The Destroyer of Finance

 The Bailout and the Abyss, a bed time story.

 I’m not so sure that the Post is all that renowned as a financial source of record, and 500 trades strikes me as a gross exaggeration in a market system that will process millions or billions of transactions a day.

 Regardless of any exaggerations, the basics of the article are true.  The most important item, for me anyway, is the note that the commercial paper(CP) markets failed.  It’s worth accessing Wisdom to learn a little about one of the world’s most fluid. liquid, and safest debt markets.

 Until last week.  The doors closed.  The liquid dried.  Almost no entity was deemed credit worthy.  Money markets supply most of the funds for this market, but they took their ball and went home in fear of “breaking the buck” which is the money market equivalent of guest starring on Dateline with Chris Hanson.

 Danger?  Only the gaping maw of darkness opening wide.

 Melodramatic?  How about requiring a retitling of the Great Depression to the First Depression, like the Great War was retitled the First World War.

 With the CP markets dry, many companies then turn to “backstop” credit lines, taken for just this sort of situation.  Banks give them out expecting that they would never be used, charge nominal fees for the unused portion of the lines, and frequently the credit lines carry interest rates very unfavorable to the bank.

 Exactly the sort of thing many banks can’t afford these days.  The sort of thing that when lenders and finance guys gather around a table these days and hear that a backstop is being drawn for $X million dollars, be it 5, 20, or 100, renders the room totally silent.  Then, with an echo of terror in his eyes, the managing lender comments, “You make sure they know we can’t afford to keep funding this… this line was never supposed to be used.”  The threat implied that the client needs to figure out a different way to get their financing or face having the credit line pulled out from under them, and damn the legal commitment.

 And should the CP markets remain dry, banks would be run under.  Eventually a bank would be forced to cancel a credit facility or refuse to fund a client.  That’s not the sort of thing that stays quiet in the financial world.  That bank itself would likely find it difficult to get funding on the CP market… and then, as rumors of liquidity problems spread, more of the bank’s own creditors would being to deny funding.  Then you’d get the inevitable bank run.

 And nothing kills a bank faster than a good bank run.  If it’s just one bank (IndyMac), then fine.  It’s a good headline.  The CP markets could bring down many banks, and not just your corner community bank.  Second and third tier banks.  If you’re in Texas, I offer Frost Bank, the Midwest I could go with Harris (even though Harris is backed by Bank of Montreal, but something of that size)… how about National City.  It’s already on the rocks anyway.  Bank of the West for those in the Rockies.  I can’t think of anything on the east coast.  Such a situation could even bring down a top tier institution such as B of A, Citi, JPM Chase, Wachovia, or Wells Fargo.  A couple years ago I might have tossed WaMu into that list, but, well….  And these are just names of banks for examples… don’t read too much into this.

 And so what if some banks fail?  Just some banks, some fat cats with outsized bonuses they get by outsourcing jobs.

 Some credit for businesses large and small.  Payrolls would come in late, capital expansion projects delayed, cancelled, or abandoned in process.  Well… I think you can pick up the thread of the story from here by cracking the cover on the Great Depression.

 The bailout?  All but required.  It makes no sense to exclude “foreign” banks that have significant operations in the US.  Back to Harris Bank… it’s owned by Bank of Montreal, yet in the US Harris employs thousands and has some $40 billion in assets.  Should Harris not qualify?  Why should UBS’s American operations not qualify? 

 And the bailout is needed sooner rather than later.  It’s not so much the timing as a need to “show me the money” and prove that the bailout is real and not a tease.  If it drags, the CP markets (which function for now) may run dry again, although extending gov’t protection to money market funds helps to a great extent.

 The further question being how the world is going to react to $700B of new Treasury bills.  Despite having crowned China as the world’s most powerful economy, that doesn’t mean the US can’t still taken the world down with it… but China can save us.  And the Oil states.  Vested interests to see us through things.  Weaker dollar is probable, but the strength the dollar has shown the last couple months gives us a little cushion.

 The UK is apparently not considering such a bailout as feasible citing budget deficit problems.

 We stand at multiple cross roads.  At one, the choice between principle and ruin on the one hand and moral defeat and the chance of economic salvation on the other.  A different cross road at the same location gives us the choice between the chill of chaos and the warmth of growth which we have enjoyed the benefits of for nigh thirty years in one direction and the other direction being sure certainty in safety and the drag of stagnation.

