When The Debt Hits The Fan

Fed speak tomorrow I believe. Big B. I wonder what he will do at the next meeting? I think it's one of these 5 choices.

1> Stand pat.

2> 1/4 point Fed Funds 1/2 point discount window

3> 1/4 point FF 1/4 point dw

4> 1/4 point FF no move on discount rate.

5> No Rate Cut 1/4 point at the dw

It sounds crazy but someone told me the meeting fell on Halloween... spooky eh? I wonder if that plays into his thinking a little bit? A market already spooked by bad debt why not toss it another 1/4? Otherwise I think Ben would rather do no move> But he could affect the width of credit spreads and the long rate/short rate/ yield curve problem with a tricky move of lowering only the discount rate.. Somewhere here bonds get a bid and the dollar firms, he's got to let it know we are right at the end of this rate cut cycle already. How the market takes that bit of info from the fed is anybody's guess-- but if it means 4% GDP and HOT inflation of 2.2% plus??

Personally I'd take the growth at this point because something HAS TO REPLACE THE CONSUMER! History books may later frown upon me but the truth is we have to stay up with the Jones' now China and Russia we need to show some explosive growth to get earnings back up. We are fond of always quoting in downturns it's ok the consumer is two thirds of the economy... they'll dig us out but when the consumer is really tapped- often the wall street types are the last to know. This is where we put our faith in Bernanke now. Hopefully he is in touch with the real man on the street and not just surrounded by his policy wonks~ stoney

 

Here's the spin. ECB isn't going to cut rates. Bernanke cuts, it's game over. No bid for the bonds when yields tank and the dollar craters.

I just dont get how he's going to wave the magic wand and re-appear on top of the box. In fact, I think that box is going to be set on fire soon when the next batch of resets come with higher yields.

 

Exports are now growing very fast, as the effect of the sinking dollar finally takes hold. That's what will replace the consumer.
That means China has to allow for more internal growth, which would naturally pull in more imports, however, and get less from exports and piling up the reserves. Otherwise the Eurozone becomes the buyer of last resort, and there's no way Sarkozy will stand for that for more than a short time.

 

I'll take $50.00 of whatever you're smokin

 

I guess the good news is everything changes Dec 7th. That is when we will embark on another 20 Week Bull Cycle... we just have to get there.

Here are some thoughts:

>Some worry that today's improved and sophisticated hedging techniques have created a false sense of security among investors.
Although there is a "richer menu" of tools for investors to hedge their portfolios, there remains the possibility of "the same cascading effect as the sellers of the hedge have to move to protect themselves from a falling market, and everyone runs for the door at the same time," says Robert Glauber, a former U.S. Treasury undersecretary for finance who led a probe of the stock-market crash of 1987 and now works as a senior adviser at Peter J. Solomon Co., a New York investment-banking firm.

In 1987, investors had relatively few tools to protect their stock portfolios, the market for futures and options was not as big at the time, and the idea of paying upfront to purchase stock-market insurance drew some resistance.

Pulitzer Prize winning Wall Street Journal editor Dan Hertzberg remembers the crash he reported on in 1987, its corresponding credit market crises, and the grimmer days that followed Monday's drama.

As stocks climbed leading up to the autumn of 1987, a growing number of pension plans turned to a computerized hedging strategy known as portfolio insurance. It usually entailed selling futures contracts on stock indexes when the market tumbled, to try to protect the value of a portfolio by scoring profits from the futures contracts. This strategy is referred to as "dynamic hedging" because it requires portfolio adjustments on-the-go, or rapid selling even as the market falls.

But as the market headed lower in the days BEFORE Oct. 19, 1987, traders began to anticipate selling by portfolio insurers, and moved to get out ahead of them, pushing stocks lower. As futures prices collapsed on Black Monday, the futures-selling programs of the portfolio insurers kicked in, accelerating the crash, doing little to help those who relied on this hedge and helping to discredit the value of this insurance.

Many of the hedging products are new and relatively opaque, raising questions about how they will hold up in a market crisis. For instance, over-the-counter derivatives trades are worked out between two parties and not widely reported, and have been embraced only in recent years.

The new strategies also have created dangers in often-obscure markets that feature little transparency, usually in the credit markets. For example, recent difficulties in structured investment vehicles, or SIVs, forced a group of big banks to band together this week to try to form a new fund to help avoid potential big losses from a part of the market that remains largely frozen since this summer's debt-market turmoil.

"People have been lulled," says Nassim Nicholas Taleb, a former trader who made big money in 1987 and is the author of "The Black Swan." He argues that investors underestimate the risks of a big crash.

>> Yes Yes & Yes. Great points here! I HAD PORTFOLIO INSURANCE in the 80's you could buy it like hot chocolate from Smith Barny. It didn't help at all.....

What of dark pools???

>'Dark Pools' Threaten Wall Street

One of the fastest moving trends on Wall Street has flown under the radar of individual investors and, seemingly, the Securities and Exchange Commission: the rapid rise of "dark pools" stock trading arenas.

