More Green Shoots...... US Corporate Default Rate Edition

Green Shoots as far as the eye can see......... The "Green Shoots" or "Second Derivitive" nonsense will vanish as fast as the other buzz words like "Contained" , "Decoupling", "Cash On The Sidelines" , "Stock Are Cheap" etc......

Noch mehr Futter für all diejenigen die in jeder veröffentlichten Zahl momentan Green Shoots erkennen ..... Just kidding...... Bin mir sicher das die Bezeichnungen "Green Shoots" oder "Second Derivative" sich nahtlos in die Reihe der letzten Modebezeichnungen ( "Contained", Decoupling", "Cash On The Sidelines" usw ) einreihen werden. Warum wundert es mich eigentlich nicht das alle permanent suggerieren das das nun der Zeitpunkt gekommen ist einzusteigen.....

Thanks to Telegraph

FT Alphaville S&P said on Monday the US corporate default rate had hit a seven-year high:

Corporate defaults continue to rise rapidly in 2009, nearly matching the number in all of 2008. Through May 13, 2009, 121 issuers defaulted, affecting debt worth $297.22 billion. By comparison, 126 defaults were recorded in all of 2008, affecting debt worth $433 billion. Of the 121 defaults in 2009, 85 are from the U.S., 21 are from emerging markets, seven are from Europe, six are from Canada, and one each is from Australia and Japan.

Nice to see that markets are allowed to work in at least some parts of the market........Now add the following chart & read examples like this ( see Another Private Equity Deal That Went Bust Within 24 Months ) and you get even more green shoots.... Sarcasm off......

Immerhin schön zu sehen das dem Markt zumindest in einigen ausgewählten Teilen der Wirtschaft erlaubt wird zu arbeiten....... Der nachfolgende Chart kombiniert mit Beispielen wie diesem lassen erahnen das hier in der nächsten Zeit noch die ein oder andere nette Überraschung auf uns wartet.......

Number Of The Day " Percentage Of US Companies With A Junk Rating"

About 50% of U.S. companies have below-investment-grade credit ratings

Showing Stress.....& The Impotent Fed.

I think it is safe to say that the spreads in the auto & credit card segment will spike much higher in the coming quarters.... And this trend will spread around the globe.....

Ich bin mir ziemlich sicher das die Risikoaufschläge besonders im PKW und Kreditkartenbereich in den nächsten Quartalen noch erheblich steigen werden. Und das betrifft dann nicht nur die USA betreffen...... Passend hierzu aus der FAZ Unternehmensanleihen : Dunkle Wolken über spekulativen Werten

Worry About Stretched Firms,Consumers Hits Debt Markets WSJ
A range of corporate bonds and securities backed by consumer loans and mortgages have sagged in recent weeks to levels last seen in March, when worries about a financial crisis hit a high.

This time there is much less panic, but concern is building about the health of businesses and consumers.

The weakness is most visible in the debt of auto makers, retailers and companies in sectors reliant on consumer spending. Bonds issued by some financial institutions are also strained.

While a large-scale credit meltdown looks unlikely now, rising bond yields will make it harder and more expensive for corporations and individuals to finance their businesses, homes, education and day-to-day expenses.

Investors are demanding higher interest rates on most corporate and asset-backed debt. The average junk bond now yields around 8.1 percentage points more than Treasury securities, or 11.5%. That compares with a yield of 11.1% and spread of 8.6 percentage points on March 17, according to data from Merrill Lynch & Co.

Average spreads on bonds backed by auto loans and credit cards are three percentage points and 2.1 percentage points, respectively, close to their highs this spring. .....

Moody's Investors Service recently surveyed 31 companies that distribute gas to households. Of the group, 18 companies said an increasing number of customers were falling behind on their gas bills this year compared to last year

> No surprise to see that banks are once more procyclical in their lending habbits ( Same is happening in Europe WSJ: Euro Banks Tighten Lending Standards via Calculated Risk) ....... Too bad that there is so far no bill/law that allow Bernanke & Paulson to order banks to lend...... But with all the attempts we have seen you can´t even rule this out for the future ........ :-)

> Schon bemerkenswert wie es Banken immer wieder schaffen Ihre Kreditvergabekriterien immer prozyklisch dem Markt anzupassen anstelle in Zeiten des offensichtlichen Exzesses gegenzusteuern ( gleiches passiert auch in Europa Banken geizen mit Krediten FTD ).... Zu dumm das es bisher noch keine gesetzliche Handhabe für Bernanke und Paulson gibt die Banken zu verpflichten mehr zu vereleihen.... Nach allem was bisher aus den USA gekommen ist kann man aber selbst das zukünftig nicht mehr ganz auschließen..... :-)

UK : Egg/Citigroup Clamps Down On Riskier Credit Card Customers

Probably no coincidence that Citigroup is forced to make the move first and one of the largest US pawnbroker & payday lender is entering the market at the same time..... Once again their risk modeling wasn´t quite perferct...... How can you buy a UK credit card company close to a top in the UK housing market...... But i think it is very safe to say that others will have to follow ( not only in the UK ) Citi in this kind of tightening.....I suggest to read this Total UK personal debt statistic February 2008 from Credit Action to understand the magnitude of the mess especially in UK .