 Lessons learned?  Statistical models are amazing, sophisticated, elaborate and yet the numbers never capture the whole story… or if they do the human discounts the downside while emphasizing the upside.  Quantitative finance has allowed the banking world to operate on a razors edge, always at the limit.  This drives progress all over the economy and in people’s lives (see: Mortgages, Housing Boom Driven by) and for every boom and bust, the bust never takes us as far back as we were before the boom.  However, I suspect the human side of the equation fancied itself too invulnerable in its quant armor and subordinated the flesh and blood judgement of intuition and reason to the cold numbers of a model.

 Chaos is the way.  The right way, rather.  For now, I believe that the country is had its fill of fear and stress.  The US just wants to sit down and rest… make all the wories go away.  We will not choose the warm embrace of growth for the fear of the chaos that comes with it.

 And the mantle of economic leader is awful heavy these days.  Mayhaps someone else could lug it around for a while.  Ah, here’s China with its government managed economy, so strong and bright.  No doubt we’ll follow their lead now.

 As to the other cross roads… well, faced with the choice between certain doom and possible salvation, the choice is clear.  Not even Congress is that dumb.  Not that the situation won’t be seen as the opportunity to arm twist another economic stimulus out… for Main Street, you see.  We can only hope the deed is done before the current spark of hope fades again… it may be harder to relight it later.

 Fear drains the soul, and I am so tired.  I see uncertainty, resignation, and even sometimes despair all around me… and why not?  We’ve done everything we can, and now we dust our hands and say que sera, sera? 

 What will be, will be indeed.

 Keepin’ it surreal,

 Tommy Lasorda

 Rockin’.

The Labor Department reported that consumer prices jumped 1.1 percent last month, much worse than had been expected. Energy prices rocketed upward by 6.6 percent, reflecting big gains for gasoline, home heating oil and natural gas.

Bernanke’s comments underscored the bind the central bank is in, caught between a faltering economy that is struggling to overcome a prolonged housing slump and a severe credit squeeze, and the risk that inflation would move higher.

Many analysts believe that the central bank is likely to leave interest rates unchanged for the rest of the year out of concern that any tightening of credit policy could send the economy into an even worse tailspin.

Over the past 12 months, consumer inflation is up by 5 percent, the largest year-over-year gain since a similar 5 percent rise in May 1991.

 Yes, and 1991 was a grand time in the economy.

Core inflation, which excludes energy and food, showed rising pressures too with an increase of 0.3 percent in June, up from a 0.2 percent gain in May and the biggest one-month rise since January.

This increase reflected a 4.5 percent jump in airline ticket prices, the biggest one-month rise for airline fares since March 2000.

 Airline tickets?  Really?  Good lord, talk about discretionary spending.

 Some good points from this and other stuff.

 A) The media is focusing on the total inflation number now, trumpeting the 1.1% increase in June instead of giving center stage to the “core” inflation number.  While I’m still TOTALLY baffled why airline tickets would be included in anything “core”, I take comfort in knowing that the media is almost never ahead of the curve, or even on the curve.  If they are focusing on something terrible, the worst is already past.

 B) I saw on the news last night (while on the treadmill) a graphic that 81% of Americans have negative feelings about the economy now, up from 61% a few months ago.  This is a great sign because, sorry for the offense, the public is generally clueless when it comes to the economy and its opinion really only reflects what has happened in the last 3 to 6 months.  Now that it’s a general concensus that the economy is terrible and doomed, it’s probably a signal that the worst is over.

For informational purposes:

1 month rankings for discussed or relevant stocks:

DRYS
ISRG (still not crazy about this one, so suck it)
UNP
*SP 500 Index*
BNI
NATI
USG
BAC

Strummin,

Jesse Jane

March 18th, 2008.

 Despite the relatively good showing on the market yesterday, I still do not see anything good in the near to medium term future.  The Dow is at just under 12,000 before open today, but I believe we’re much more likely to see 11 or even 10,000 before we see 13,000 again.

 Technically, I admit defeat because the DOW did make it back to 13,000, if only for a few days.  In my heart, though…

 I fucking told you so.  I hell damn god told you so.  Shit.

 Also on that day nearly 4 months ago, I mentioned the falling dollar.  Today we’re about in the same arena as we were back then as far as the strength of the dollar goes, but we’ve lost more ground against the Euro: they’ve taken a harder stance on interest rates and inflation and their currency has appreciated as a result.

