Daily Digest

Daily Digest - June 24

Wednesday, June 24, 2009, 9:54 AM
  • Russia, Venezuela sign $4 bln joint bank deal
  • Alternate Elliott Wave Possibility...
  • 1931, again, what if?
  • Update on Bonds
  • California Collapsing (H/T Nate)
  • FDIC's Bair: 'Too Big to Fail' must end
  • Another Hotel Defaults on Mortgage Debt
  • Local Shelters Lose Food Aid Because Of Fees
  • Hey New York - You're Next After California
  • Downey Savings and Loan: The Anatomy of an Option ARM led California Banking Disaster. Other People’s Money Delusion
  • New California Law Will Have Impact on Small CA Websites Including LATOC Blogger (SuzieGruber)

Economy

Russia, Venezuela sign $4 bln joint bank deal

The bank will be 51-percent owned by Russia through the state-controlled lenders VTB and Gazprombank, with the rest going to various Venezuelan partners, Russian Deputy Finance Minister Dmitry Pankin told reporters.

The new bank is due to be created by the end of 2009, Pankin said.

Venezuela is a key partner for Russia in South America, where Moscow is trying to expand its reach mainly through arms and energy deals.

Moscow and Caracas signed arms deals worth 4.4 billion dollars between 2005 and 2007 and Russian energy groups are expanding activities in the country.

Alternate Elliott Wave Possibility..(Charts on page)

McHugh is labeling the rally off the 666 low as wave B up (the eye of the storm) with wave A having finished at that low in March. He believes that wave C will follow and that it will be devastating. I agree completely with that sentiment but am not certain of the count, not that it matters much in the short term, but in the longer term it will matter, so let’s take a look...

Speaking of the short term, this trumped up rally has been very difficult to count on the way up – almost unnatural, because that’s exactly what it was. But the recent decline that began on June 11th is very easy to count… you can see in the 10 minute SPX chart below that we had 5 clean waves down in a neat channel (wave 1), we broke that channel up with a smaller corrective channel (wave 2), and we have now begun wave 3:

1931, again, what if?

I am beginning to sense another paradoxical twist. What if the Fed is right and Angela Merkel, Zhou Xiaochuan, Warren Buffet and James Grant are wrong? And that contrary to their inclinations the American authorities are forced to moderate their monetary expansion in order not to undermine the confidence of the international community. Whilst at the same time the bond market pushes long rates higher.

Under such a scenario the debt reduction efforts of the private sector would usurp the government’s attempts at stimulus; the economy would falter once more. Back in 1931 the same thing happened. Bond prices dropped and yields rose to the level that had prevailed for the previous ten years; a feeble economy lapsed back into a deflationary spiral. Perhaps if this were to happen again, and we were once more confronted by a truly dire economic outcome, then it is conceivable that the authorities could gain the vital legitimacy necessary to engage in an unquestionably large monetary response which finally purges the system of deflation. That is when I would choose to let rip on buying commodities and cheap equities.

The key is the economy’s sensitivity to bond yields. Russell Napier argues that it would require ten-year yields of 6pc (vs. 4pc today) to knock the economy and stock market from their perch and reassert the deflationary trend. But he bases his assertion on observations taken since the early 1960s. My quibble is that today’s leverage is unprecedented and prices are falling. May’s American CPI is forecast to contract by 0.9pc YoY; they fell in April. We never had falling prices in the 1960s, 70s, 80s or 90s. I therefore maintain that it is feasible that some unquantifiable but certainly lower nominal rate could choke the economy.

Regardless, it is my contention

Update on Bonds (Charts on page)

Commodities are down sharply. That is not a good sign for the bulls as commodities and technology led this rally after the manipulation in the financials (who are also manipulating oil and other commodities). Without the leadership of commodities, further rally becomes way less likely. And beyond speculation, why would they continue to rally? Demand is certainly not strong, in fact it has fallen off the proverbial cliff.

This weekend we learned that the Fed is going to be a buyer at today’s bond auctions, but they don’t say how much and once again we return to the fantasy of QE (printing/buying our own debt) but now without any transparency whatsoever, not that there was ever any real transparency anyway. It is my belief that the $300 billion announced by Bernanke (and supposedly only $150 billion spent so far) is just the tip of the iceberg for the amount of QE that has happened in reality. Of course they don’t want their books to be audited by an independent agency, it likely won’t happen, and we’ve all seen the video of how effective and competent the internal auditor is (not).