Sicher kein Zufall das ausgerechnet Citigroup den ersten Schritt machen muß und gleichzeitig das größte US Pfandleihaus & einer der größen "Kredithaie" in den UK Markt eintritt..... Es sieht so aus als wenn die mal wieder genau zum Top eine riskante Investition getätigt hätten.... In diesem Fall bin ich mir sicher das Citi mit diesem Schritt nicht lange alleine bleiben wird. Andere Anbieter ( auch länderübergreifend ) werden sich dieser Art der Kreditverknappung anschließen müssen.... Um einen Überblick über das Ausmaß gerade in UK zu bekommen empfehle ich einen Blick auf diese Übersicht Total UK personal debt statistic February 2008 von Credit Action zu werfen.

This quote sume it up / Dieses Zitat spricht Bände

"We can certainly understand the concerns, but even if people are up-to-date with repayments, they are people we decided we no longer wish to lend money to regardless of their status." Egg spokesman

Egg customer anger at credit move BBC
Angry customers of internet bank Egg have hit out at its decision to cancel their credit cards.

Egg says 161,000 cards belonging to people whose credit profiles have deteriorated since they signed up will stop working in 35 days' time.

But people who insist they have good records have been contacting the BBC to say they are on the list.

A spokesman for the bank said those affected were customers it no longer wanted to lend to "regardless of their current status".

Credit cards are being withdrawn from 7% of Egg's customers who it deems to pose an unacceptably "high risk".

This could include those who have missed repayments or exceeded their credit limit.

'Arbitrary action'
Cardholders will be able to continue making minimum monthly repayments on their balances but will not be able to spend any more after the deadline.

The move follows a "one-off" review after Egg was bought by US-based Citigroup for £575m last year.

The bank is not demanding immediate repayment of balances or making any changes to customers' terms and conditions or their interest rates. ....

Gillian Cox, of Farnham, Surrey, said she was "absolutely furious" to learn her credit card had been cancelled in what she described as an "unbelievable arbitrary action".

Mrs Cox said she and her husband are "retired, no mortgage, no debts" and "always paid the balance off in full each month".

She added that she had contacted credit reference agency Experian who said she was marked as having an excellent credit rating, "thus totally negating Egg's claim that this measure is about credit risk".

'Stop spending'
A spokesman for Egg said: "We are sorry some customers are upset after receiving notification we are ending their credit card arrangement, but they are people we do not feel it is appropriate to lend any money to."

He added: "The decision was taken after an extensive one-off review of our credit card book following acquisition by Citigroup."

Der Spiegel London - Die Internetbank Egg greift durch. Die britische Citigroup -Tochter will rund sieben Prozent ihrer zwei Millionen Kunden die Kreditkarte sperren. Offenbar haben es Egg und Mutterkonzern Citi mit der Angst zu tun bekommen - sie fürchten, die Risikokunden könnten sich übernehmen und ihre Darlehen nicht zurückzahlen können. Offiziell heißt es: Das Kreditrisiko der "riskanten" Kunden sei zu hoch.

Egg teilte zwar mit, der Schritt habe nichts mit der weltweiten Kreditkrise zu tun. Es handele sich bloß um eine "Neubewertung der Risiken", nachdem Egg im vergangenen Jahr von der Citigroup gekauft worden war. Die Maßnahme zeigt aber, dass Banken weltweit konservativer bei der Darlehensvergabe werden und hart gegen Risikokunden durchgreifen.

Die Egg-Mutter Citi hatte sich bei riskanten Kreditgeschäften so sehr verhoben, dass an den Finanzmärkten sogar zeitweise Insolvenzgerüchte zirkulierten. Citi hat im Zuge der Kreditkrise mehr als 18 Milliarden Dollar abschreiben müssen und damit einen Verlust im vierten Quartal von rund zehn Milliarden Dollar verbucht. Mit der Wahrheit über das Ausmaß der Krise rückte Citi nur scheibchenweise heraus. Egg will die Karten innerhalb von 35 Tagen sperren, die Kunden wurden bereits angeschrieben.