 AND on that day I congratulated myself for pinning down National City as “bank most likely to fail”.  Well, Indymac failed first (although I doubt I would have thought about that one if you’d given me 6 hours and a blank sheet of paper), but if you bought NCCstock 4 months ago, I doubt you’re really pleased with the result.  (You’ve lost 64% of your money as of right now and NCC actually had to release a press statement denying that they were experiencing a bank run yesterday.)

 I’d still stay away from NCC.  And Fannie Mae (FNM) and Freddie Mac (FRE).

 If you’ve gotten into Dryships, and you’re wondering about the wisdom or you’re not sure you can handle the volatility, I say: patience.  Wait for it.  I wish I could have timed my investments better and jumped in at $68 instead of 85.  And 105.  And 85.  And 85.  And 79.  And 77.  And 68.  And 75.

 Yet Dryships has STILL outperformed the Dow, NASDAQ, and SP 500 over the last month, last 3 months, and last 6 months.  So, you haven’t lost as much money as you could have.

 Have faith in DRYS.  By the way, the acquisition of Ocean Rig is officially complete, if trivia like that is important.

 Where’s the market heading now?  I no longer have the deep feeling of gloom that I did four months ago, and even though I questioned my gut feeling as the market rode back up to 13K it never felt right.  Bank failures are lagging indicators of the economy.  Banks that have failed or will fail were mortally wounded months ago (although a bank run, senator inspired or not, is still the most lethal thing to a bank).

 I think we’re near the bottom.  Are good times ahead?  Let’s not start the party yet.  The DOW could still touch 10K, but I think a return to 12 thousand is more likely than 10, and there is still plenty of turmoil ahead.

 Kneel before boats,

 Rembrandt

 You know its a bad day when an analyst cuts your target stock price to $0.  Ah, Indymac Bank… how will we survive without your no income verification subprime loans?

 Recap of Glacier National Park?  Not yet.

 Good times to be a bank?  Not yet.

 Light at the end of the tunnel?  Not yet.

 Bad news: Oil at $143.  Don’t think I need to explain this one.

 Bad news: Expected corn harvest drops due to flooding.  7% drop!  F!

 Bad news: Eurozone inflation up to 4%.  Bad because if the EU Bank raises rates to fight inflation and the US doesn’t, it will drive down the strength of the dollar more… making oil more expensive.

 Bad news: EU telecom merger undone.  When companies start becoming prudent with their mergers, it’s generally not a good sign.

 Good news: I got a new phone this weekend?

 Here’s to the lucky ones,

 Charles VIII of France

 For today’s recap of the stock market, I require audience participation.

 Please find a water hose of some sort: garden, detachable sink faucet, shower head, fire hose, super soaker, etc.  Ensure ready supply of water.  Really even a regular bucket of water will do.

 Engage the supply of water (hose or bucket) in such a manner as to apply a steady steam of water against your person.

 Now scream.

 Louder.

 While continuing the above, view the picture below

 If you’d like you could maim yourself now, but that’s likely taking things too far.

 Given that 1 in 5 stocks across all three major markets (NYSE, AMEX, NASDAQ) was actually green (up) today, odds are pretty good you might have lost some money today.

OIl at $140?  You think Congress can wave a wand and make it go back to $60?  Oil futures are trade globally now… outlaw them in the US, their trading will go to London, Paris, Geneva, Hong Kong, Singapore, Abu Dhabi, Dubai, Kuwait City, Moscow.  It could go anywhere.  The people who testify to congress that congress could legislate oil back to $60?  Want to bet that they’re getting killed being on the wrong side of some oil derivatives?

 Anyway, I have changed my mind on the gas tax repeal.  In the short run, if you lifted the federal gas tax ($.18/gal) I do think the price of gas would drop.  It probably wouldn’t drop 18 cents (the refineries would want to get some of their lost profit margin back), but probably 10-15 cents.  I forgot, and was reminded, that the gasoline retail market is such a competitive one that gas stations make next to no profit on the gas they sell, relying instead on snacks and sodas for the Hamiltons.  This is assuming, of course, that it’s not the only gas station within miles or right next to the rental car place at the airport.  Or at a boat dock.

