The Credit Crisis Financial Stocks Short Journal

Now Rosenberg wont admit his mistake
"Not sure what mistake you are referring too. If I ever mentioned the loan officer survey I said that conditions were tightnening by less than they had been previously."

Previously he had said to me after I asked "Are you sure the survey shows loans are not as tight as a few months ago?" "Less tight. Yes I am sure" he also said in the daily musings "In fact, it’s not so much hoarding because the
latest Fed Loan Officer Survey showed that credit guidelines are not nearly as
tight as they were three or six months ago"

 

Who needs TARP funds when fed is loaning out 100's of billions @ zero . lol

Fed Unveils Details on $1 Trillion in Lending, Doesn't Identify Borrowers

By Scott Lanman

June 10 (Bloomberg) -- The Federal Reserve unveiled its most detailed picture yet of its record $1 trillion expansion of credit, as Chairman Ben S. Bernanke responds to congressional pressure for greater transparency from the central bank.

For the first time, the Fed announced details on the number of borrowers and the ratings of securities pledged as collateral for loans. The data come in a new monthly report released by the central bank today in Washington.

The Fed said a total of 378 banks borrowed from its discount window in May or got funds from auctions of cash aimed at combating the liquidity crisis. Officials still stopped short of identifying the firms, a measure called for by some lawmakers and the subject of freedom-of-information requests and lawsuits.

Fed officials believe naming companies would undermine the central bank’s efforts to stabilize the economy, a senior Fed official said at a press briefing today.

“We will continue to look for opportunities to broaden the scope of information and analysis we provide,” Bernanke said in a statement today. The Fed statement said the central bank is providing “considerable new information.” Bernanke said in congressional testimony last week that the monthly reports would begin “soon.”

The 20-page document combines new data on collateral and the concentration of borrowers with information the central bank began disclosing in other reports on its Web site earlier this year as well as weekly balance-sheet figures.

‘Completely Insufficient’

Senator Bernie Sanders, the Vermont independent who sponsored an April 2 resolution that urged the Fed to identify borrowers and passed by a 20-vote margin, said today’s Fed report is “completely insufficient.”

“It is time for the Fed to name names,” Sanders said in a statement. The money “belongs to the American people,” and disclosure would show whether banks that are repaying the government’s capital injections are getting loans from the Fed, the senator said.

Among the new data, the Fed said an average 378 depository institutions borrowed $448 billion from the central bank in the four weeks ended May 27. That included 27 commercial banks with assets of more than $50 billion that took $257 billion, and 95 with less than $250 million in assets getting $1 billion.

Of the $618 billion in securities pledged as collateral to the Fed by banks, $125 billion are Treasuries or other federally backed assets, $215 billion have a AAA rating, $29 billion have a Baa/BBB rating and $131 billion have “other investment- grade” ratings that are “determined based on credit review” by the Fed.

Shore Up Market

Some 57 firms participated last month in the Fed’s program to shore up the market for corporate short-term debt. The top five commercial-paper issuers borrowed $57 billion on average in the four weeks ended May 27, out of the $159 billion total for the program. The bottom 47 firms took $73 billion.

The central bank said its lending to banks, bond dealers and American International Group Inc. produced $1.2 billion in interest income for the first three months of 2009, on a balance of $607.2 billion.

Also in the report, the Fed gave an update on the government’s January agreement to give Bank of America Corp. an aid package to help it absorb Merrill Lynch & Co. “The agreement has not yet been formally signed and is under review by the parties involved,” the Fed said.

Bank of America agreed to a loss-sharing plan with federal regulators in January on $118 billion in assets, mostly involving securities held by Merrill Lynch. Bank of America in May said it is negotiating to end that agreement because improving credit markets make the protection unnecessary.

Congressional Votes

The Fed’s effort at greater transparency in its emergency lending programs is a response to an April 2 nonbinding budget amendment sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and the panel’s ranking Republican, Alabama Senator Richard Shelby, Bernanke said. That proposal passed 96-2.

The Fed didn’t mention the tougher measure, also nonbinding, sponsored by Sanders, which passed 59-39 on the same day. Bloomberg News filed a lawsuit against the Fed in November seeking the names of borrowers.

Sanders, in a statement last month, threatened to pass the measure again “in a stronger form” if Bernanke failed to accept it. Bernanke told Sanders in February that identifying borrowers would be “counterproductive” and result in “severe adverse consequences for the economy.”

May Be ‘Overblown’

Robert Eisenbeis, former research director of the Atlanta Fed, said those concerns “might be overblown” because borrowing from the Fed doesn’t have the stigma it did before the financial crisis. “Right now it’s not really a sign of weakness,” said Eisenbeis, who is chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc.

The new monthly report will be released two weeks after each month’s final Wednesday, which is when the Fed closes its books each week, an official said. The officials spoke on condition of anonymity.

 

The flow of funds report from the Fed shows one interesting thing regarding GSE securities: That market was almost offer only and the US government was almost the only bid in Q1.
Selling was lead by households who sold $1,395b at an annual rate of agency securities. The fed purchased $1,069b, a further $434b was bought by the GSE themselves, another $209b was bought by the federal government.