The Federal Reserve loan officers’ survey

The impotent Fed........ Taken from Pimco´s U.S. Credit Perspectives. More on this topic from Calculated Risk , Mike Larson & Michael Panzner / Financial Armageddon

Die machtlose Fed..... Das ist ein Auszug aus dem aktuellen U.S. Credit Perspectives von Pimco. Mehr zu diesem Thema gibt es von Calculated Risk , Mike Larson & Michael Panzner / Financial Armageddon

Banks & Lenders: Rising Caution

The large debt overhang in recent years was sustainable so long as banks were willing to lend, structured credit markets provided liquidity and housing prices rose. Of course, those factors changed radically in August. While the Federal Reserve will likely lower the Fed Funds rate considerably in this environment, I don’t believe the risk appetite to extend credit to individuals and companies will resurface anytime soon amid falling home prices and slowing corporate profits. Financial sector write-downs will likely continue into next year given declining asset quality, and banks will likely be increasing loan loss provisions.

Not exactly the best environment for fostering lending and risk taking. The Federal Reserve loan officers’ survey confirms these trends

> With less and less appetite in the ABS market to unload the loans this should come as no surprise.

> Da den Investoren der Appetit auf die weitergereichten Kredite vergangen ist sollte dieser Trend keinen wirklich überraschen

Bond Buyers Are Losing Confidence / NYT

Bank Data Reveals Stretched System / Minyanville

I´m pretty sure that the endgame will hit the "experts" with surprise and will shock the markets in the future at least for one week until the Fed steps in....... ;-)

Nach meinen Erfahrungen dürfte das Ende vom Lied mal wieder alle "Experten" überraschen und die Märkte in ferner Zukunft für maximal eine Woche in einen Schockzustand versetzen bis die Fed zur Rettung eilt....... ;-)

" Well, I´d better go now. I´m almost at the wall..."

Thanks to The New Yorker

Minyan Peter / Bank Data Reveals Stretched System
On Friday, several pieces of key bank data were reported by the Federal Reserve:

First, for August, non-mortgage consumer debt rose at an annual rate of 5.9%, up from 4.7% in July. The bulk of the increase came from revolving debt, principally credit cards, which rose at 8.1% versus 7.5% in July.

To frame the revolving credit figure, here is some historical data:

Year	Annual Growth Rate
2003	2.3%
2004	3.8%
2005	3.1%
2006	6.3%
June 2007	7.1%
July 2007	7.5%
August 2007	8.1%

That credit card debt growth is accelerating at a time when retail sales growth is slowing suggests that more consumers are turning to their cards to finance their basic monthly cash flow. As I have said previously, it appears that the credit card banks have become the consumer lender of last resort. How long this can continue, particularly with the slowdown in personal income growth, (from 0.9% monthly income growth in January to 0.3% in August) remains to be seen.

Second, the weekly report on system-wide bank balance sheets showed a surprising $100 bln increase in bank assets for the week following the Fed Funds rate cut. I, and others, had expected to see a decline in bank balance sheet assets, figuring that the rate cut would have paved the way for banks to move some more liquid loans or securities off their balance sheets and into the secondary market. That this did not happen suggests that either corporate borrowers are hoarding liquidity by drawing down credit lines or the secondary markets have not fully responded to the rate decline. At the same time, system-wide net assets (a proxy for capital) showed a $15 bln decline for the week.

For the record, since May, when it peaked, net assets (again, a proxy for capital) for large U.S. banks has dropped by $55 bln - or 7% (from $740 bln to $685 bln), while over the same period, total assets for large banks has grown by $228 bln - or 4% (from $5.607 trln to $5.835 trln). Furthermore, substantially all of this growth was funded through non-deposit debt sources.

To return large bank capital ratios to their peak May levels would require either an $85 bln increase to capital or a $640 bln reduction in assets.

While the “all clear” whistle may have blown for the stock market, the growth in system-wide bank balance sheets, particularly credit card balances, coupled with a meaningful decline in large bank capital levels indicates to me that our banking system is being stretched.

Earnings Quality And Credit Cards

Minyanville Peter has done a great job of digging into numbers at Target. It looks like credit card lenders have in essence become the consumer lenders of last resort and on top of this Target (and others) are getting creative ( I assume this is nothing new) in putting aside lower loss provisions to make their latest number. But why should they act in a different way than lots of banks.....? This move in the face of the coming recession is very shortsighted and underpins my view that the earnings quality ( not only in the US) is often "subprime". This doesn´t make the market more attractive......