 Anyway, I was remebered this in Omaha when I was startled to note that “super” (mid grade) gas there was 10 cents cheaper than regular (premium was 30 cents higher than mid grade).  Ultimately, I learned that mid grade is cheaper because it has ethanol in it and the other grades apparently don’t (and since it’s NEBRASKA, corn ethanol is cheap).  Also, it’d be interesting to know what the MPG difference was (ethanol has a significantly lower energy content / volume, and thus less MPG than gasoline… no, octane has nothing to do with energy content, look it up) and whether or not it was worth the 10 cent discount to get the mid grade.

 Ah, stats!

 Boats float, banks sink;

 Colonel Tom Parker

 Death of Blog?  Not yet.

 If you are experiencing heavy breathing you are: A) working out, B) having sex, C) in the middle of an asthma attack, D) scared about the economy, or E) far too big a fan of blog.  Or a combination thereof.

 A) Good for you

 B) Gross.  Pics or it didn’t happen.

 C) Don’t you know steroids make you hit baseballs better?

 D) see below

 E) Three letters: T R O.

 Ok, so the market is pretty rocky these days.  A couple things:

 The whole “credit” thing isn’t done yet.  Just because “we” forgot about it for a month and the DOW got back to 13,000 doesn’t mean anything really changed.  All that did was demonstrate that the market is merely a highly efficient reflection of inefficient human perception.

 Global trade isn’t going to vaporize.  China still needs loads of raw materials, and the other Asian countries aren’t just scratching their asses.  Also, China isn’t going on vacation after the Olympics.

 We can live with $130 oil.  I know this seems incredulous, but it will not end life as we know it.  It will shift our behaviours in sometimes subtle and sometimes obvious ways.  Life will, however, continue much as before.

 Oil reserve does not equal oil supply.  Well, at least not in the present time frame.  All that matters for the next 20 years (at least) is flow rate.  Everyone knows we have enough Dino to rock our asses off for 20,30,50 years.  How fast can you slurp the milkshake is what we need to know.  As long as it’s 85 million barrels a day, oil will keep getting expensiver (just not necessarily at the same rapid pace).  “Expensiver” is not a word, I know.

 Dryships!  Why hast thou forsaken me!!!!!  If you bought DryShips before the death deying plunge, stay strong.  The company is good and very profitable and will continue to be very profitable into the future.  The price will recover, you just needs a HANS device to keep from getting fatal whiplash.

 Going forward, 6th-10th business day generally means no blog: tooooo busy.

 Also, next week I will be contemplating the cool air of Montana’s mountains while preparing my soul for the brimstone fired heat of the Texas summer.

 I am civilized,

 David Rockefeller

 Quite a day, no?

 Following up a great day yesterday, we get today featuring some reaming worthy of an edgy porn flick.

 How does everyone feel about $139 barrel oil?

 How about a larger than expected jump to 5.5% unemployment?

 How about corn (and wheat) jumping on too much rain in the midwest?  Hadn’t heard much about grains from me in a while, eh?  They’ve been moderating a bit… actually, the price of wheat has even still fallen quite a bit from the bire days of a few months ago.  Still, they ain’t cheap.

 Insurance giant AIG, already beset by financial woes, now faces probe by SEC regarding how they represented the value of various subprime mortgage contracts.

 AMD can’t pull its fist out of its ass long enough to beat Intel on the open market, so they’re taking to the courts.  I’m no Intel fan so I wouldn’t mind seeing a win for AMD, but it wouldn’t change the fact that AMD shat on numerous opportunities to really make some inroads against Intel without any outside help.

 I spent a few hours this morning running through the mind numbing excercise of trying to forecast the interal profit margin for a particular product at the bank for the next 18 months.  Couple highlights: its internal only, meaning its fake, hypothetical profit to begin with, and secondly how the hell am I supposed to say what our interest margin on this is going to be in 18 months?  Have you looked out the window recently?

 Rangers drafted Smoak and I approve.

 Can’t wait to drive to Omaha,

 Nathan Hale

 Those cell phone commercials with the wizard might have to get redone as Verizon is attempting to acquire Alltel for a paltry $27B.  This doesn’t seem to make a whole lot of sense given that a private equity group paid $27.5B for Alltel a little over a year ago.  Could be just another example of the irrational exuberance that existed in the world of finance as little as a year ago.

 In other acquisition deals that involve “B”s, Smucker’s thinks you need some caffeine with your jam, buys Folgers from Proctor & Gamble for $3B.  In a modestly humorous twist, PG shareholders will end up owning 53% of the new Smuckers.