So, the biggest weekly auction amount in history is scheduled for this week and that is the real news. More debt than there are buyers for and the Fed admits it must continue to buy its own debt. That is DEFAULT. When you can no longer finance your debts, you have failed – as in BANKRUPT!

And speaking of bankrupt, California is a disaster that is not waiting to happen, it is imploding NOW. Martin Weiss wrote a good article on California and I suggest everyone read it. With an economy larger than Russia or Canada, its collapse is not insignificant, quite the contrary, it will have a very profound effect indeed. Please take the time to read Weiss’s article - California Collapsing.

California Collapsing (H/T Nate)

California is home to the largest manufacturing belt in the United States and to Silicon Valley, the nation’s largest high-tech center.

California is America’s most populous state with 38 million people. Its GDP of $1.8 trillion is the largest in the U.S. Its economy is bigger than those of Russia, Brazil, Canada, or India.

And it’s collapsing.

Major California counties are ground zero in the continuing mortgage meltdown:

Los Angeles County with 5.32 percent of mortgages 90 days past due … Monterrey County, 8.02 percent … Imperial, 8.13 … San Bernadino, 8.66 … Madeira, 9.21 … San Joaquin, 9.53 … Riverside, 10.2 … Merced, 10.57 … and more!

California’s inventory of foreclosed homes is skyrocketing. Home prices are plunging. And the impact of surging unemployment is just beginning to show up in the data …

(More)

FDIC's Bair: 'Too Big to Fail' must end

“[Obama’s regulation is] a good opening to the process,” said Bair. “I commend the President for getting personally involved in this and taking leadership and putting his own considerable influence behind the efforts…We’re still analyzing the whitepaper and want to work with the administration and Congress constructively on this.”

“[The FDIC] is guaranteeing over $6 trillion right now,” she said. “The FDIC has tremendous exposure to the system so we would like a real say on systemic risk issues. [Reform overhaul] is an institutional issue, not a turf issue or a personality issue.”

"Still analyzing the whitepaper"? [emphasis mine]

Another Hotel Defaults on Mortgage Debt

From the WSJ: Red Roof Inn Defaults on Mortgage Debt (hat tips to all in the comments!)

Red Roof Inn Inc. ... defaulted on $332 million of mortgage debt ... Red Roof confirmed the defaults Tuesday.

All told, Red Roof's properties carry at least $1 billion in debt, including mortgages, mezzanine loans and other notes.

"As a result of the extraordinary stress in the hospitality industry and the economy overall, we have entered into some restructuring discussions with our lenders," said Andrew Alexander, an executive vice president of Red Roof.

Occupancy at Red Roof's properties, which averaged 62% when the mortgages were originated in 2007, sank to 50.7% in the first four months of this year.
The drop in occupancy rates are similar to the overall industry decline. And not only are occupancy rates off sharply, but so are room rates. Smith Travel Research reported last week that revenue per available room (RevPAR) was off 18.6 percent for the comparable week last year. I think this is just the beginning for the hotel related defaults.

Local Shelters Lose Food Aid Because Of Fees

SOUTH BEND - Three local shelters have lost the ability to acquire food from the Food Bank of Northern Indiana because they charge fees to certain residents or accept their food stamps.

It could create a financial pinch for the shelters: the Center for the Homeless, the YWCA of St. Joseph County and the Salvation Army's Adult Rehabilitation Center.
Food Bank CEO Lisa Jaworski says she regrets that those ties had to be severed, but she says her “hands are tied” by the strict federal and nonprofit rules for the two kinds of food that were provided.

Hey New York your next after California

For now, folks living in New York can watch the soap opera playing out in California from a comfortable, continent-sized distance.

But after that drama plays out, New York is next.

Smart Money: Right now, at least 47 states are facing significant shortfalls in their 2009 and/or 2010 budgets, according to the Center on Budget and Policy Priorities, a think tank in Washington, D.C. And many of those states are looking to tax hikes to help fill the gaps.

“Pretty much everyone is doing poorly,” says Kim Rueben, senior research associate at the Tax Policy Center. “It’s just a question of who’s hurting more than others.”

