Monday, September 24, 2007

Kass: How the Market Will Unravel

There is not much more to add to Kass. But so far the market is still in denial and is playing "Fed will safe the market" nonsense. I think they will wake up very soon and realize that after the next cpi number ( close to 4%) and the rising 10 year treasury yield there is zero chance that the Fed will cut without making them looking like George Bush..... I think the next chip that the bulls will have to play is the inevitable "year end rally"..... I´ll give the market another 4-6 weeks until Cramer and the rest plays the last remaining straw ;-)

Eigentlich gibt es den Ausführungen von Kass nicht viel hinzuzufügen. Bisher ist es eindeutig so das der Markt geblendet von der Vorstellung das die Fed den Markt schon orgendwie retten wird. Ich denke das die Marktteilnehmer demnächst erwachen werden und spätestens bei der nächsten Konsumenteninflationsnummer die nahe 4% liegen dürfte und den weiter steigenden 10 Jahresrenditen bemerken wird, das die Fed 0% Spielraum für niedrigere Zinsen hat und eine Senkung die Fed endgültig zur Witzfigur wird....Ich wette das die nächste Karte die vom Bullenlager gespielt werden wird die der unvermeindlichen "Jahresendrally" sein wird..... Dieser dann wohl letzte Strohalm wird wohl in gut 4-6 Wochen zum ersten Mal von Cramer und Co "gespielt" werden....

Kass: How the Market Will Unravel
The bearish case for stocks is predicated on the notion that the massive creation and accumulation of debt -- particularly the consumer sector -- contributed to a large portion of the domestic economic (and stock market) gains experienced since 2000.

WSJ Lenders Require Higher Credit Scores

Until this summer's subprime crisis, a score of 720 or higher earned you some of the best interest rates, says John Ventura, director of the Texas Consumer Complaint Center at the University of Houston Law School. Borrowers now need a score in the high 700s to get the same benefits, he says.

This added liquidity from nontraditional lenders dulled the effect of the Fed and served to buoy the low credit markets, allowing companies that should have failed to have access to large sums of equity and bonds. This created the feeling that all was well with the business world as stock markets rallied around the world and corporate default rates hit all-time lows by early 2007.

But that was an illusion.

Today, the nontraditional (and creative) credit originators are in intensive care and will not fuel growth anywhere near the degree to which they have in the past. The binge of mindless mortgage (and other forms of) borrowing abetted by generous strangers and central bankers abroad, by legions of unscrupulous mortgage lenders in the U.S. who fed the machine of packagers of credit on Wall Street and, most importantly, by a too easy Federal Reserve -- is now being reversed. The credit unwind in the upcoming years can be expected to have a profoundly negative impact in the current down cycle of economic activity -- possibly for years to come

> These days are gone..... Diese Tage sind sicher vorbei....

Thanks to Randy Glasbergen

Other factors:
Lower Business Spending Based on a Weakening Domestic Economy: In the coming months, the credit market's unwind will most likely be felt by a reduction in hirings and delays in business fixed investment. Last week's ISI Group surveys -- trucking and shipping, U.S. CFO Diffusion Index (Fuqua), U.S. Small Business Optimism Index, the North America Business Confidence Index, U.S. CFO Employment Expectations (Fuqua), U.S. CFO Capital Spending Expectations (Fuqua) and U.S. Small Business Trends (NFIB) Capex Plans -- all point to multiyear lows in confidence and are supportive of a marked slowdown in business spending.

The Industrialized Nations' Economies are Beginning to Weaken: The same poor domestic trends are being seen in surveys in Europe and Japan. The latter is particularly discouraging as the Japan Consumer Confidence Index (ESRI) and Japan Business Confidence Index (ESRI) were the most negative in almost three years in light of "declining wages and financial market turmoil" and a much-weaker- than-expected second quarter 2007.

Supporting this notion, semiconductor equipment shipments in August fell dramatically and well more than forecast. Importantly, the U.S. does not have a concession on poor mortgage lending practices -- investing/trading in housing and heavy mortgage equity withdrawals have spurred housing speculation and consumption binges in Europe . Indeed the resort areas of Europe (like Costa Del Sol, Spain) are no different than the Miami, Fla., market a year ago -- dotted with construction cranes and now with an excess of unsalable housing inventory.

The Emerging Growth Markets Will Not Be Insulated from the Industrialized Economies' Deceleration: Despite the Bulls' marginalization of a weakening U.S. economy -- BRIC remains the catalyst for growth -- the industrialized nations (Germany, England, Japan, etc.) are turning more sluggish. That weakness coupled with our domestic weakness could finally impact even the high-growth regions of the world.