 Some more better-than-a-shiv-in-your-crotch news on the economy reveals that US worker productivity was up while wage increases remained moderate, yet measurable.  So, things could be better, but at least you don’t have a shiv in your crotch.  Of course, we might be saying that about our economic read outs for a while…

 In the end, the market indexes mostly tanked after Moody’s (the rating agency) announced they were considering cutting the credit ratings for financial insurance giants MBIA and Ambac.  This won’t affect your car coverage, but it might shake your city’s ability to fund new roads and stuff.  Well, not in Texas since we apparently contract EVERYTHING to be toll roads.

 MBIA and Ambac both dropped at least 15% almost immediately, so probably not your best day if you’re still holding that bag this evening.

 In my continuing fascination: part 3: day one of how Finland does do teaching the childrens.

 So now that Hillary is officially unofficially done, we can start the VP guessing game.  Yeah.

 Hmmm… short post today.  Sounds good to me.

 Greatness,

 Angelina Jolie

 First, a correction: SINO (Sino-Global Shipping), which I covered a few days ago, has significantly more shares outstanding than I initially believed.  I’d like to revise my targets from $12 to about $7, or $8 if you are feeling more aggressive.  Since SINO dropped 10% today to $13, I hope no one bought in at $14.

 Second: man, are the US auto makers screwed.  This might seem obvious, of course, but why don’t I add a little detail to the pornography.

 A carmaker, generically, makes cars and/or trucks.  The US automaker has a business model (all three use the same model): sell cars for little to no profit and sell trucks for big money.  See, those crazy import companies, they price their cars so cheap the good patriotic American companies can’t really get a good profit in the car market.  They could have tried something radical like justifying a higher price by creating a better product, but that’s one of them dangerous communists would do.

 Better dead than red, I say.

 Anyway, the US makes elected to essentially tread water in the car market while exploiting the truck market for big margins.  Think it costs GM/Ford/Chrysler much more to make a pickup truck (think Ram/F-series/etc) than a car?

 Shiiit son.  Heck, naw.  Hell, they be easier to build, don’t take much extra metal, and aren’t legally required to do so good on all that fuel efficiency, e-missions, and safety bull crap.  All you’s gotsta do is take a big shitty metal box, slap some gaudy pastic moulding on the sides, drop in the biggest, baddest, loudest engine built on 1960’s technology you can find, then mark up the cost so high it makes every chaw dippin’ roper dump a spittoon on his head tryin to get one.

 Or you can close up the back of the pick up, bolt in some extree seats, and make sure the dern thing be so big that it’ll crush any car (and associated fellers inside) that it happens to run into.  Then mark the pricer up even higher and you’ll make every broad with a pack of brat-devils soak their panties with lust.

 Shucks, and everybody knows only a real ‘Merican can build a truck.  Can’t trust them foreigners to do it right, ya hear?

 Yee haw!  Boy howdy!

 ‘Course, now-a-days don’t no one want a pickem up truck.  That’s a problem.  A conversation with one of my stalwart coworkers, late of Detroit:

 Coworker: “What’s it going to take to turn this thing around?”

 Me: “A lot of pain.”

 CW: “Think they’ll have to break free of the unions?”

 Me: “Sure wouldn’t hurt.”

 So, sorry to anyone that is in or related to an auto workers union, but the unions are part of the problem now.  I’d say about 40% of the problem, with the other 60% going to past and present strategic management of the US auto companies.

 I understand all the great things unions brought to the labor scene.  As a supporter of the free market, I identify the labor unions as one of the great achievements of the development of the western market economy.  The fact of the matter is that without the US government, the auto union would fail because the big three would drop all the union workers like a rock, and that for years now the unions have stifled competitive innovation and economic growth in the US auto scene in particular and the Midwestern economy in general.

 I enter into evidence the state of Michigan.

 I digress.  Just don’t look to the auto industry to save us.

 Bernanke and Fed are now more worried about inflation, suggest more rate cuts are not forthcoming.  This gives the purchasing power of the dollar a little bump, making imported items a little cheaper.

 The essential story of the day, however, was more fretting and hand wringing about the health of financial institutions.  Today it was Lehman’s at center stage, but it could be a different bank tomorrow.  Never know these days.

 Still a good read: day 2 of visiting the Nordic education system.

 Also, the primary season sort of ends tonight with the voting in ethnically diverse Montana and South Dakota.  Regardless of the outcome, the AP reports that Obama has won the necessary number of delegates for the nomination.

 I’ve got your value right here,

 The great Rafael Nadal