Yesterday didn’t see much volatility – but we did see some weakness. Part of that was Mike Mayo’s comment about bank loans losses expanding – coupled with the forecast of bond defaults rising. The financial stocks started to see selling pressure as the realization that the rally in the financials was predicated on a freeing up of credit and that the coming Obama Plan was going to create a light at the end of the tunnel - which still seems to be far off.
The problem – the Geithner plan was NOT going to work (or very limitedly). The reason was simple – Financial institutions that hold the toxic assets want to sell them at higher prices than the buyers are willing to pay for. They have been keeping these prices high (and some would argue artificially). It’s NOT that they are illiquid because there are no buyers, it is that they are illiquid because the sellers do not want to sell them at the bid prices.
In steps Barney Frank and Congress – if they can water-down the accounting standard to a "mark-to-model" and let the banks determine the value (rather than a market price) – the banks will be able to keep the toxic prices artificially high and not have to sell them and avoid insolvency. I was aghast with Congress’s support of such measures – in my book Congress has given banks a free pass to actually “cook the books” – I don’t say that lightly, because inh is past accounting firms that had done just that “marking to models” have been busted for artificially inflating prices. Ironically the mark-to-model method doesn’t just water-down the standards, it also water’s down Geithner’s plan – since banks will use a new model to pump up the value of these assets, do you really think anyone will buy them at these NEW HIGHER prices?
And you wonder why China is concerned about our dollar and demanding a new reserve currency? Simple – if Tax Payer money (100s of billions, if not trillions) are used to prop up the banks and now Congress is giving them a free pass to “cook-the-books” – any investor financing our debt should rightfully be concerned.
Peter Schiff wrote a good article about this: http://news.goldseek.com/EuroCapital/1238778900.php
______________________________________________
GM prepares for bankruptcy
It looks like it is in the cards and GM is preparing for possible bankruptcy as the management continues to find a way to slash costs. They need to slash about 50% of the debt and also almost another 50,000 jobs by the end of 2009 and that STILL might not be enough to avoid bankruptcy.Bond holders look out – corporate bond prices tumble to 5-10 cents on the dollar as the possibility looks as if these 5 and 10 year bonds may never come to pass. The restructuring is also completely uncertain – the government will no doubt have an active role in it – but who knows what will become of GM – other than GM will now stand for Government Motors!
Of course people are still buying the stock – don’t ask me why, hope, patriotism, “buy America”? who knows. For now – even if it avoids it and gets another government handout – at some point the government’s ownership will be so big that it might as well be bankrupt or nationalized.
_________________________________________________
Defaults are up
As I mentioned yesterday – Jim Reid (of Deutsche Bank) expected default rates on bonds to exceed 50%. Well this morning Bloomberg reports that 35 companies defaulted in March (the highest number in a single month since the Great Depression) – according to Moody’s.
So far almost $1.3 trillion of losses (and/or) write-downs have hit financial companies worldwide and according to CNBC (I haven’t seen it yet) in the Financial Times (or London Times) – expectations are for $3 or $4 trillion of losses are to come before all is said and done. That means we are (almost) half way there.
2009 doesn’t seem to be the year to see any recovery in the economy – maybe 2010 (if we are to believe any of these reports).
________________________________________________
Earnings Seasons kicks off
Great – well Alcoa, which has seen a rocky ride of late, will be kicking off the earning season after the close. Only time will tell – but for now the stocks is seeing a little negative pressure in the premarket.
________________________________________________
Futures Pre-market
Futures are seeing pressure – the spreads are in – so expect the ARB traders to short the cash to cover the futures position at the opening – thus putting sell pressure on stocks at the opening.
_________________________________________________
Support / Resistance
As I mentioned the other day – those resistance levels needed to break and hold before they became supports. We didn’t have a big sell off yesterday – but the market could not hold those levels.
INDU 7500 (7750) 8000 (We came off 8000 – can we close above it and turn that resistance into a support. For now it doesn’t look like it. 7750 is the short-term support or pivot point)
NDX 1250 / 1300 (We are still above 1300 but the futures are pointing lower. Unlike the INDU the NDX stayed about 1300 going into the end of the day. The question is can it remain up there.)
SPX 800 / 850 (We never go to 850 and we started to slid a little yesterday)
RUT 400 / 450 (Just below that 450 number)
The resistance is seeing lots of push-pull. Those that are trying to keep the 3 week rally a live and those that are unloading for profits (or going short)
=-=============================
Gold 850 (Gold snapped 900 and the next stop will be 850 – which should be short-term support. There seemed to be, just like with treasuries, some unloading of positions to step in a buy equities.)
Silver 12 (We are right above 12 in the futures – 11 could be in the cards if 12 doesn’t hold.)
__________________________________________________
Conclusion
Moody’s reporting defaults on the rise on going to increase, London (or Financial) Times reporting losses could hit 3 or 4 trillion, new accounting rules to keep banks solvent, and GM looking to shed 50,000 more jobs and 50% of their debt (or face bankruptcy) – yeah that’s all great news. I really am not trying to be pessimistic – I hate all this garbage.
However, the market is the market and we ALL borrowed to live a little higher on the hog (Companies, Government, and People) – so let’s get this cleaned up FAST and find a bottom. The problem that I am really upset about is all this intervention and changing of the rules. We have bankruptcy courts – let the government help companies that file bankruptcy and do it in a controlled manner (even if it takes 6 months to a year) at least we KNOW what the balance sheet REALLY looks like. Let’s get the government to balance the budget and debt (not spend and hope on GDP growth in the future).
What upsets me is not the market trying to correct itself – it is that circumvention from letting it do what it needs to do – and that IS find a bottom. These accounting rule changes allow toxic assets to stay on the books and otherwise insolvent banks with tax payers money remain in business (even though the math on the balance sheets makes no sense). Would it suck if Citi failed or went through a structure bankruptcy, or spun off several parts of the company? Sure it would – but if the company is going to have to survive own that is sometimes what needs to be down. But that is NOT what happened – instead our government has given them money from multiple sources (FED, TARP, Direct Investment, etc.) and not once – but multiple times. It is now own 40% - 80% by the government (whether or not you want to include debt obligations or not). So how and when WILL we know if Citi can stand on its own? And when will tax payers get their back? I have a bad feeling the answer to both of these questions is never. It is possible that Citi will have to spin off companies, face bankruptcy, or other liquidation events. Look at what happened with GM – we gave them money 3 times and billions – we just gave them billions and not even after a week of the government giving them billions – the government says that bankruptcy is probably in the cards. Thanks Government for blowing 10s of billions on GM – when they are just going to face bankruptcy ANYWAY!
When will the people seriously wake up to this. Sure the economy stinks and the stock market has gone down – but it NEEDS to do that to flush out the crap and all the leveraged loans and with that some people and companies fail. We don’t need the government tossing OUR money after bad! That just prolongs and makes the problem worse.
But this accounting standard thing is just the worse – it seriously makes me sick. It’s as if they want to keep the party going.
You (or should I say Barney Frank) can choose to Ignore Math (water down accounting standards), but at the end of the day you can’t avoid math (changing the accounting standards doesn’t mean that they are NOT toxic assets anymore.)
No comments:
Post a Comment