, although the SEC has the power to extend it beyond that date.

[top]

What action did ProShares take on Friday, September 19, 2008 with respect to SKF and SEF?
We made the decision that as of 11:25AM on Friday, SKF and SEF would not issue new shares until further notice.

[top]

Why did ProShares decide not to issue new shares of SKF and SEF?
In light of the SEC’s unprecedented action, we thought there was the potential for extraordinary demand to create new shares of these ETFs. We were concerned there might be limitations in getting sufficient short investment exposure to cover any new shares of SKF or SEF. So we decided it would be in the best interests of the ETFs to cease creation of new shares.

[top]

Can I still buy and sell shares of SKF and SEF?
Yes. Shares are currently available to be bought and sold in the financial markets. Please check with your broker regarding current market conditions before placing an order.

[top]

When do you expect to resume creations?
The regulatory and market environment affecting these ETFs has been changing rapidly over the past several days. The decision to resume creating new shares will be based upon the best interests of the ETFs with a view of the then-current regulatory and market environment. We expect to make a public announcement when we decide to resume creating new shares.

[top]

Why did the American Stock Exchange temporarily stop trading in SKF and SEF on Friday morning, September 19th?
The Amex halted trading in SKF and SEF on Friday morning pending the public announcement that we would not be issuing new shares on SKF and SEF. These ETFs resumed trading on the Amex shortly after the announcement was made.

[top]

How will the market prices of SKF and SEF be affected by your decision to stop creating new shares?
As disclosed in the ProShares prospectus, market prices in shares will fluctuate in response to changes in NAV and supply and demand for shares. ProShares cannot predict whether shares will trade above, below or at their NAV. It is possible that because no new shares are currently being created, there could be a supply and demand imbalance in the secondary market for SKF and SEF shares, which may cause those ETFs to trade at a premium or discount to their indicative values for some period of time, although, for a variety of reasons, it is impossible to predict whether or for how long any premium or discount would persist.

[top]

Will trading be halted again?
The American Stock Exchange determines the circumstances under which trading in a listed security is halted. The Amex may halt trading for a variety of reasons.

[top]

How will the SEC restrictions affect SKF's and SEF's ability to track their indexes daily?
ProShares will continue to manage these ETFs with a view to meeting their investment objectives. The evolving regulatory and market environment may affect the ETFs’ ability to meet their investment objectives. As disclosed in the prospectus, there are many factors that affect their ability to meet their objectives and there can be no guarantee that these funds will do so.

[top]

How does the SEC restriction affect your other ProShares?
At this point in time, we have no intention to cease the creation of new shares for other ProShares. As the regulatory and market environment evolves, we will evaluate current conditions and will take any action we believe to be in the best interest of the ETFs.

[top]

2008-4059