Daily Digest

Daily Digest - May 15

Friday, May 15, 2009, 10:09 AM
  • * * * * Four Stars * * * * Naked Short Selling - Redefining Systemic Risk (Video)
  • Obama Says U.S. Long-Term Debt Load ‘Unsustainable’ (Update1)
  • China's yuan 'set to usurp US dollar' as world's reserve currency
  • Only Monkeys Pick Their Bottoms ~ Hugh Hendry
  • Retail Sales
  • RealtyTrac: Record Foreclosure Activity in April
  • US Dollar Inded Enters Downtrend (Chart)
  • Japanese opposition would avoid U.S. dollar bonds if elected
  • Dow 4,000 still in the cards? (Movie on page)
  • The Cybersecurity Act of 2009 (S. 773) grants Obama power to shut down internet, ignore laws (Video)
  • Debt (Musical Comedy)
  • Government Receipts Down 34% Year over Year (Chart)
  • Joseph Saluzzi on Stocks & Gold (Video)
  • Glenn Beck: The World is Dumping the Dollar (Video)
  • Post Carbon Institute New Fellow (Chris Martenson) (H/T DamnTheMatrix)
  • GM, Chrysler to cut up to 3,000 dealers: sources
  • Barry Ritholtz's Book: Now shipping: Bailout Nation
  • FDIC Planning for a Huge BANK FAILURE?

Economy

* * * * Four Stars * * * * Naked Short Selling - Redefining Systemic Risk (Video)

Obama Says U.S. Long-Term Debt Load ‘Unsustainable’ (Update1) 

By Roger Runningen and Hans Nichols

May 14 (Bloomberg) -- President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

Holders of U.S. debt will eventually “get tired” of buying it, causing interest rates on everything from auto loans to home mortgages to increase, Obama said. “It will have a dampening effect on our economy.”

The president pledged to work with Congress to shore up entitlement programs such as Social Security and Medicare and said he was confident that the House and Senate would pass health-care overhaul bills by August.

“Most of what is driving us into debt is health care, so we have to drive down costs,” he said.

Credit-Card Fees

Obama also prodded Congress to pass restrictions on credit- card issuers, saying consumers need “strong and reliable” protection from unfair practices and hidden fees.

“It’s time for reform that’s built on transparency, accountability, and mutual responsibility, values fundamental to the new foundation we seek to build for our economy,” the president said.

Obama called on Congress to pass a credit-card bill he can sign into law by May 25 that would clamp down on what he says are sudden rate increases, unfair penalties and hidden fees. He wants the measure to protect consumers, strengthen monitoring and impose penalties for credit-card company violations.

The U.S. House of Representatives passed the credit-card bill last month after adding a provision requiring banks to apply consumers’ payments to balances with the highest interest rates first. The bill also imposes limits on card interest rates and fees.

The Senate is debating its version today. It also would require credit-card companies to give 45 days’ notice before increasing an interest rate. It would prohibit retroactive rate increases on existing balances unless a consumer was 60 days late with a payment.

(More)

China's yuan 'set to usurp US dollar' as world's reserve currency

Professor Roubini, of New York University's Stern business school, believes that while such a major change is some way off, the Chinese government is laying the ground for the yuan's ascendance.

Known as "Dr Doom" for his negative stance, Prof Roubini argues that China is better placed than the US to provide a reserve currency for the 21st century because it has a large current account surplus, focused government and few of the economic worries the US faces.

In a column in the New York Times, Prof Roubini warns that with the proposal for a new international reserve currency via the International Monetary Fund, Beijing has already begun to take steps to usurp the greenback.
China will soon want to see the yuan included in the International Monetary Fund's special drawing rights "basket", he warns, as well as seeing it "used as a means of payment in bilateral trade."

Prof Roubini's warning followed the US government's latest economic data that showed producer prices in April experienced their biggest year-on-year drop since 1950, falling 3.7pc.

The number of Americans claiming unemployment benefit for the first time rose by 32,000 to 637,000 in the week to May 9. The increase meant the total number of people claiming benefits stood at to 6.56m, a record high for the 15th consecutive week in a row.

But neither the gloomy data, nor Prof Roubini's verdict on the greenback's future, held back the markets. The Dow Jones traded up 59.89 at 8344.78 in lunchtime trading.

Only Monkeys Pick Their Bottoms ~ Hugh Hendry 

Yet Another Greenspan Housing Bottom Call
By Barry Ritholtz - May 13th, 2009, 7:20AM

We are finally beginning to see the seeds of a bottoming [in the housing industry. The U.S. is] at the edge of a major liquidation [in the stock of unsold properties, which may help to stabilize prices].
—Alan Greenspan, May 12 2009

I don’t know, but I think the worst of this may well be over.
—Alan Greenspan, October 2006

Why does the public — and the Press — constantly seek out reassurances from the same people who misled them time and again in the past?