As the name suggests, dark pools lack transparency: They are used by institutional investors seeking to trade large blocks of stocks without creating the price wobbles that routinely accompany such moves. The trading is done away from the traditional exchanges, offering unprecedented anonymity.

Recently, more than 20% of all trades in New York Stock Exchange-listed stocks have been funneled through these dark pools, up from just 3% to 5% two years ago, according to NYSE figures.

Asked about the SEC's view of dark pools, a spokesman cited a recent speech by the head of the Division of Market Regulation, Erik Sirri, who said that "while the increasing use of hidden orders may be troubling," the SEC believes the new venues are available to all market participants. He suggested that the SEC is not in the position of favoring one market model over another. It would appear that until the trend toward dark pools has a measurable impact on investors, the SEC is willing to be simply an observer.

An increasing number of these dark pools are popping up — more than 35, it is estimated — that seek to match large buy and sell orders without recourse to the traditional trading discourse on stock exchange floors. This is not to be confused with electronic trading, which is not new. The electronic communication networks such as Archipelago and Instinet that started up in the 1990s changed trading forever by essentially replacing the matching efforts of the specialist with computers. The ECNs report trading data in a traditional manner — publicly.

Dark pools, by contrast, do not alert the market makers that a sizeable order has been placed. Instead, by breaking the orders into smaller pieces, computer programs match and execute the different segments of the order in hundreds of separate transactions. This slicing and dicing is very similar to the complex structures banks used to divide up subprime mortgage debt.

All the major investment banks have dark pools operations, such as Block Alert, owned by Merrill Lynch, and ACE, which is part of Citigroup. There are also independent firms such as Liquidnet, which now ranks as one of the top 10 brokers. None comes close to Sigma X, which is owned by Goldman Sachs, some say.

"Goldman is a leader in the area. They're way ahead of everyone else," a financial services analyst with Punk, Ziegel & Company, Richard Bove, said. "They have spent hundreds of millions of dollars on systems. They have more people in IT than they have traders or investment bankers. They want to drive the price of trading to a level that will drive most firms out of business."

The attraction of these dark pools is clear. If an insurance company, for instance, wants to unload 1 million shares of Deere & Co., it traditionally would have to phone its broker, who would then have to contact the floor of the New York Stock Exchange, and in the process information about the institution's intent to sell would begin to leak out to other traders. Presumably, the shares would come under pressure, and the seller would end up receiving less money for his stock.

The problem is that in using the dark pools, there is little way for sellers to assess whether they have received the best possible execution on the order.

This is especially the case if the broker has "internalized" the order. This popular activity allows brokers to match the order within their own shops, operating beyond the vision of other dealers and outside the spotlight of the SEC. Though internalization has always taken place, the development of crossing networks has greatly expanded the in-house opportunities.

This has an impact on the average investor by shrinking the amount of trading that is being funneled through traditional channels, and which is available for filling the orders that such small investors place through their brokers. That is, it reduces liquidity and transparency in the marketplace for the small investor, while enhancing it for the big players. Less liquidity means less opportunity for "price improvement," wider spreads, and, ultimately, more costly executions!!

Also, over time, internalization will mean a continued consolidation in the brokerage industry. Those firms such as Goldman Sachs that have giant order flows already are obviously best positioned to fill orders in-house. They profit off a spread between the price they paid for a stock and the price they charge the buyer.

>>> Ahem Mr SEC. Talk about letting the little guy fend for himself! GS is basically the Devil, more and more will come out about them. Yea they were the only ones who made their number- wonder how? Skimming, cheating, in house, behind the scenes dark pools, derivatives, dirty pool. It always amazes me how slim the margin is between White collar and Ankle monitoring device. I'm embarrassed I spend so much time in near proximity to all you have read above. ~ SI

 

Today Julian Robertson predicted the worst recession ever or something close to that-- he's not thought to be a stupid man.

The head of YRC which is in trucking has said the same thing.

Anyway lets take a look back at a very important day! OCT 17th! Seems like yesterday doesn't it? I had $5 K sucked out of my account that day by bad bets made on UTSI & EXAS (can you tell that at the end of these runs you are buying straight crap?) But that's not the big news. On October 17, volume on the FXI shares (China etf) spiked to 13 million shares, easily its highest single-day volume ever.

As even rookie investors know increasing volume is thought of as bullish when an ETF is breaking out of a base of consolidation-- as it indicates the presence of institutional buying. However, such massive volume surges can actually be bearish when it comes in blow off stages. As of its October 17 close, FXI was 16.5% above support of its 20-day EMA. A little extended I'd say!

Mark our low on the S&P that day, it may come in play again. The current uptrending channel has a last stop there before we lose it.. The Nasdaq Composite looks much healthier, as the index is solidly in the middle of its uptrending channel. The Dow is already below its lower channel but just by a smudge. The DOW is valiantly crawling back each day in an effort to hold on to support of its 20-day EMA... Is the Naz right? And can tech draw the other two averages to them? Or shall we take Mr. Robertson and the YRC guy at their word and assume the industrial earnings to come are going to point to the same deceleration problem in the economy which is on the horizon but not yet upon us? I just don't see the earnings folks!