Housing Is Replacing Technology as the Achilles Heel of Future Growth: The parallels between the excesses of technology in the late 1990s (daytraders goosing share prices, overpriced IPOs delivered by Wall Street, zero cost of capital leading to capacity increases and unrealistic expectations of a new paradigm of uninterrupted growth) and the residential real estate market in the early 2000s (daytraders (investors/speculators) in homes goosing home prices, a too-easy Fed that delivered generational-low mortgage rates and a Wall Street community that demanded and packaged products of nondocumented subprime mortages) are clear. Following the stock market bubble in the late 1990s, it was tech that was dreck (and plagued by excess capacity). In the most recent cycle, it was the housing sector that bubbled up and is now plagued with excess capacity. In my debate last week, economist Brian Wesbury was a devout economic bull, citing that housing represented only about 6 percent of GDP.

From my perch, bears are not overstating the multiplier effect of a sustained housing downturn (homeowners have only just begun to acquiesce to a deteriorating market) nor the negative wealth effect of a decline in housing prices. (A 20% drop in home prices equates to over $4 trillion of lost consumer wealth.)

Supportive of a 20%-plus drop in home prices was last week's CME extension of the futures market of the S&P Case-Shiller Home Price Index to five years from only one year. ....

The Salutary Inflation Environment of the Last Decade is In the Process of Being Reversed: The (previous) benefits of globalization, productivity and technology gains -- which served to reduce inflation over the last decade -- will be losing their effect in the cycle ahead. Inflation, understated as it might have been over the last several years, will begin to accelerate as emerging markets continue to produce a demand pull.

Based on continued strength in the emerging markets, the recent commodity cost pressures (oil and food), a sharply lower U.S. dollar placing upside pressure on import prices, and, more importantly, a projected rise in the Owners Equivalent Rent (the irony is that currently tight rental markets -- the consumer can't readily access the mortgage market and home prices remain high -- should produce a 4%-plus rise in the housing component (31%) of the CPI) it is reasonable to expect an alarming rise in the CPI over the next few months.

Gold is rocketing and TIPS (Treasury inflation-protected securities) spreads are already widening. (Higher inflation is the inference of Greenspan in his recent book in which he candidly admits that his own efforts at containing inflation were helped by "the potent disinflationary force" of "globalization's vast economic migration" of cheap labor into competitive markets. In the next two decades, Greenspan relates, the benefits will be played out and will be replaced by inflationary influences.

The Democratic Tsunami Bodes Poorly for Stocks: As the schism between the haves and have nots grow, the political tide is turning ever further towards populism -- RealClear Politics' Head to Head polls point to a Democratic presidential victory in 2008.

And with that likely success will be rising trade protectionism and higher corporate and individual tax rates. Again, as Brian wrote in the WSJ. "Populism is in the air these days, and the threat from tax hikes, trade protectionism and more government involvement in the economy is rising." (To select a candidate that is most aligned with your views, take this quiz!.

Slowing Top-Line Growth, Cost Pressures and Higher Corporate Tax Rates Augur Poorly for Profit Margins: The outlook for corporate profit growth for the last half of 2007 and 2008 remains too optimistic and, as a result, P/E ratios are higher than the bulls contend. Already, the nonexport domestic economy is slowing. (Domestic nonfinancial profits and cash flow were down 1.4% and 1.8%, respectively, in the second quarter of 2007).
> This video from Minyanville sums ist The Earnings Parade

> Folgendes Video von Minyanville trifft es recht gut The Earnings Parade

Pushing on a String: Pushing on a string means that the positive impact of lower interest rates is overwhelmed by the reduction in credit availability and the desire to borrow as lenders try to improve the quality of their loan book and borrowers, at the same time, repairing their balance sheets.
In all likelihood, the Federal Reserve's loosening of the monetary reins will not only hasten the depreciation of our currency -- it will do little to bring the housing market back into balance. The 50-basis-point reduction in the discount rate and the federal funds rate is like treating a patient wracked with cancer with antibiotics.

When the injections of antibiotics wear off, the patient's body is still disease-ridden. That body of stressed and stretched individual mortgage holders, a consumer levered far greater than in prior cycles, the quickening pace of mortgage resets in 2007-08, crippled (capital weak) nontraditional lenders and a record inventory of unsold homes will act as a weight against economic recovery.

Strangers Might No Longer Be Kind Enough to Underwrite our Consumption and Growth: Faced with the prospects for an unsteady and perhaps precipitous drop in the U.S. dollar, the nations that underwrite our consumption binge in the last decade will diversify away from the U.S. dollar -- denominated assets into more sound currencies, serving to raise the cost of financing our country's economic growth.

Bullish Sentiment Is Elevated: Forget the negativity bubble -- investors are getting downright giddy. Short interest fell a whopping 5% last month on the NYSE. Moreover, the Investors Intelligence survey indicated that nearly 54% of respondents were bullish (up from 40% a few weeks ago) while bears slumped by 10 percentage points to 27%. (Not surprisingly, many technical analysts -- who often counted short interest and the II survey in their bullish repertoire -- have ignored these technically bearish signs.)