That was the question on my mind as I pondered yet another declaration from Alan Greenspan that the Housing Market has bottomed. That he has consistently made similar such statements before is cause for doubting him here. That these prior bottom calls were as far back as 2006 is cause for ridicule.

Few people have been worse than Greenspan in analyzing the Housing market. In fact, the only person / group I can think of with a consistently worse track record than Greenspan’s of analyzing the housing market was the group he spun his foolishness to yesterday: The National Association of Realtors.

Indeed, consider this golden oldie from David Lereah, the NAR’s chief economist, circa December 2005:

Home sales are coming down from the mountain peak, but they will level out at a high plateau, a plateau that is higher than previous peaks in the housing cycle.

That 2005 declaration, made 5 months after Hosuign prices had topped out, was typical of the reality denial we saw from the NAR over the entire housing cycle. They continuously got it wrong, spinning all data, good or bad, in a shamelessly self-promotional manner.

That this group of blind flacks paid Greenspan $100,000 plus to spin them lies is somewhere between ironic and pathetic. At least it wasn’t taxpayer monies . . .

Retail Sales

April Retail Sales were weaker than expected, falling .4% headline and .5% ex auto’s vs the consensus of flat and up .2%. Also, March was revised lower both headline and ex auto’s. Sales ex auto’s and gasoline fell .3%. Sales fell in furniture, electronics, food/beverages, department stores, and online. Gains were seen in restaurants/bars, sporting goods, health/personal care and in building materials. All the green thumb gardeners out there can count as many shoots as they want but the US economy still comes down to the activities of the US consumer and the consumer is still retrenching, paying down debt, saving and getting their credit lines cut. This is a long term process and with a still difficult labor market, won’t change anytime soon.

RealtyTrac: Record Foreclosure Activity in April

From RealtyTrac: Foreclosure Activity Remains at Record Levels in April

RealtyTrac ... today released its April 2009 U.S. Foreclosure Market Report(TM), which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 342,038 U.S. properties during the month, an increase of less than 1 percent from the previous month and an increase of 32 percent from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.

"Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level," said James J. Saccacio, chief executive officer of RealtyTrac. "Much of this activity is at the initial stages of foreclosure - the default and auction stages - while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It's likely that we'll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months."
emphasis added

US Dollar Inded Enters Downtren (Chart)

Japanese opposition would avoid U.S. dollar bonds if elected

It is not just the Chinese making noises about the reliability of the United States as a debtor. Now, Japanese politicians are doing it too. In fact, the Democratic Party of Japan (which is not in power) have said they would not buy U.S. bonds if elected. An excerpt from a BBC story covering these comments reads as follows:

Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected.

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar.

Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits.

But, he added, it would continue to buy bonds only if they were denominated in yen - the so-called samurai bonds.

“If it’s [in] yen, it’s going to be all right,” Mr Nakagawa said in an interview with the BBC World Service.

“We propose that we would buy [the US bonds], but it’s yen, not dollar.”

However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa’s party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party.

While the Democratic Party is unlikely to gain sway over the electorate in Japan, their comments do reflect a growing unease with the United States’ deficit spending. With dissatisfied noises coming from America’s two largest creditors, the Obama Administration’s policy options for continued reflation appear more limited. In essence, America can inflate and deficit spend at its own risk. Unfortunately, there are not very many other policy options available.

Dow 4,000 still in the cards? (Movie on page)

As you all know, I think we are in a secular bear market rally/cyclical bull market right now. So, yes, this has been and may continue to be a powerful up-move in shares worldwide. However, I am certainly not convinced we are off to the races for the long-term here.

Now that we have gotten the stress tests out of the way and banks are falling all over themselves to issue shares, you might think this signals the beginning of a renewed upswing, underpinned by the green shoots of economic recovery. But, the signs of underlying weakness have begun to pop-up. Here are but a few examples:

Hitachi posts record loss for Japanese manufacturing company
Slowdown in UK manufacturing sector almost stands still in March
Chinese exports fall sharply
Let’s not fool ourselves that the incipient signs of recovery means any recovery is going to be robust or that it will be long. Leo Kolivakis makes a good case for a ‘W’ recovery i.e. double dip. Right now, I would put myself in the VL camp, double dip with a weak longer-term outcome.

What does this mean for the stock market? I think it means caution is warranted. We have already seen a powerful rally and the stress tests are the buy-the-rumour, sell-the-news event in my opinion. Taking money off the table now is a good idea.

