Custom Search

Friday, March 20, 2009

In The Beginning...

[ HT Good ]

Click image to enlarge.

Thursday, March 19, 2009

Where Did All the Money Go?

[ HT Good ]

Click image to enlarge.


No post today. Traveling.

Helluva a day yesterday. Plenty to write about, so I will try to catch up tomorrow.

Wednesday, March 18, 2009

The Global Financial Crisis

[ HT Good ]

Click image to enlarge.

Baltic Dry, Global Trade: The Rally in Equities Isn't Real

The Baltic Dry Index (BDI) has been losing steam during this rally in equities. A sustainable trend changing rally in equities would be accompanied by an increase in BDI.

Also, in a real rally, a stock like Dry Ships (DRYS) would participate... or even lead. If the economic situation really was improving, global trade would be improving and this would be reflected in a name like DRYS.

Related Posts:
China, Commodities, Baltic Dry: Pop, then Drop

McClellan Oscillator: Too Far Too Fast?

Spikes in the NYSE McClellan Oscillator (NYMO) into the 100 area have marked two significant tops. Too far too fast?

Tuesday, March 17, 2009

Thornburg Mortgage: Pyrrhic Rescue, UPDATE1

“Victory with devastating cost to the victor.”

I wrote about this disaster in March of 2008 in Thornburg Mortgage: Pyrrhic Rescue and predicted the company would ultimately die.

Thornburg Mortgage may file Chapter 11 bankruptcy: “Thornburg Mortgage Inc (THMR.PK), a large and troubled provider of "jumbo" mortgage loans, on Tuesday said it may file for Chapter 11 bankruptcy protection.

The Santa Fe, New Mexico-based company has struggled with liquidity problems since the summer of 2007, when the value of mortgages on its balance sheet began to tumble. Thornburg later suffered a series of margin calls from its own creditors.

A bankruptcy filing would make Thornburg one of the largest U.S. mortgage providers to seek protection from creditors since the housing slump began, joining rivals such as Washington Mutual Inc (WAMUQ.PK) and IndyMac Bancorp Inc (IDMCQ.PK).

Thornburg has specialized in making mortgages larger than $417,000 to borrowers with good credit, but it ran short of capital as investors stopped buying its loans. It has stayed alive mainly through a series of agreements to restructure or otherwise delay paying its debts.

In a Tuesday statement, Thornburg said it is evaluating strategic alternatives to restructure its financing agreements, make deferred payments, and meet obligations to bondholders.

The company said it hired the law firm Kirkland & Ellis LLP and the restructuring firm Houlihan Lokey Howard & Zukin Capital Inc as advisers. It also said several of its own lenders have agreed through March 31 not to exercise their rights under various financing agreements.

Last March, Thornburg arranged a $1.35 billion bailout from the distressed debt investor MatlinPatterson Global Advisors LLC and other investors to stay out of bankruptcy.

According to a Tuesday regulatory filing, MatlinPatterson surrendered all of its Thornburg common stock -- 120.8 million shares -- on March 12 and 16 without any compensation. The firm's principals, David Matlin and Mark Patterson, resigned from Thornburg's board of directors on March 12, citing potential conflicts of interest.”

The 2008 Financial Crisis

[ HT Good ]

Click image to enlarge.

"Ponzi" Economics in One Easy Lesson and the Minsky Moment

Tim Knight posted this over at The Slope of Hope under the title Economics in One Easy Lesson:

“Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Heidi's bar. Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages.

Her sales volume increases massively. A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top- selling items.

One day, although the prices are still climbing, a risk manager of the bank, (subsequently of course fired due to his negativity), decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar. However they cannot pay back the debts. Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy; her beer supplier is taken over by a competitor. The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non- drinkers.”

That describes the generic “Ponzi Scheme” perfectly. More generally this describes what is known as Finance Capitalism where the processes of production are subordinated to the accumulation of money profits in a financial system.

In Stabilizing an Unstable Economy, Hyman Minsky warned of the inevitable consequences of finance capitalism. He theorized that the accumulation of debt eventually results in the unexpected manifestation of a debt crisis. The final point of no return for an economy is referred to as “The Minsky Moment”:

“…the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity.”

(Pssst! That’s deflation right there.)

An interesting paper: Minsky's Analysis of Financial Capitalism


In this paper, the authors discuss Minsky's analysis of the evolution of one variety of capitalism--financial capitalism--which developed at the end of the nineteenth century and was the dominant form of capitalism in the developed countries after World War II. Minsky's approach, like those of Schumpeter and Veblen, emphasized the importance of market power in this stage of capitalism. According to Minsky, modern capitalism requires expensive and long-lived capital assets, which, in turn, necessitate financing of positions in these assets as well as market power in order to gain access to financial markets. It is the relation between finance and investment that creates instability in the modern capitalist economy. Financial capitalism emerged from World War II with an array of new institutions that made it stronger than ever before. As the economy evolved, it moved from this more successful form of financial capitalism to the fragile form of capitalism that exists today.

S&P 500: Rejected

The S&P 500 (SPX) was rejected around 770 intraday, giving back a gain of about 2%. After rallying 15% from a low of 666, SPX has now worked off the oversold condition and moved nicely into overbought territory. The rejection was made with decent volume.

Expect a test of the lows...

Where Are All the Puts? So Much Complacency

Last time this happened, the S&P 500 (SPX) slid slowly into the abyss, before stopping at 666.

Banks Went Red Starting Friday

The Bank Index (BKX) rallied from an intraday low of $17.75 to an intraday high of $27.65, or 56% in six trading days. Enough is enough. This short covering sprint has left the buyers exhausted and the banks overextended.

The banks closed in the red on Friday, even as the broader S&P 500 (SPX) rallied almost another 5%. The banks then closed red again on Monday, and the SPX fell slightly into the red, giving up 2% intraday.

BKX has gone from oversold to overbought... while failing to take out the previous swing high of $27.99.

The Regional Banking Index (KRX) looks exactly the same. The previous swing high of $40.03 held. KRX also put in two consecutive red days.

The short squeeze has run out of steam...

Expect a quick return into the abyss.

Monday, March 16, 2009

Visual Guide of the Financial Crisis

[ HT Visual Guide to the Finacnial Crisis ]

Click image to enlarge.

A Bottom in Equities as Tent Cities Emerge?

[ HT The Doomsday Report ]

It is truely amazing how a violent short squeeze brings out the bottom callers. As tent cities spring up around every major city like mushrooms on fresh dung, it is almost hysterically insane to call a bottom. These developments are not isolated and they are not insignificant. These are not "mustard seeds of hope". Things have NEVER gotten this bad this quickly... not even during the Great Depression.

Sunday, March 15, 2009