Minyanville Peter hat Ihr wirklich einen tollen Job gemacht und hat sich stellvertretend für etliche Firmen die genauen Daten des Target ( nach Wal Mart die Nummer 2 in den USA) Ergebnisses angesehen. Und die zeigen zwei wenig erbauliche Trands. Zuerst bleibt festzuhalten das die Kreditkarte nach Wegfall der Immobilienrefinanzierung und anderer Kreditmöglichkeiten mehr denn je der letzte Strohhalm für den bis über beide Ohren in Schwierigkeiten US Konsumenten ist. Zum anderen wird einmal mehr deutlich wie "kreativ" (sicher nichts neues) die Firmen werden müssen um Ihre letzten Quartalszahlen zu "treffen". Immerhin haben die ja in etlichen Banken erstklassige Vorbilder (bloß das es dort um Mrd geht....). Und das ganze im Angesicht der kommenden Rezession. Sieht für mich doch extrem kurzsichtig, fahrlässig und auch offensichtlich aus. Das Pendel wird dafür in den kommenden Jahren umso stärker zurückschlagen. Einmal mehr ein Beleg für meine These das die Gewinnqualität (nicht nur in den USA) oftmals "subprime" ist. Das macht die schon jetzt nicht billigen Märkte nicht gerade attraktiver......

Minyan Mailbag: A Bird's-Eye View of the Credit Conundrum
Finally, no one is talking about it yet, but I think the market will soon begin to realize that the credit card lenders have in essence become the consumer lenders of last resort.

As consumers have been shut out of the mortgage and home equity world, the last available credit is plastic. One statistic that I have found very troubling is the degree to which credit card balance growth is running ahead of retail sales growth - a key sign that the consumer is stretched.

In normal times, you would expect aggregate credit card balance growth to run about in line with GDP and retail sales growth. This year it is running almost 2.5 times that. Clearly consumers are using their cards for far more than purchases. And my guess is that for many Americans their credit cards have become the latest, but potentially last, source of financing available.
Because of the oversized credit card balance growth, however, I think the market is missing what is really happening within card issuer portfolios – particularly loss and delinquency data. Today, no one seems to be very concerned about the increases in reported losses and delinquencies. However, when you start to normalize these statistics for the enormous balance growth we’ve seen, the increases in both are quite dramatic.
To put this all together, take Target’s (TGT) latest financial results and you can see the numbers for real. First, credit card balance growth was up 14% year-on-year - almost 1.5 times Target sales growth of 9.5%. Second, thanks to this balance growth, reported year-on-year delinquency ratios are up only a little bit (60+ days delinquencies of 3.5% versus 3.4% a year ago), but the dollars of delinquent accounts are up almost 18% - to $242 mln from $205 mln – and, as an aside, “late fees and other revenue” are up more than 36% year-on-year.

Digging even deeper, you come away with more unanswered questions. First, annualized net write-offs for the quarter were up 17% - 5.4% of loans versus 4.6% during the year ago quarter. But behind that, masked by 14% balance growth, there is a 32% increase in the dollars charged off.

Further, and to me more troubling, Target dropped its loan loss allowance from 8.3% of loans at the end of July 2006 ($501 mln) to 7.4% at the end of July 2007 ($509 mln). Had Target kept its provision at 8.3% of loans, the incremental cost would have been over $64 mln or almost 40% of the pre-tax quarterly earnings of Target’s credit card business.

Alternatively, had Target kept its provision at the same 1.8 times net charge-offs as last year (an 8.3% allowance on 4.6% in net write-offs), the required ending provision would have been over 9.7% of loans - at an incremental cost to the company of almost $144 mln – all but eliminating earnings from the credit card operation for the quarter. Put simply, when measured in dollars (rather than percentages of balances) Target’s nearly flat year-on-year loan loss allowance does not synch with the increase in loan balances, delinquencies, charge-offs, and late fees.

Credit Crunch Moves Beyond Mortgages / WSJ

The WSJ has a very good (free) story about the tightening credit conditions for consumers. Please click on the headline to read the entire story

Das WSJ hat eine sehr gute Geschichte wie sich die Kreditbedingungen abseits der Hypothekenmärkte für den US Konsumenten spürbar verschlechtert haben. Klickt bitte auf die Überschrift um die Details zu erfahren.


Thanks to Solvent Celt

Individuals See Higher Rates,Harsher Terms on Credit CardsAnd Other Consumer Loans

.....because more consumers -- increasingly locked out of home-equity loans and lines of credit -- are using their credit cards more. This month, for example, the Federal Reserve said consumer credit rose at an annual rate of 6.5% in June to a record $2.459 trillion, the second straight sizable gain. The increase was led by an 8.4% rate of increase for revolving credit, the category that includes credit-card debt.

Doug Eddings, a 35-year-old small-business owner in Portland, Ore., says three of his credit-card issuers all took steps in recent weeks to tighten his credit, either by raising his interest rate, halving his available credit or freezing his accounts.

First, he received a notice from Chase in June, notifying him that it was going to raise the interest rate on his Chase Amazon card to 29% from 17%. Soon after, another lender, HSBC Holdings PLC's HSBC North America, dropped his $5,000 credit line on his Best Buy store card to $2,105 -- just $5 above his current balance. ....