While I think shares can rally again for another two quarters due to upside earnings surprises, the outlook is murky beyond that point. I am not saying a multi-year recovery and rally is impossible. I AM saying that the fundamentals do not justify a secular bull market.

So, if you think this is a bear market rally you will be interested in the four posts below.

The Cybersecurity Act of 2009 (S. 773) grants Obama power to shut down internet, ignore laws (Video)

Debt (Musical Comedy)

Government Receipts Down 34% Year over Year (Chart)

The U.S. reported the first budget deficit for April in 26 years, recording a shortfall in the month that usually sees a jump in individual tax payments before the Internal Revenue Service’s mid-month deadline.

“When the government can’t post a surplus in April, you know things are dire,” said Richard Yamarone, director of economic research at Argus Research Corp. in New York. “It’s going to take a very long time until we see anything close to a balanced budget.”
Stripping out receipts ONLY, we see a whopping 34% decline from April 2008.

Joseph Saluzzi on Stocks & Gold (Video)

Glenn Beck: The Word is Dumping the Dollar (Video)

Post Carbon Institute New Fellow (Chris Martenson) (H/T DamnTheMatrix)

Chris Martenson, Fellow

Chris Martenson, FellowChris Martenson is the creator of The Crash Course, a 20-chapter online video course that educates viewers on our broken economic system, the crisis of population demographics, and Peak Oil. Since its launch in 2008, The Crash Course has been viewed over 200,000 times online and has sold over 20,000 DVD copies. Prior to spending four years educating himself and developing the course and other materials to help individuals understand and take action, Chris was a Vice President at a Fortune 300 Company and spent over ten years in corporate finance and strategic consulting. He has a PhD in pathology from Duke University and an MBA from Cornell University.

GM, Chrysler to cut up to 3,000 dealers: sources 

GM, facing a U.S. government-imposed deadline of June 1 to restructure or file for bankruptcy, is expected to send termination notices to up to 2,000 dealers -- a third of its roughly 6,000 U.S. dealers, the sources told Reuters.

Chrysler, which filed for bankruptcy on April 30, will also tell up to 1,000 of its 3,189 U.S. dealers it is terminating their franchise agreements, according to the sources who asked not to be identified because the controversial closure plans have not been yet announced.

Barry Ritholtz's Book: Now shipping: Bailout Nation

FDIC Planning for a Huge BANK FAILURE?

Late reports this evening are citing an anonymous source that says the FDIC is preparing some sort of superfund that could handle the failure of a large “systemically important financial institution.”Reuters reports:

“Another source familiar with the FDIC’s plans said on Tuesday that the agency was considering seeking to create a new fund to help deal with any resolution of systemically important financial institutions.”

The details on this story out of Reuters are very vague so this is mostly speculation, but such a development would not be shocking to anyone familiar with the state of the U.S. banking sector. FDIC losses are quickly mounting and they are certainly ill-prepared to handle a major failure. Shoring up the FDIC is a wise insurance policy if nothing else. Or they could be preparing some U.S. banks for the same fate as Chrysler and GM. A welcome development in my opinion.

As regular readers know, the recent government induced rally created the perfect environment in which to raise capital, but these capital raises only place band aids on axe wounds. The patient is suffering from cancer and we’re performing chemo to no avail. The tumors must be removed. Instead, we continue to allow the banks to operate with the toxic assets on their balance sheets. The government knows real estate losses and credit card losses are mounting. They also know the TALF & PPIP will not succeed as the banks have no incentive to sell assets.

Is there a chance the economy rebounds sharply and these banks are able to earn their way out of this crisis? Certainly, but the odds of a prolonged and sluggish recovery are far too high in my opinion to allow these banks to operate in their current state. The government knows they can’t prop up 8,000 banks forever and I suspect they are none too pleased with the stress test results if the economy were to remain sluggish for longer than expected. The only resolution: FDIC receivership. In this case, perhaps a rather large one. 

9 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - May 15

IMHO The Refco Video is a really important watch. I wouldn't miss it for anything. Marsh and I watched it in bed last night on the Mac and just stared at each other when we found out about Refco.

For me, Refco's bankruptcy really hit close to home - we almost lost money by being ready to trade with them.

When we sold our house in 2004, (the other home we built ourselves,) we had a great deal of our net worth extracted from the sale of it and moved it into a Charles Schwab account.

Schwab didn't have a currency trading desk. Gold was at, if I recall mid 500's, they didn't do commodities either, but at the time I felt okay with GLD.

