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