> On top of this i think this Interview from iTulip with James Scurlock, Creator of "Maxed Out" is worth listening

> Um das Bild abzurunden bietet sich zusätzlich der folgende Link an Interview from iTulip with James Scurlock, Creator of "Maxed Out"

Kass: 'Don't Fight the Fed.' How Quaint

'Don't Fight the Fed.' This phrase will from now on put on the table almost every day from CNBC, Cramer, Wall Street etc. And with the macro news getting worse days by day it it probably their only argument for a long time to come. Remember that this new "Mantra" will be coming from the same guys that didn´t see the housing bubble, then said housing is contained, talked about a "Private Equity Put", said the market is cheap, there is cash on the sidelines, will come up with the Fed Model...

So it is good that Doug Kass is providing some "anti spin". The only thing that might dampen the slump a little bit is that the world economy is much stronger than during the past. But this won´t save the US from going into a recession.

'Don't Fight the Fed.' Diese Redewendung wird uns die nächsten Monate unweigerlich jeden Tag von Seiten CNBC, Cramer, Wall Street usw. begegnen. Und da sich die Marcodaten Tag für Tag verschlechtern bleiben aus Bullensicht natürlich auch nicht mehr allzu viele Argumente übrig. Man sollte dabei jedoch bedenken das dieses neue "Mantra" von denselben Leuten kommt die erst keine Immobilienblase erkannt haben, dann das Immobilienproblems als isoliert bewertet haben, die einen "Private Equity Put" gesehen haben, die steif und fest behaupten der Markt wäre günstig (trotz 30-40 % Finanzgewichtung), die Tonnen von Cash an der Seitenlinie vermutet haben, die das sog.Fed Model bemühen.........

Da tut es gut wenn Doug Kass wie üblich zum "Anti Spin" ausholt. Das Einzige was evtl. den Verfall etwas abmildern könnte ist die noch immer rund laufende Weltwirtschaft die sich so stark wie noch nie präsentiert. All das wird aber die USA nicht vor einer happigen Rezession schützen.

On Friday night, I appeared on CNBC's "Fast Money" and was asked a critical question: Why fight the Fed in maintaining a cautious market view? After all, the markets soared after the Fed eased in response to the Long Term Capital Management (LTCM) bailout in 1998.



I'll answer that question now.

Back in 1990-1992 and 2001-2003, the Fed lowered interest rates 100 basis points, secure in the belief that it had thwarted a recession. Both times, the Fed was wrong: A recession commenced, and a bear market in equities followed. For example, the DJIA soared nearly 3% with the surprise January 2001 interest rate cut. Three months later, the markets made new lows and ultimately fell 20% from the highs.

Seven years ago, the economy was soaring with real gains of about 4%, productivity was unprecedented, technology was in the midst of a renaissance, and the consumer was in fine shape. The LTCM issue was fairly contained; it was an isolated liquidity crisis in a hedge fund that was forced by the misuse of leverage and the insolvency of a relatively small economy, Russia.

The result was a 75-basis-point reduction in the fed funds rates, which restored calm in the financial markets in a matter of weeks.

Things are far different today.

Today, we face an economy that has far less promise with participants (consumers, hedge funds and borrowers of all kinds and shapes) all hocked up. Unlike 1998, today's housing market is in a sustained downturn, which will not likely recover until 2010. The consumer is at a tipping point, hedge funds don't hedge, and the world's economy faces a broad credit crunch. What was a liquidity issue seven years ago is both a liquidity and solvency issue today.

I have argued that, in the current credit cycle, nontraditional lenders have proliferated by circumventing Regulation T and banking reserve requirements, serving to soften or even dull the Fed's role in monetary policy. In turn, this systemic change has led to unusual borrowing in the form of interest-only and teaser adjustable-rate mortgage loans and levered quant hedge funds.

Furthermore, growth in the derivative market ran amok, serving to underwrite the sale of a broad-based group of products (such as motorcycles, automobiles, furniture, etc.) and also serving to brighten the markets for private equity.

This added liquidity from nontraditional lenders also buoyed the credit market, allowing companies that should have failed to tap large sums of equity and bonds. This created the feeling that all was well with the business world as stock markets rallied around the globe and corporate default rates hit all-time lows in 2006.

> Here are more charts that shows how deep the US consumer is in trouble

> Here mehr Charts die eindrucksvoll zeigen wie tief der US Konsument inzwsichen im Schuldensumpf steckt

But this was an illusion.