We opened 2 smaller accounts. One for commodity trading and one for currency trading.

Schwab had Refco listed or was somehow "partnered" with Refco and we moved several thousand over to Refco. I did it as a hedge, I was mindful that if the dollar went below 1.25 (EUR/USD) that it could cliff dive and wanted to hedge some against a depreciating dollar, knowing we'd be buying land an paying for building materials in the not too distant future.

Right before the dollar stepped off that cliff I was helping a friend lay out his house that he was building on 5 acres. It was a monumental project (8,000 square feet with out buildings) that he was undertaking himself and he was up to his neck with several commercial properties/projects. I had just turned off the chain saw and felt my (at the time fancy PDA phone) Palm Treo vibrating. The caller ID was out of state and unfamiliar. My hands had oil and leaves on it and I remember thinking if I answer this I'm probably going to be smearing poison ivy against my ear. But something told me to take the call.

I am grateful I did!!!!!!!!

The call began with Mister. Those calls never are good. I was then informed by a broker at Schwab that Refco clients were being called and advised they should IMMEDIATELY liquidate their Refco account and demand a check be FedEx'd and if they didn't they stood to loose everything and deal with bankruptcy courts. "Gee, their a brokerage, do you really think they will go chapter 7 that quickly?"

"Would you like me to connect you with Refco now?"

My answer.

My DUH!

"Please."

The Refco guy told me they were getting a lot of Schwab client calls, and that they'd be operating under the auspices of chapter 11 and my money would be fine.

"FedEx it. Good luck to you." (I flew for an airline that issued its' employees IOUs after paychecks bounced and that had its' planes repossessed all while telling passengers and employees chapter 11 would work fine, the airline employees repossessing the planes knew more than we did and rumors were Gospel.)

The check didn't come Friday.

Or Monday.

But late the following week it showed up and it cleared.

Five years later I watch a video linked off "some" blog and learned what the mainstream media couldn't find with both hands and the lights on even if they had GPS. The blog is one I respect, Nate's and the ironic thing, Nate is an ex-airline captain also. 

As the late Kurt Vonnegut used to say: "Someone should look into this." I mean really, how is it that everyday bloggers, an ex pilot, ex scientists, ex whatever saw what economists missed? How is it bloggers do an in-depth job reporting and the mainstream news is bottom picking while we still have thousands of feet to fall?

Needless to say, that experience made me mindful of just how precarious things can be when the big domino's begin to fall on one another.

Take care.

 

mpelchat's picture
mpelchat
Status: Silver Member (Offline)
Joined: Sep 10 2008
Posts: 214
Re: Daily Digest - May 15
Davos wrote:

Five years later I watch a video linked off "some" blog and learned what the mainstream media couldn't find with both hands and the lights on even if they had GPS. The blog is one I respect, Nate's and the ironic thing, Nate is an ex-airline captain also. 

As the late Kurt Vonnegut used to say: "Someone should look into this." I mean really, how is it that everyday bloggers, an ex pilot, ex scientists, ex whatever saw what economists missed? How is it bloggers do an in-depth job reporting and the mainstream news is bottom picking while we still have thousands of feet to fall?

Hey Davos, great video by the way,

Why can economists not see this happening?  Well some do and the MSM does not want to hear from them or they try to discredit them. 

Why?  MSM is controlled by the people this information can hurt. 

Why?  The one thing and only one thing we as a people can truly do to injure the people that own MSM (bankers/wall streeters) is it to have a run on the bank.  They lose in this scenario.  We lose too but only faster than we are now. 

Why do they lose? They lose because all the leveraged money would be unravel reducing there purchasing power much faster than they want it.  They are not positioned just yet to be big winners in a great deleveraging action. 

However with Obama's recent comments (we can not sustain borrowing like this forever, gee how do you think we would fund your 3.4 trillion dollar budget, dah), it seems that the president has been called into action to begin this process.

The if is going away fast, when is the real question. 

Hold onto your hats it is going to be an interesting ride.

green_achers's picture
green_achers
Status: Silver Member (Offline)
Joined: Jan 3 2009
Posts: 205
Re: Daily Digest - May 15

Dumb question alert, but which video is the "Refco Video?"

gyrogearloose's picture
gyrogearloose
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 537
Re: Daily Digest - May 15

"China's yuan 'set to usurp US dollar' as world's reserve currency"

So once the little green bits of paper have been printed into oblivion....

people switch to little red bits of paper because that have "value"

If it wasn't so sad it would be comical

 

 

Cheers Hamish

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - May 15

  Hello Green Achers:

My bad, and appologies, no where on it does it say Refco. It is the systemic risk (the top) video take care

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - May 15

 Zero Hedge: What Is Enough Risk? "I Will Know It When I See It"

Quote:

After decimating the Federal Reserve's Inspector General, and exposing her for the uninformed figurehead she is, Rep. Alan Grayson continues steamrolling through the swath of executive-level stupidity on both Wall Street and in D.C., and demonstrating just how clueless those who should be in control and anticipate the next potential black swan event, really are.

