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Thursday, July 2, 2009

Third Major Distribution Day

Pay Your Taxes With an IOU!

FN: Can California residents pay their taxes with IOUs now? I mean, it would only be fair right? The same arguments apply. Expenses exceed revenues for the individual consumer, just like the state. So why can the state pay its bills with IOUs but individuals can't pay the state with IOUs?

Oh wait. Isn't fiat currency (like the DOLLAR) just one big fat IOU? Hehe.

How can this end well? How? (The last paragraph is epic.)

State rolls out $3.36 billion in IOUs today: "California plans to begin issuing billions of dollars in IOUs today to scores of creditors, including private businesses and county governments.

The move will not affect many individuals who receive government assistance. Low-income people, the elderly and the disabled will receive their regular checks on schedule. Schools, state workers, Medi-Cal providers, pension funds and In-Home Supportive Services are all protected by law from receiving an IOU in lieu of a real check.

But thousands of vendors who provide goods and services to the state will be given IOUs instead of cash. From a company that sells french fries for prisoners to a firm that pumps out latrines in state parks, many businesses are trying to save cash and hoping their banks will accept the IOUs.

Meanwhile, the University of California has not yet decided whether it will front the money for educational Cal Grants, another program that will get IOUs.

State Controller John Chiang expects to disburse $3.36 billion in IOUs and $10.9 billion in regular payments this month.

After officials decide this morning how much interest they'll pay on the IOUs and when they can be redeemed, the controller's printing presses will churn out the first batch of IOUs for 28,742 state tax refunds totaling $53.3 million, said Garin Casaleggio, a spokesman for the controller.

The IOUs probably won't be cashed by the state for 90 days - and then only if the treasury has the money to cover them."

Wednesday, July 1, 2009

Banks, Transports Foreshadow Equities Decline

FN: I've pointed out some of the divergences over the last few weeks that are mentioned in this Bloomberg article.

Banks Falling 23% Since May Foreshadow S&P 500 Slump (Update1): "Declines of more than 20 percent in regional banks and homebuilders and the failure of transportation companies to erase their annual loss may be signs the rally in the Standard & Poor’s 500 Index is about to fizzle.

Smaller lenders in the gauge lost 23 percent since climbing to a four-month peak on May 8, while builders tumbled 26 percent from May 4, when they reached the highest level since October. Concern that mortgage rates, credit losses and foreclosures are increasing spurred retreats in the companies forecast to be among the biggest beneficiaries of $12.8 trillion in government stimulus spending.

Slumps in bank stocks foreshadowed previous declines in the S&P 500 as investors focused on real-estate losses that curbed lending. Regional banks’ 51 percent plunge over 28 days starting Dec. 8 came a month before the S&P 500 began a 28 percent slump to a 12-year low of 676.53. The lenders’ all-time high in February 2007 occurred seven months before the S&P 500’s record.

FN: I pointed out three times that banks had stalled, rolled over and were threatening to break down in: Financials: Charts Say "Decision Time", Update1, Update2.

“If housing and credit led us into all this, they will have to stabilize,” said Mark Demos, a Minneapolis-based money manager at Fifth Third Asset Management, which oversees $18.7 billion. “There’s a growing concern that they’re not out of the woods. Less bad does not equal good.”

Speculation government spending will end the first global recession since World War II helped push up the S&P 500 by 15 percent since March 31, the biggest quarterly increase since 1998. Financial shares gained the most among the S&P 500’s 10 industry groups, rising 35 percent. Futures on the index rose 0.6 percent to 920.60 at 7:12 a.m. in New York today.

Stocks began to decline three weeks ago as economic reports spurred speculation the U.S. economy isn’t recovering fast enough to justify the S&P 500’s 36 percent advance since March 9. The Federal Reserve said in its June 10 Beige Book business survey that “stringent” loan conditions persist even amid signs the recession is moderating.

“This has been a government-induced rally,” said Jordan Irving, who helps manage more than $110 billion at Delaware Investments in Philadelphia. “We need to see some real positives coming from internal demand, as opposed to government- related demand, and it’s just not there.”

Borrowing costs climbed in the past month, with the average rate on a 30-year fixed mortgage reaching a six-month high of 5.59 percent on June 11, according to McLean, Virginia-based Freddie Mac. The rate was 5.42 percent when last reported on June 25. The increase spurred the Mortgage Bankers Association to cut its forecast for mortgage originations in the U.S. by 27 percent on June 22 as fewer people refinance their home.

Marshall & Ilsley Corp., Wisconsin’s largest bank, tumbled 52 percent since May 11, wiping out three-fourths of its rally from March 5. Citigroup Inc. analysts on June 11 predicted loan losses will remain high even after the Milwaukee-based lender raised capital by selling shares.

D.R. Horton Inc., based in Fort Worth, Texas, is down 31 percent since May 4, the steepest decline among rivals in the S&P 500 since then. The largest U.S. homebuilder posted a worse- than-estimated quarterly loss on May 4.

“The average regional bank out there is going to see increasing net charge-offs and loan loss provisions, and people may say, ‘Gee, do I really want to be in banks?’” said Barry Knapp, head of U.S. equity strategy at Barclays Plc in New York. “That could definitely be a catalyst for a sell-off.”

FN: Dow Theory requires confirmation from "the transports". There has been no such confirmation. I posted twice on this: Transports Diverge, Update1.

"Lagging transportation stocks are another bad omen for the rally, according to strategists at Bank of America Corp. and Raymond James Financial Inc., who say gains in airlines, truckers and railroads usually precede economic rebounds.