With credit being extended to everyone, the consumer -- already having ponied up to the Credit Bar Saloon -- went further into hock by loading up on ARMs and "no-money-down" durable (and nondurable) purchases. The hedge funds, in this period of mispricing of risk, got into the act by levering up in order to capture unsustainable returns. (According to Merrill Lynch hedge fund assets now approach $10 trillion, which is supported by less than $1.5 trillion of equity.)

The "hot money" provided by nontraditional lenders eventually led to what we have today and what I have described as a tightly wound financial system vulnerable to any interruption or negative event. The subprime mess was the event that triggered a chain reaction and a reassessment and repricing of risk; it was a ticking credit time bomb that most ignored -- until recently.

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 repair their balance sheets.
> I think the chart for corporate loans in 2006-2007 is looking similar

> Ich denke das der Chart für gewerbliche Kunden in 2006-2007 wohl ähnlich aussehen dürfte

The 50-basis-point reduction in the discount rate will likely be followed by further easing by the Fed, but it will do little good

The combination of stressed and stretched individual mortgage holders, a consumer levered far greater than in 1998, crippled nontraditional lenders, grossly extended hedge funds and debt-heavy subprime companies will exacerbate the downturn in the domestic economy in a far more severe manner than during the LTCM crisis. The two periods, quite frankly, are not even comparable in terms of how secure or shaky the economic foundation is.

Regardless of the Fed's actions, the odds favoring a 2008 recession have been increasing daily and until recently have been almost entirely ignored.

Political Consequences
After the LTCM mess in 1998, the Republican Congress was firmly in control and so was the security of lower taxes for both individuals and corporations. This is not the case in 2007, as the rising odds of a recession and the possible perception that the Fed is working as an agent for corporate America to bail out the hedge funds and troubled lenders already follows the Democratic midterm election victories of 2006.

Also, the growing schism between the haves and the have-nots in 2007 over 1998 will likely serve to give the Democrats the 2008 presidential election on a silver platter -- and with it, the headwinds of rising trade protectionism and higher taxes.

"Don't fight the Fed," a phrase promulgated by Marty Zweig, is one of those nonrigorous "truisms" that may no longer be useful. The markets in August 2007 have had the expected and Pavlovian reaction by immediately soaring; this is just what occurred on Jan. 3, 2001, after another surprise rate cut.

Back then, the Fed and the markets briefly thought that the threat of recession had been eliminated. It had not; we entered a recession soon thereafter. Today, the financial system is far more levered (and stressed) than in 2001, and a reduction in interest rates would simply ease a small portion of the pain of the debt excesses since 2000.

Our investment eyes need to be washed by tears once in a while so that we can see the markets and economy with a clearer view again. From my perch, we are in one such period. Everybody is going to hurt.

Fight the Fed.

Carry Trade & Economist Summary

The Economist has a good sample of what happened during the last weeks. As an example i have taken the report on the carry trade. I hope the links work without subscription. O top off this you can click at the labels to get more on last weeks topics. Please leave a comment if a certain Link doesn´t work.

Der Economist hat eine ziemlich gute Übersicht was in den letzten Wochen abgegangen ist. Beispielhaft habe ich mir mal den Report zum Carry Trade herausgepickt. Ich hoffe das die Links auch ohne Abo funktionieren. Hinterlaßt bitte einen Kommentar wenn ein bestimmter Link nicht abzurufen ist.
Banks in trouble
A liquidity squeeze "Bankers' mistrust"
Funding difficulties "A conduit to nowhere"
Hedge funds "Behind the veil"
Financial contagion "Mortgage flu"
Should central banks act as buyers of last resort?

Not-yet-desperate housewives
Is Mrs Watanabe doing her bit for global stability?

IN MOST of the world in the past week, attention has been on highly leveraged hedge funds that have been forced to dump assets bought on margin. In Japan, however, a different species of margin trader has—until now, at least—stood firm: the housewife. On her shoulders may lie responsibility for some of the stability of the global financial system.

On August 15th the Japanese currency climbed to a 4½-month high against the dollar and continued to surge against the New Zealand dollar, raising concerns about the sustainability of the carry trade, through which investors borrow in cheap yen to buy higher-yielding assets elsewhere. This had made fortunes for international investors but, lately, Japanese retail investors had become the carry trade's greatest enthusiasts.

> The latest strenght of the Greenback is worth mentioning and if the $ will sustain these trend it will be unusual. I doubt that that this will last. Brad Setzer is also wondering The dollar, still a currency that you run to?

> Die Stärke des US $ in den letzten Wochen des Chaos ist zumindest wenn dieser Trend anhält recht ungewöhlich. Ich glaube das dies nicht von Dauer sein wird. Brad Setzer stellt sich die gleiche Frage The dollar, still a currency that you run to?