Downey Savings and Loan: The Anatomy of an Option ARM led California Banking Disaster. Other People’s Money Delusion.

The fact that the report tells us that Downey was unresponsive is a joke. This is like a person speeding down the highway going 100 miles per hour not “responding” to a cop and his siren. Do you think the cop would just let him go and say, “oh well, I’m sure he’ll slow down later.” It is this kind of nonsense that has made the banking industry the ultimate oligarchy in our country since they are not only guiding policy, but writing it. The case of Downey Savings and Loan gives us clear policy implications yet we are not following what is in front of us. If we keep letting the banks loot this country with the aid from the U.S. Treasury and Federal Reserve, there will be a repeat of this kind of bubble in a few years in some other industry.

New California Law Will Have Impact on Small CA Websites Including LATOC Blogger (SuzieGruber)

I just learned that California legislators in efforts to close the budget shortfall have included a provision in the latest budget that will likely result in internet affiliates pulling advertising from small business' websites. Amazon has already sent a letter to the CA state government saying they will do so if the bill passes. You can read about the details of the proposal here"

Why do i care? Because one of the websites affected is Matt Savinar's site, lifeaftertheoilcrash.net. Matt has tirelessly educated many, many people about the realities of peak oil. While his style is very direct and overwhelming for some people, I believe he is providing much needed information especially through his Breaking News page. His site caused me to wake up to the realities of Peak Oil.

What can we do? If any of you out there have been thinking about crash prep supplies or anything from Amazon, if you buy them through Matt's site, it will help the site stay afloat. www.lifeaftertheoilcrash.net.

Thanks,

Suzie 

18 Comments

Davos's picture
Davos
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Re: Daily Digest - June 24

 I think Red Roof needs some more hotels in Massachusetts!

Mass. is housing homeless in motels

Costing tax payers around $2 million
per month

Updated: Wednesday, 24 Jun 2009, 9:24 AM EDT
Published : Wednesday, 24 Jun 2009, 9:15 AM EDT

Bruce Morin
MASSACHUSETTS (WPRI) - A record number of families are being put up in motels in Massachusetts. High unemployment and the rising number of home foreclosures is the reason the state is taking this action.

Housing Massachusetts’ homeless is costing tax payers around $2 million per month. It costs an average of $85 per night to have families, including nearly 1000 children, stay in motels.

The Interagency Council on Housing and Homelessness admits that the use of motels for the homeless is not ideal, but is the best that can be done at this time.

Homeless advocates are worried that families are not getting the support of shelters with living rooms, kitchens, and play areas.

 

lundsta's picture
lundsta
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Re: Daily Digest - June 24

http://finance.yahoo.com/news/Monsanto-3Q-profit-falls-14-apf-3551521605...

 

Monsanto's profits declined more than they expected. Perhaps the NO GMO movement is taking hold? I am hoping that others are refusing their strong hold on our food supply.

FireJack's picture
FireJack
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Re: Daily Digest - June 24

What happens if california defaults on its debt? Anyone know what going on in Latvia and eastern europe? Are things about to blow up in our face?

EndGamePlayer's picture
EndGamePlayer
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How much oil . .

. . . does the US get from Venzuala?

Chart (hint . . they are our 3rd largest importer after Canada and Saudi)

Davos's picture
Davos
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Re: Daily Digest - June 24

 Hello FireJack:

I dunno. Last time, if I have it correclty, they couldn't pay they issued some sort of an IOU, which got passed around like currency, one contractor for the state sent the IOU's he got to them to pay his tax bill. Don't know how that went over.

All heck could break loose and there could be systemic waves through the market and bond markets or very little could happen.

my 2 cents

joemanc's picture
joemanc
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Re: Daily Digest - June 24

Fannie, Freddie asked to relax condo loan rules

Quote:

In March, Fannie Mae (FNM.N)(FNM.P) said it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of the units have been sold, up from 51 percent, the paper said. Freddie Mac (FRE.P)(FRE.N) is due to implement similar policies next month, the paper said.