The Dow Jones Transportation Average has fallen 8.6 percent this year, led by a 62 percent drop in Fort Worth, Texas-based American Airlines parent AMR Corp. The 2009 decline exceeds the 3.8 percent retreat in the Dow Jones Industrial Average of 30 companies that are “leaders in their industries,” according to Dow Jones & Co., a unit of News Corp.

Adherents of a century-old stock-picking strategy called “Dow Theory” say the averages must exceed their Jan. 6 intraday highs of 3,737.01 and 9,088.06, respectively, to send a buy signal for stocks, Bank of America’s Mary Ann Bartels said. The measures are more than 7 percent below those levels.

“For cyclicals in general, it’s hard to imagine that they’re going to have very good earnings in the second quarter,” said E. William Stone, who oversees $100 billion as chief investment strategist at PNC Wealth Management in Philadelphia. Because the economy probably shrank for the fourth straight period, “you’re flying against the wind.”

GE Quietly Bailed Out

I recently wrote Don't Forget About GE.

After some serious behind the scenes begging... err... negotiating, GE has managed to quietly collect about $80 billion in bailout money via the Temporary Liquidity Guarantee Program (TGLP). This is a program that GE didn't even qualify for until it found a loophole to exploit.

Jesse Cafe Americain caught the whole mess in Government Bails Out General Electric.

Tuesday, June 30, 2009

AIG: Ready to Blow Up Again

“Given the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on AIG’s consolidated results,” -AIG

“They’re guaranteeing close to $200 billion in assets in probably the riskiest environment in our lifetimes. It’s a huge number -- if there was any surprise, it’s that this hasn’t been flagged before.” -David Havens, Hexagon Securities LLC.

FN: AIG is about to get into trouble... again. Hehe. If it weren't so damn sad and expensive it could be comical. You children's children will curse your names because they'll still be slaves to your debts. You've sold their futures so you wouldn't have to get up off the couch and make the hard choices... like letting AIG actually FAIL so the next generation doesn't.

AIG Discloses New Risk on Derivatives Sold to Banks (Update3): "American International Group Inc., the insurer bailed out by the U.S., said that valuation declines on credit-default swaps sold to European banks could have a “material adverse effect” on the company’s results.

The risk of losses on the derivatives may last “longer than anticipated,” the New York-based insurer said late yesterday in a regulatory filing updating the “risk factors” in its 2008 annual report. The firm had $192.6 billion in swaps allowing lenders to reduce the funds they had to hold in reserve as of March 31, AIG said.

“They’re guaranteeing close to $200 billion in assets in probably the riskiest environment in our lifetimes,” said David Havens, managing director at investment bank Hexagon Securities LLC. “It’s a huge number -- if there was any surprise, it’s that this hasn’t been flagged before.”

Gerry Pasciucco, hired from Morgan Stanley in November to clean up AIG’s Financial Products operation, is under pressure to unwind contracts at the unit, which brought the insurer to the brink of bankruptcy with separate bets tied to subprime home loans. Collateral payments tied to mortgage-linked swaps drained AIG’s cash last year, forcing the firm to seek a U.S. rescue.

“Given the size of the credit exposure, a decline in the fair value of this portfolio could have a material adverse effect on AIG’s consolidated results,” the company said yesterday about the European contracts.

The insurer slipped 22 cents, or 17 percent, to $1.11 at 9:41 a.m. in New York Stock Exchange composite trading. AIG has plunged 96 percent in the past 12 months.

Pasciucco said in an April interview that winding down the bets would take until at least the end of 2010.

Accounting Changes

The insurer said it doesn’t expect it will have to make payments under contractual agreements tied to the regulatory relief swaps, most of which will be terminated over the next year. Because of accounting changes, benefits to banks from the contracts will diminish after Dec. 31, the insurer said. The pace at which AIG terminates the transactions will be affected by credit performance of underlying assets, the company said.

“No event related to these securities or their holders prompted this filing,” said Christina Pretto, a spokeswoman for AIG, in an e-mail today. “As part of the SEC comment period on our financial disclosures, we are reclassifying our previous disclosures on the regulatory capital book as ‘risk factors.’”

AIG said it was unable to provide full details on the value of assets backed by the swaps because of confidentiality agreements with counterparties and lack of information about debtors on loans tied to the contracts.

Home Loans

The $192.6 billion figure for the swaps is comprised mostly of $99.4 billion tied to corporate loans and $90.2 billion linked to prime residential mortgages, the insurer said in a May 7 filing. The combined total was reduced from $234.4 billion on Dec. 31.

Most of the home loans tied to the European swaps are first-lien mortgages for owner-occupied properties, the insurer said in March. The other transactions include secured and unsecured corporate loans.

The fair value of the derivative liability was $393 million as of March 31, compared with $379 million on Dec. 31, according to AIG filings.

AIG’s $182.5 billion bailout includes $30 billion to help retire swaps linked to subprime mortgages. The package also includes $22.5 billion to unwind the securities-lending program, a $60 billion credit line and an investment of as much as $70 billion."

Wheres the Volume and the Volatility?

On Friday, a down day, volume was higher than yesterday. The day closed as a "doji", an indecision day. On Monday the market drifted higher, but volume all but disappeared. It took five days to recover the June 22nd decline, not a sign of strength for the Bulls. This move looks exhausted.

With volatility (VIX) stretched below the band, a mean reverting snap back is highly probable and that would put equities under pressure.

Volatility has dropped for too long and too quickly. A dangerous level of complacency has set in. The real risks to the economy have not receded nearly as much.