Minyanville is asking Where Are The Bears

According to Bloomberg, despite a housing slump that has shaved $5.6 trillion from global markets, Wall Street strategists are the most bullish they've been since 2000. Where are the bears?

  • The rally has taken the S&P 500 to within 5 percent of strategists' average year-end forecasts of 1,595, the most bullish since December 2000, Bloomberg said.
  • "You couldn't mix a better drink for the stock market,'' gushed James Paulsen, who helps oversee $175 billion as chief investment strategist at Wells Capital in Minneapolis, to Bloomberg.
  • Meanwhile, none of the Wall Street strategists tracked by Bloomberg cut their 2007 S&P 500 forecasts during the August sell-off.
  • In fact, they actually become more optimistic during the year, bringing the average estimate to 1,595, up from 1,550 in January.

> But what else do you expect from "Wall Street Finest"

> Was anderes sollte man auch sonst von den immer "objektiven" Wall Street Größen erwarten.....

The History of Market Performance Following Rate Cuts When the Markets are Near 52-Week Highs Is Uninspiring: The virtuous cycle of 2002-07 is over.

The equity markets are currently moving on the fumes of that past cycle.

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Blogger jmf said...

Subprime Panic Freezes $40 Billion of Canadian Commercial Paper

On Baffin Island in the Arctic Circle, Baffinland Iron Mines Corp. almost missed its window to ship provisions to workers before winter arrives. The delay came not from the weather, but from a sudden freeze in the market for short-term debt 2,000 miles south in Toronto.

Baffinland ran short of funds to pay for food, fuel and drilling equipment after investing in commercial paper that borrowers couldn't repay. Without the money, the company had to arrange an emergency line of credit before shipping lanes froze over....

11:29 PM  
Blogger jmf said...

CPI's Lie on Household Inflation Doesn't Wash: John F. Wasik

Since 2001, health premiums have risen 78 percent while wages have only gained 19 percent. The government's inflation measure during that stretch was 17 percent.

11:32 PM  
Blogger jmf said...

Target Warns and Blames Florida - Lowes Blames Dry Weather

On a recorded message, Target said it expects same-store sales to rise between 1.5 percent and 2.5 percent for the five weeks ending Oct. 6.Earlier this month, the No. 2 U.S. discount retailer behind Wal-Mart Stores Inc. (WMT), forecast September same-store sales to rise 4 percent to 6 percent.

12:34 AM  
Blogger jmf said...

Are we headed for an epic bear market?

According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.

When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.

1:26 AM  
Blogger jmf said...

Jeff Matthews on the failed Harman / KKR buyout. Excellent!

Private Equity: What a Business!

2:30 AM  
Blogger jmf said...

This will set the tone for the rest of the builders

Lennar Monster Write-Off´s

Revenues of $2.3 billion
- down 44%
- Loss per share of $3.25 (includes a $3.33 per share charge related to valuation adjustments and write-offs of option deposits and pre- acquisition costs, goodwill and financial services notes receivable)
- Homebuilding operating loss of $787.7 million (includes $847.5 million of homebuilding valuation adjustments and write-offs noted above)
- Financial Services operating loss of $5.2 million (includes $9.3 million of write-offs of notes receivable)
- Homebuilding debt decreased $212.8 million; homebuilding debt to total capital of 33.5%
- Deliveries of 7,636 homes - down 41%
- New orders of 5,804 homes - down 48%; cancellation rate of 32%
- Backlog dollar value of $2.2 billion - down 60%

90 days ago the estimate was for a $0,25 profit......

3:20 AM  
Blogger jmf said...

Wan´t this the unit they wanted to sell in late 06.....

H&R Block: move to draw down funds linked to market conditions

said Tuesday that its unit drew $250 million from certain credit facilities in light of the tightening market for commercial paper.
The Kansas City, Mo.-based tax-services giant said its unit drew the money to provide a stable source of short-term funds "in light of recent market conditions that have negatively impacted the availability and term of commercial paper."
According to a filing with the Securities and Exchange Commission, the $250 million in draws bear interest at the Eurodollar Rate plus an applicable margin and are subject to adjustments.
Block Financial Corp., which drew down the funds, is an indirect subsidiary of H&R Block and is party to a $1 billion five-year credit and guarantee agreement dated Aug. 10, 2005 and an amended and restated $1 billion credit agreement dated Aug. 10, 2005.
The facilities contain certain covenants and events of default. One covenant requires H&R block to maintain a certain level of Adjusted Net Worth, which currently is at least $650 million at the last day of any fiscal quarter, according to the filing.

5:02 AM  

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