 

In a letter to the CEO's of both companies, Representatives Barney Frank, the chairman of the House Financial Services Committee, and Anthony Weiner warned that a 70 percent sales threshold "may be too onerous" and could lead condo buyers to shun new developments, according to the paper.

http://www.reuters.com/article/GCA-Housing/idUSTRE55L39120090622

Here we go again. More government meddling in real estate, by none other than Barney Frank. When oh when will the clowns in DC learn?

dcm's picture
dcm
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Re: Daily Digest - June 24

Housing Massachusetts’ homeless is costing tax payers around $2 million per month. It costs an average of $85

found a 4 star in Boston for $81 on HotWire

is this like that Carnival Cruise Katrina thing? 

Matt Holbert's picture
Matt Holbert
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Re: Daily Digest - June 24

The problem with most of real estate is the lousy design and construction.  Red Roof is an example.  One of the all time great architectural books, A Pattern Language, discusses how important it is to have natural light from at least two directions.  Motels and most hotels only have windows on one wall.  Most this type of building will probably be razed within the very near future.  The homeless prefer tents.  Natural light from 4 sides!

I'm looking for a REIT shell -- few liabilities and few or no employees.  Does anyone know of an entity that meets these requirements?

Matt

http://MindfulCapitalClub.org

dcm's picture
dcm
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Re: Daily Digest - June 24

"The Federal Reserve on Wednesday held monetary policy steady and said the U.S. economic recession was easing, as it signaled its worries over a possible troubling downward spiral in prices were fading"

 

is that a nice way of saying that inflation is gaining? 

JAG's picture
JAG
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Re: Daily Digest - June 24

Thanks Davos for the Alternate Elliott Wave Possibility..(Charts on page) link. I read Nate everyday but I missed this very important post. Nate posted another great article by Yves on June 15th titled:

Bond Market Analysis Comparing Now to 1987 

in which Yves states that current bond market behavior portends a coming crash in the stock market of similar significance to the 1987 stock market crash.

Thanks again.

nickbert's picture
nickbert
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Re: Daily Digest - June 24

Beatings by walker? Retirees get revenge

http://blogs.moneycentral.msn.com/topstocks/archive/2009/06/24/beatings-by-walker-retirees-get-revenge.aspx

Apparently in Germany a group of elderly retirees ambushed their financial advisor (who had lost all their money), beat him with their walkers, and kidnapped him so they could beat him some more for four more days.  I know it's a violent crime and is probably a glimpse of more things to come, and I really shouldn't be laughing.  But I just... can't... help myself!  I'm a bad bad man 

Perhaps I should have put this on the Definitive Humor thread instead of the Daily Digest, but anyway Davos its yours to post up for tomorrow if you like.

- Nickbert

Davos's picture
Davos
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Re: Daily Digest - June 24

 Hello NickBert:

Wow, there was another post by someone about a financial planner who had been kidnapped and tortured. One thing I read recently in a few places is that society as a whole likes to have only one entity to blame.

Take care

On another note, the green shoots of Durable Goods looks to me like Planes, Trains and Automobiles Planes, Planes and more Planes! Another weed!

idoctor's picture
idoctor
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Re: Daily Digest - June 24

Charlie Gasparino 6/24/09

http://www.cnbc.com/id/15840232?video=1162813274&play=1

Peter Schiff

Davos's picture
Davos
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Re: Daily Digest - June 24

 cap. and-trade Bubble #5

Davos's picture
Davos
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Re: Daily Digest - June 24

 California set to issue IOUs as fiscal crisis weighs

"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state's bills beginning on July 2.

"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September and after that we see a double digit freefall," Chiang said. "Unfortunately, the state's inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses."

Davos's picture
Davos
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Re: Daily Digest - June 24

 Getting better all the time...

mrobinson's picture
mrobinson
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Re: Daily Digest - June 24

A Tale of Two Depressions.

By two credentialed gentlemen, Barry Eichengreen & Kevin H. O'Rourke

http://www.voxeu.org/index.php?q=node/3421

Woodman's picture
Woodman
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Re: Daily Digest - June 24

Those charts comparing the current great recession to the Great Depression really seem to show similar trends and that there is still the potential for much worse economic conditions ahead.  My gut feeling is continued Fed intervention could bring the current trend above the historical curve, at least temporarily, but eventually peak oil, environmental, population, and credit/borrowing limits could bring us down closer to historical low levels again.

Tom

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