At a hearing yesterday, Grayson received witness opinions from the following "erudite" professionals, some of whom may very well be next in line for the critical post of systemic regulator.
Ms. Patricia Guinn, Managing Director, Global Risk and Financial Services Business, Towers Perrin;
Mr. J. Robert Hunter, Director of Insurance, Consumer Federation of America;
Mr. Martin F. Grace, James S. Kemper Professor, Department of Risk Management and Insurance, Georgia State University
Mr. Scott Harrington, Alan B. Miller Professor, Wharton School, University of Pennsylvania.
Mr. Baird Webel, Specialist in Financial Economics, Congressional Research
The bottom line, as Scott Harrington of the Wharton School said, is that nobody has any idea how to quantify the risk of a major outlier event, but everyone will likely "know it when they see it." It is absolutely terrifying that we are nowhere better off in terms of risk quantification today, than we were before the Lehman bankruptcy, and yet the administration keeps throwing money at insurance companies and AIG hoping the problem will go away. With $1.5 quadrillion of total notional derivatives in circulation, it is obvious that nobody can predict just how and when things will go wrong. But by merely printing more cash and hoping that will be sufficient is the worst possible approach to this problem.

Jasenica's picture
Jasenica
Status: Bronze Member (Offline)
Joined: May 6 2009
Posts: 35
Re: Daily Digest - May 15

In my opinion it is clear that the lunatics are running the asylum.

philv's picture
philv
Status: Member (Offline)
Joined: Oct 6 2008
Posts: 13
State departement going cheap

An article from CNN highligting the fact that the state department can't afford to pay local staff in foreing US embassies a competitive salary anymore :

http://www.cnn.com/2009/POLITICS/05/13/state.employees.pay/index.html

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - May 15

Recession storms across Europe

http://www.abc.net.au/news/stories/2009/05/15/2572306.htm


Germany has registered its worst output performance on record - falling 3.8 per cent in the first quarter. (ABC News)

Recession storms have barrelled across Europe as data reveals the extent of the damage to Germany and France, but the International Monetary Fund (IMF) has forecast the world economy will turn the corner by 2010.

Germany registered its worst performance on record when its output was shown to have shrunk 3.8 per cent in the first quarter, while French gross domestic product contracted 1.2 per cent over the same period and Italy fell by 2.4 per cent.

The gloomy news from western Europe was reflected further east, with Romania and Austria becoming the latest countries to officially slide into recession while Hungary and Slovakia also registered sharp falls in output.

However Europe's leading stock markets all rose, mirroring a trend in Asia and Wall Street and reflecting a growing belief the crisis had bottomed out.

"We still see a recovery in first semester of 2010 and the beginning of the turning point in October, November or December," IMF managing director Dominique Strauss-Kahn said.

The global recession is also hitting hard in Japan, where the country's second-largest bank, Mizuho, recorded a net loss of $7.6 billion, while electronics giant Panasonic posted a $5.2 billion loss.

Both companies have blamed their losses on the credit crunch and the strong value of the yen.

Worst on record

The quarter-on-quarter contraction in Germany, the world's biggest exporter, was even steeper than the 2.2 per cent fall recorded in the final three months of 2008, officials said.

The worse-than-expected German result - economists had forecast a drop of 3.2 per cent - was the worst since records began in 1970.

"This very bad news, which was broadly expected, had demonstrated the large dependence of the German economy to foreign trade," said Natexis economist Costa Brunner.

"But the good news is that the worst is behind us."

An official EU estimate showed the 16-nation eurozone contracted a record 2.5 per cent in the first quarter.

However Europe's main stock markets shrugged off the data, with London's FTSE 100 index adding 0.36 per cent in late morning trade.

Frankfurt's DAX 30 climbed 0.13 per cent and the Paris CAC 40 increased 0.53 per cent.

"This time around, the worst really seems to be over," said Carsten Brzeski, an analyst at ING bank.

"Looking ahead, the second quarter has the potential to surprise to the upside, boosting stock markets," he said.

US treasury secretary Timothy Geithner said earlier this week that the financial system "is starting to heal" as a response to government efforts to get more credit flowing, including moves to clean up so-called toxic assets that are weighing on banks' ability to lend.

- AFP

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