The metaphorical Mr and Mrs Watanabe account for around 30% of the foreign-exchange market in Tokyo by value and volume of transactions, according to currency traders, double the share of a year ago. Meanwhile, the size of the retail market has more than doubled to about $15 billion a day.

One reason for the surge is margin trading. Brokers are offering leverage of as much as 200 times the down-payment (though the average is more like 20 to 40 times).

In July Japanese retail investors' short positions on the yen (a bet that it would fall) exceeded the amount taken by traders on the Chicago Mercantile Exchange, a foreign-exchange trading hub. “The gnomes of Zurich were accused in their day of destabilising markets. The housewives of Tokyo are apparently acting to stabilise them,” boasted Kiyohiko Nishimura, a Bank of Japan board member, in July.

Strikingly, as the yen appreciated, retail traders, rather than dump their positions, saw a buying opportunity and sold yen for other currencies, softening its rise. “The Japanese government has not intervened—they've not had to, because the Watanabe-sans have been selling yen for them,” says James Gow of FXOnline Japan, a retail broker.

U.S. Credit Perspectives / PIMCO

It is always good to hear what one of the biggest players is doing in such critical times. And i have to admit that since i followed the reports they have a really good track record. So i find it interesting to hear that PIMCO is now warming up to the secondary bank loan market ( probably like this one )and that they are still largely avoiding bonds from financials. Click on the headline to read the entire report.

Es kann nicht schaden wenn man zu hören bekommt was einer der größten Spieler im Kredit und Anleihemarkt zu sagen hat. Das gilt besonders dann wenn man wie Pimco in den letzten Jahren ziemlich ein extrem guten Track Record vorweisen kann. Besonders hervorzuheben ist hier das PIMCO wohl sein Engagement im sog. " Secondary Bank Loan Market" ausbauen will ( dieses hier könnte ein gutes Beipsiel sein ) und das Bonds von Finanzunternehmen noch immer extreme Risiken bergen. Klickt bitte auf die Überschrift um den kompletten report zu lesen.



To summarize, our firm’s view was that rising global liquidity was stimulating an aggressive search for yield which, when combined with rapid innovation in the structured credit markets, was leading to excesses that dislodged the fundamental link between the prices of assets and their underlying values in the corporate bond market. We noticed another discouraging trend as a growing number of private equity deals and aggressive corporate managers were piling more debt on balance sheets through leveraged buyouts (LBOs) and increasing shareholder-friendly initiatives such as share buybacks. Finally, the lack of covenant protection and the tight level of credit spreads (Chart 1) relative to history led us to under-weight investment-grade credit risk, and favor other asset classes where we felt returns would be higher and risks lower.

....The second bottom-up opportunity where PIMCO has benefited thanks to significant credit analysis from both our corporate and mortgage team has been our belief that the U.S. housing market would surprise on the downside. We have written extensively on our housing views and our positioning across PIMCO portfolios remains under-weight housing, sub-prime and cyclical credit risks. Rising inventories, tightening lending standards, and significant sub-prime and prime adjustable-rate mortgage (ARM) resets were an early warning sign that prompted us to reduce housing and sub-prime mortgage exposure. Not surprisingly, the relationship between home prices and mortgage rates has changed amid falling prices and tightening credit conditions. The real mortgage rate (Chart 4), or the difference between the current 30-year mortgage rate and the year-over-year change in housing prices, has been rising sharply. Investors who moved into these asset classes without thoroughly analyzing risks are now clearly wishing they had done more bottom-up credit work. Fortunately, PIMCO’s bottom-up investment process prompted us to pro-actively steer our clients away from these risks.

Knowing when to avoid risk and play it conservatively, as in golf, is just as important as knowing when to take risk. At PIMCO, we saw opportunity in the energy sector and risk in the housing and homebuilder sector that markets were not priced to reflect. Fortunately for our clients with credit exposure, these bottom-up decisions have paid off as energy sharply outperformed homebuilders (Chart 5). In golf terms, our corporate bond, mortgage and credit teams have just hit a 3-wood 250 yards right on the green
Our current strategy will be to move a portion of our high-quality investments into more credit risk as opportunities present themselves. One opportunity may be in the bank loan market, which has re-priced significantly, and specifically in the credit default swap market which references bank loans. The loan credit default swap index (LCDX), which references a diversified basket of bank loan credit default swaps (LCDS), has gone from initial spreads of LIBOR+120 to over LIBOR+350 in roughly two months. This has caused the relationship of the spread on the high yield credit default swap index (HY CDX), which references a diversified portfolio of high yield CDS, and LCDX to change dramatically (Chart 6).

Banks hedging bridge loan commitments have likely influenced the move wider in LCDX and its recent underperformance versus HY CDX. Given the significant forward calendar of new issuance lined up to come to market, it is not surprising recent covenant-lite bonds and loans have come under pressure. Despite these near-term negative technical factors, our initial analysis of the putting green suggests bank loans, and specifically LCDX, have cheapened considerably.