What as puzzling was the fact that money market mutual funds pulled back on buying, in 2008 they bought $500b, in Q1, they bought $127b at an annualized number(they also sold tons of treasuries). Foreign holders continued their relentless selling dumping $318b AR, US banks also stopped buying

The demand for GSE stuff ex-government was very weak in Q1, I dont think the fed can afford to stop supporting the market unless money market funds and banks come back in a big way(foreign holders also need to stop selling), specially after this rise in mortgage rates. So I bet the fed keeps an easy money bias(keeping 'extend period', etc) in their next FOMC statement, even if they dont announce more purchases

 

I suppose another way to interpret this data is to think that the Fed was a more willing buyer then money market funds, therefore they took over ownership of the securities at a price higher than what other buyers would, if they back out the money funds would still buy, just at a lower equilibrium price so the demand would still be there. The fed however knows the housing market would be depressed further if they allowed the equilibrium rate to keep rising

 

Since the great depression most countries in the world have had fiat currencies untied to gold, almost all of them have produced inflation, the only fiat currency to my knowledge that has failed to depreciate is the Yen.
If there was something inbuilt in capitalism that made persistent deflation inevitable 'no matter what the government does' by randomness alone its likely there would be other examples of currencies like that. The fact that there isn't shows that there could be other reasons behind the japanese dilema, specially considering that housing crisis and banking crisis have happened multiple times in the last century

Japan also has a declining population(cuts aggregate demand overtime) and a 'avoid losing face' ideology, which makes the government less effective to try new plans and get reform in place.

So, I accept that it COULD be that sometimes capitalistic societies build such big bubbles that a rare unbeatable deflation becames a reality, the evidence would be japan and the sample would be a vast amount of fiat currencies(with many crisis and bubbles happening in them) against it, so even if that is true it it still looks like an unlikely outcome

 

It also could be that the population issue combined with a less adventurous central bank and bad banking reforms lead to their deflation, US population is still growing, the Bernanke fed is more extreme(Japan M2 supply grew something like 2% in the first years of their bursting, they hit the 0% rate in 1995) and by the time banks get smashed in the 2nd half its possible that congress will be willing to give them money or the private capital is still accessible

 

If you think about it, the likely really long-term nominal GDP of a country that always declines in population is 0, the likely long-term CPI of a country which the nominal GDP goes down every year is also headed in that direction.
Therefore deflation is the natural outcome in those countries and the central bank needs to make an even GREATER effort to counter it, given that the BOJ announced QE in IIRC 2001 and the non-loose enough money policy in the post-bubble, deflation is not really a surprise. In my opinion Japan was a 'perfect storm', a 1 in century type event. All the elements lined up there to produce this situation. In the long-run governments seem quite efficient at producing inflation

 

Has this rally shaken my belief that trading without a hard price stop is a viable way to get returns?I'm not so sure, you see I'm of that belief that stops are inherently irrational a lot of the time

Lets you do a fundamental analysis of macro trade X(say you get bullish on copper), since the fundamentals are on your side, the odds that the price will drift in your direction is also with you. If you put a stop on and the prices reaches that, the trader is essentially saying "even though I like the fundamentals(and therefore odds are with me), I believe the price reaching this point means its headed further against me in the short-term, I know how to read short-term action and it doesnt look good for me, even though the odds are in my favor" but if this is really the case the trader shouldn't just get out of the position he needs to REVERSE!
One cant claim to know where short-term moves are headed and not take advantage of it, which begs the question, if he knows where short-term moves are headed why use fundamentals at all, just time your way into the money and forget the analysis

Cutting a position that goes against you is different, specially in short selling, there you are factoring drawdown sizes that you are comfortable with

 

I understand a lot of people hate averaging down and for most people its a bad idea but there is also some irrationality in never averaging down

Lets say you are playing blackjack and you are couting cards in a new casino without much security. You lose 15% of your gambling stake even though you believe you are counting and playing perfectly, a certain situation comes up that you believe is very rare, little or no aces and 10s showed up so far so there a tons left in the deck, this gives the edge to the player in a big way. In this situation it would be irrational not to increase your bet size(say from 1% of your stake to 1.5%/2%), this is like avereging down but is also a good idea, your risk reward has gone up, there is more potential for profit because a good opportunity has showed up

I did a similar thing last week, even though the stock rally has cost me money when fed funds futures tumbled after the employment report I averaged down in the 'green shooters are wrong' trade by going into 2010 contracts and increasing size. It looks a bad attempt to get even but I consider the risk reward and chance of the ff futures trade working much better than other sorts of trades, therefore taking more risk makes sense, even if one time out of ten(which is my estimate of the fed raising rates in the next 12 months) that will leave me with a large drawdown. Still it doesnt change the fact that nine times out of ten I will be cashing in a big way

So far it has been working as they are rallying, I wish I had bought more actually, the risk reward at those lows were flat out silly

 

A hard price stop wouldn't be irrational in the case on trading based on technicals(like daytrading), there the price IS the fundamental so the move means more

Trading without a hard stop could be dangerous in the case of bubbles, but in that case I dont consider that problem a hard stop deficit problem, if there is a bubble and a likely bubble developing then the fundamentals aren't really in the trader favor(at least not in a time frame that assures his risk of ruin is close to 0), therefore shorting a bubble is more like an analysis mistake rather than a lack of stop problem. However I cant see a sell fed funds futures bubble developing anytime soon