It seems to me the logical answer is- the market is propped up now with end of month and first week in Nov is going to suck and the other indexes will come huddle around their 50 day.... and if that doesn't hold. All bets are off. ~ stoney

 

Wed Low 1526 & we are there already.

Contemplating shorting now - looking at SDS Anyone use this? ~ stoney

 

>> Well here we are nearly a month later and what does it tell us that a with so much individual pain out there a general short position on the market has returned very little? Well on the Naz 100 1/2 of the total return has been the 4 horsemen. This type of group think/buy it never works out well does it? It's very worrisome that rallies are not broad based.

On the debt front a lot has happened. Deals have not gone through and Banks have tried twice in some cases to bring paper to market. Last I heard they were losing about four cents on the dollar... to me that's not the end of the world, but these are big dollar amounts. The Alltel deal I believe is the latest to get swept up in this. Think back. remember this summer when every monday was a new buyout? Wow, when's the last time we had one? Yet somehow the averages cling.

Productivity number was really good today. 4 fed guys speaking. Dollar crashing, Oil soaring, it's pretty much the apocalypse oh yea we're at 13,500.... There is a disconnect here and it it may be the shorts who are disconnected. The newsflow ebbs and flows when it's going good they make snarkey remarks about Goldy locks and how she feels a couple days later and they are projecting support zones, they are just grasping. To me it's soft landing more than ever.


The amount of losses recognized by the brokers and banks so far is around $20 billion – this will end up in the hundreds of billions of dollars obviously.
* FASB 157 CONNECTION *
*Most financial institutions – banks, commercial banks, pension funds, hedge funds – have barely started to recognize the lower “fair value” of their impaired securities. Valuation of illiquid assets is a most complex issue; but starting with the November 15th adoption of FASB 157 the leeway that financial institutions have used so far for creative accounting will be much more limited. FT today research by the Bank of England shows that small minor changes of assumptions in these models can lead to changes in the value of “safe” asset of 35%. So even AAA or AA assets may be worth much less than par, as the ABX is telling us. But financial institutions are not using the prices derived from the ABX indices to value most of their sub-prime assets. As put it by the FT:

“the banks have not yet made write-offs as large as the ABX might imply. Merrill Lynch analysts, for example, calculate that mid-quality ABX debt is on average now trading at 40 cents in the dollar. But these analysts say that Merrill Lynch itself has only written this type of debt down to 63 cents in the dollar – and UBS is still assuming this debt is worth 90 cents. “Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct,” Merrill says.”

This FASB 157 could it be a giant trigger? I've requested more info on this from smarter people.

According to a MarketWatch article from September – based on Bernstein Research – many Wall Street firms put an excessive amount of securities in the level 3 bucket that uses unreliable models for valuation. The share securities in the level 3 is:

15% for Goldman Sachs;

13% for Morgan Stanley;

8% for Lehman Brothers;

7% for Bear Stearns

and only 2% for Merrill Lynch.

Merrill's eagerness to come clean makes sense now they have the least to lose apparently! But have they hid stuff at hedge funds off shore? The forthcoming adoption of FASB 157 --unless current lobbying pressure by interest group forces the postponing of its November 15th adoption-- will reduce the ability of financial firms to hide losses.

>> Wait PREDICTION TIME!!! BUSH tells SEC HOLD OFF on FASB 157 &MARKET SOARS!

>> Wait PREDICTION TIME NOV 16th (day after FASB 157 could be UGLY!)

Strange stuff. A supermodel sets off the dollar. More on that later. ~ stoney

 

There was that book Tipping Points I read one summer on the beach and how ultimately ironic that a Supermodel focused the world on our falling dollar. That's all it takes... we have officially tipped!~ SI



Supermodel Gisele Bundchen The Brazilian beauty has insisted that she is paid in Euros rather than US dollars.

With the dollar hitting an all time low against the Euro and British pound, the 27 year old catwalk queen has demanded the currency change.

Gisele refuses to be paid in US dollars

Her sister and manager Patricia revealed she was avoiding being paid in dollars because of uncertainty over its strength.

And according to a Brazilian newspaper when the model signed a deal to represent Pantene hair products, she demanded that the brand owner, Proctor & Gamble pay her in euros.

She is also likely to receive Euros as payment for a new campaign to promote Dolce and Gabanna's "The One" perfume.

Bundchen, a former girlfriend of Hollywood star Leonardo Di Caprio, is known as one of the most financially savvy models.

She is believed to earn over £15m a year from catwalk appearances and fashion endorsements and is recognized as the world's top earning model.

Patricia Bundchen said: "Contracts starting now are more attractive in euros because we don't know what will happen to the dollar."

 

Life's tough all over. She's got a contract. Sounds like a prima donna football player. Imagine... getting $30Million/year simply because of HOW YOU LOOK.... then pissn' and moanin' about it. Just how vain IS our society? (Rhetorical question)