Tightening credit conditions have also raised significant uncertainty about whether or not announced LBOs will get funded. Higher financing costs, due to tighter credit conditions and widening credit spreads, should reduce the momentum of future deals. The institutional forward loan calendar has grown significantly (Chart 7) and, as a result, the stock market could face increasing headwinds, with less aggressive private equity support and higher financing costs on future deals. In the bond market, tighter credit conditions, more robust covenant protection, and wider credit spreads are leading to opportunities for our clients. A recent bank loan deal with a spread of LIBOR+400 priced recently at a significant discount. This type of pricing is now giving us the opportunity to potentially earn significant returns on senior secured bank loans over the next several years.
PIMCO will seek to capitalize on selective opportunities in the new issue and secondary bank loan market now that terms are becoming more favorable for bondholders. Bank loans historically recover around 75% in the event of default due to senior positioning in the capital structure. Credit fundamentals remain healthy for a lot of companies, and bank loans are currently experiencing less than 1% default rates (Chart 8). What’s the big picture? At current spreads of roughly LIBOR+400, a diversified portfolio of bank loans would have to default at near 16%, assuming a 75% recovery rate, for an investor to break-even versus LIBOR. While bank loan defaults rose to 8% in 2000, a rise from the current level below 1% to anything remotely approaching 16% is highly unlikely. Clearly, technicals, not fundamentals, are driving spreads in the bank loan market.
Within the credit markets, another area of potential opportunity is in financials, which have sharply underperformed recently, with both banks and broker spreads (Chart 9) moving to levels not seen in over five years. Uncertainty surrounding sub-prime, housing and bridge loan exposure has changed the outlook for the financial sector.

While widening spreads in bank debt, bank capital securities and brokerage paper could represent opportunities, we are being highly selective in our bottom-up credit process to ensure we avoid unnecessary risks.

Credit Crunch Not Going Away / Minyanville

Mr. Practical from Minyanville has it right. The party is over...

I aslo recommend the Five Things You Need to Know: Oh, THAT Excess Liquidity; Oh, THAT Liquidity Crisis; Oh, THAT Credit Crunch; Oh, THAT Excessive Risk-Taking; Oh, THAT Consumer Slowdown that gives a good summary what happened on the day that had almost historic proportions....

Denke das Mr. Practical von Minyanville es hier treffend beschreibt. Die Party ist vorbei....

Zudem ist der folgende Link Five Things You Need to Know: Oh, THAT Excess Liquidity; Oh, THAT Liquidity Crisis; Oh, THAT Credit Crunch; Oh, THAT Excessive Risk-Taking; Oh, THAT Consumer Slowdown lesenswert. Hier wird noch einmal der gestrige (historische) Tag zusammengefasst.

Last night the European Central Bank issued a statement promising plenty of liquidity to banks. The Fed arranged a very large $24 bln in repos this morning, trying to get fresh credit in the hands of banks to deal with their current commitments. Even the Bank of Canada issued the same statement.

> In the meantime Bank of Japan & RBA have joined the party. No surprise that the ECB provides further EUR61B to boost liquidity is acting with a follow up . Looks like $130 billion wasn´t enough to calm down the market..... That was already roughly 50 percent more than after 9/11! All Central Banks have now provided close to $ 250 billion liquidity....

> In der Zwischenzeit müssen immer mehr Notenbanken zur Hilfe eilen. Keine Überraschung das die EZB 61 Mrd € nachlegen muß (95 Mrd € waren wohl nicht genug.....das waren immerhin fast 50% mehr als nach dem 11. September) . Addiert man alle Zentralbankinjektionen zusammen kommt man auf ca. 175 Mrd. €......

But all this misses the problem. The theory is flawed. Central banks promising new credit to strapped banks only helps them with their current problems. It will not get new credit into a system that can't take anymore. Banks, given their situation, are reducing drastically their new commitments, as they should. Borrowers can't afford to borrow more.

Sooner or later the market will realize that this is a credit crunch. We have not seen a real credit crunch since 1973. Go back to your history books to witness what a credit crunch does to asset prices. Pure and simple, when the borrowing dries up, there is no "money" to buy assets.

This is a process that is likely to take years to correct. It will not be a pretty process as debt gets destroyed (foreclosures) until enough of these excesses get wiped away to start anew. It was all caused by too-easy credit for too long by a Central bank not willing to let the market itself handle the allocation of capital. It insisted on providing credit cheaply when the market didn't deserve it.

So U.S. consumers have lived beyond their means for too long. They have wasted away their savings and are now in too much debt. Pure and simple