Sunday, November 11, 2007

Expecting A Recession / Hussman

This is only a smal snippet from Hussman´s latest work Expecting A Recession . Havn´t heard the word "contained" for a long long time.....

Dieses ist nur ein kleiner Ausschnitt von Hussman´s letzten Werk Expecting A Recession . Nebenbei bemerkt habe ich das wort "contained" schon lange nicht mehr gehört.......

Industry groups: rotating disappointments
It's interesting that investors have not yet put the rotating disappointments among various industry groups into a “gestalt.” Rather, investors seem to be looking at various industries as if their problems are each somehow unique and unrelated. Investors recognized early that the housing sector is profoundly vulnerable. More recently, they have recognized that financials face growing loan loss risk. With Caterpillar's disappointing guidance, they suddenly realized that cyclicals and machinery face significant challenges. With Exxon's refining difficulties, they realize that profit growth in the oil sector is unlikely to produce major upside surprises. And last week, technology stocks were clipped when Cisco produced strong earnings but didn't raise guidance. Yet somehow, investors haven't put all of these together to see the larger picture, which is that the market has lost leadership from every important group. This isn't a stock-selection or an industry-selection issue. It is a pervasive indication of oncoming economic risk.

With regard to financials in particular, investors continue to look for a bottom. Aside from periodic short squeezes and spectacular but short-lived rebounds, I don't think it is coming anytime soon. The recent concern about higher loan losses is no surprise (see The Problem with Financials), and this is likely to continue. This is not simply a problem that will go away if various financial companies “come clean” with what their CDOs and so forth are worth. The real problem is that the companies don't know what they're worth because the foreclosures that will determine their value haven't happened yet. The defaults are just starting. The heaviest round of mortgage resets only started in October, so it will probably be months before we observe mass delinquencies, and several more months until we observe significant foreclosures, loan losses, and writeoffs. This is a multi-year problem, not a multi-week problem that can be resolved by “just coming clean” with what's on the balance sheet
According to the latest FDIC banking profile, FDIC insured institutions currently hold a notional value of $153.8 trillion in credit derivatives. That's not a typo – though GDP itself is only about $13 trillion, the high notional value emerges because for each derivative that connects two true “end users” (one long, one short), there is a whole chain of intermediaries who are long with one intermediary and short with another, hoping to earn a tiny profit on the spread. For example, I buy a derivative from Andy, who goes short to me, so he buys one from Barry who is short to Andy, hopefully for a tiny spread, and covers the risk by buying a derivative from Charlene, and so on, until someone finds a true “end user” who actually wants to carry a pure short position in that derivative. Unfortunately, this also exposes banks to as-yet-unknown “counterparty” risk. If one link in the chain snaps, the links surrounding that chain have to bridge the gap. This is not a material risk in exchange traded derivatives, but can be a problem in “over-the-counter” derivatives traded between banks, where “know thy counterparty” currently ought to be chiseled into every marble surface.
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11 Comments:

Blogger jmf said...


Stage is set for a stock crash / Fleckenstein

11:09 PM  
Blogger jmf said...


Goldman Held Bigger Share of Level 3 Assets Than Citi, Merrill


Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

11:33 PM  
Anonymous Anonymous said...

J-M,

What a mess.

Right now I am trying to weigh this info about the amount of bad assets out there -- which I've had a sense about for some time, thanks to efforts of bloggers like you (vielen Dank) -- with the talk of a year-end rally, in order to decide what to do, how to play this -- what positions to take. How will the markets behave?

And my head is starting to hurt.

eh

1:13 AM  
Blogger jmf said...

Moin Eh,

i´m in the same situation. I have lightened up some more short positions

I have done something i havn´t done for almost 5 years.

I went long the Nasdaq 100 before the German market opened with futures down another 13 points at 2030.

Stopp loss is 2025.....

1:31 AM  
Anonymous Anonymous said...

J-M,

i´m in the same situation. I have lightened up some more short positions

This makes sense because if people think we are getting close to the bottom -- and some people, especially the ones who pay attention to the popular financial media, will definitely think that -- the more likely it is that buy-and-holders will show up.

I just wrote to someone else that, in the short term, I felt the tech sell-off was overdone and that some of those stocks would bounce back a bit. But instead of playing an index like you, I bought INTC.

Aber immer noch: I will trade this market, not "invest" in it.

So far I have not used stops much, but a couple are in place now.

A pair of ideas/Bemerkungen:

A Case Study on Market Manipulation: LEAP

Is there more downside to LEAP?

I find it odd that, laut Yahoo!, only a tiny % of Citi's float is short.

eh

1:54 AM  
Anonymous Anonymous said...

Latvia `Hard Landing' May Cause Baltic, Balkan Economic Tremors

In the capital Riga, where property prices more than doubled last year, the values of Soviet-era apartments have tumbled 12 percent in the past five months, real-estate company Latio says.

Apparently the 'decoupling' of emerging markets may not apply to Latvia. How does one short Latvia...?

eh

P.S. Maybe when/if there is a small or big crash in Latvia, someone will ask Latvians how they like this capitalism thing, complete with ruthless speculators who can and will drive their economy so that it careens from one extreme to the other: I don't think Latvians were responsible for most of the speculation that drove Riga Immobilien prices to double in just one year.

2:24 AM  
Blogger jmf said...

Moin Eh,

i´m already feeling uncomfortable with my long position....

Thanks for the links.

The short position in Citi is really weird.

The LEAP story is just brilliant.

These kind of stories make it so dangerous to be short. I have seen similar attempts especially from the builders during the past 18 month.

Thank god i was so comfortable that it didn´t squeeze me out of my builder shorts...

Juts watch what happened to
WCI
sicne mangement turned down the $ 20 Icahn offer....

This sounds exactly like the LEAP Story....

2:29 AM  
Blogger jmf said...

Moin Eh,

here is more on the
Baltics
.... Amazing!

I have no idea how to short such exotic markets. Thank god. If i knew it i would have been way too early and probably ran out of money

"P.S. Maybe when/if there is a small or big crash in Latvia, someone will ask Latvians how they like this capitalism thing"

I think they will ask this not only in Latvia.... :-)

2:44 AM  
Blogger jmf said...


Mortgage Market Losses May Be $400 Billion, Bank Says


It feels like the estimates are growing $ 10 to $ 20 billion a day......

4:00 AM  
Anonymous Anonymous said...

Doubling down on a global downturn

One good thing about ETFs like these -- maybe the only good thing, because after all you may or may not make money by investing in them -- is that at least now you have the possibility to go short in accounts where otherwise margin/shorting is not permitted (zB IRA accounts in the US).

eh

5:20 AM  
Blogger jmf said...

Moin Eh,

i agree.

Too bad that nobody is allowed or able to offer a product for the A shares in China to short.

All Chinese short products are including only the less expensive Hong Kong listed version of the A-Shares....

5:58 AM  

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