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    Daily Digest – Apr 26

    by Davos

    Sunday, April 26, 2009, 1:16 PM

  • T – 30 Minutes to Stress Test: Above or Below 3% Tangible Common Equity? (Chart)
  • Stress-Tested Banks May Struggle as Bad Assets Triple
  • Stress Test: Not Very Stressful (Interesting GDP projections)
  • Durable Goods and Global Trade – Going to the Charts…
  • Notice of Financial Default: California Develops a Mortgage Tsunami Patter Reminiscent of the 2007 Subprime Collapse. Alt-A and Option ARMs Unite.
  • Bloomberg: Mexico’s Calderon Declares Emergency Amid Swine Flu Outbreak
  • Live Avian Flu Virus Placed in Baxter Vaccine Materials Sent to 18 Countries
  • "The Great Influenza" by John M. Barry
  • GM Employee Stock Fund Dumps All Company Shares
  • New Reality Check

Economy 

 T – 30 Minutes to Stress Test: Above or Below 3% Tangible Common Equity? (Chart)

 Stress-Tested Banks May Struggle as Bad Assets Triple 

The tests on the 19 largest banks are likely to focus in part on loan quality as a measure of health. The lenders, which may need to raise $1 trillion in capital to cushion losses according to an April 23 KBW Inc. report, may have a hard time persuading investors to give them cash.

 “We’re really hesitant to put money into financials,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas, which has $1.6 billion under management. “The ambiguity is still engulfing the opportunity.”

 Stress Test: Not Very Stressful (Interesting GDP projections) 

One thing struck me right away — unless I am misunderstanding something, this stress test is not very stressful.

 Durable Goods and Global Trade – Going to the Charts… 

Boy, those are some serious binoculars they are using to look for signs. What sign, exactly, is Immelt seeing? Is it his hunch? I prefer to look at the data… let’s go to the charts, but before I do, let me address a couple of points about the charts. First of all, it is true that these charts are HISTORY indicators showing us what has already happened. Still, my point would be that one should not construe a leveling out or a bounce to be a change of trend. Once markets have fallen a large percent, the math is deceiving. For example, when an indicator such as the Baltic Dry Shipping Index falls 90+%, it can then bounce 50% off the bottom and that only recovers 5% of its previous value. Hardly the stuff to get excited over. It’s simple math, please keep it in mind. 

The second thing to keep in mind about these charts is that I can’t always get a common value on the vertical axis as they come from the Fed and they do not present all their data in the same manner, so it’s important to look at that vertical axis. Sometimes you are looking at percent change, sometimes the change in a raw dollar figures. Spend some time with each and don’t move too quickly.

The last thing to keep in mind is that most of these economic charts have experienced parabolic growth. When you look at the raw data, it may appear that a blip is occurring on the top of a chart, but when you look at the rate of change you see a completely different picture. Growth is important, so when you compare year over year figures, seeing the rate of change go negative is telling you about growth or lack thereof.

Durable Goods are a good example of the differences in charts. What are durable goods? Let’s turn to the “Investor’s Dictionary” for help:

“A durable good, or a hard good is an economics term for a good which does not quickly wear out, or more specifically; it yields services or utility over time rather than being completely used up when used once. Most goods are therefore durable goods to a certain degree. Perfectly durable goods never wear out.

Examples of durable goods include: Cars. Appliances, Business Equipment, Electronic Equipment, Home Furnishings & Fixtures, Housewares & Accessories, Photographic Equipment & Supplies, Recreational Goods, Sporting Goods, Toys & Games”

Notice of Financial Default: California Develops a Mortgage Tsunami Patter Reminiscent of the 2007 Subprime Collapse. Alt-A and Option ARMs Unite. 

To put it bluntly, there is major economic distress in the form of further collapsing housing heading down the California highway. You wouldn’t know this by looking at short term evidence. Future indicators are flashing red while many people simply choose to ignore bad news and pretend the bottom is in. They will get a rude awakening in a few months. The California economy is still in tatters with unemployment reaching 11.2% which is the highest in the post-War era. Yet some people think this is reason enough to call a bottom. What many fail to realize is the notice of default surge is starting to look very similar to what occurred in early 2007 when we were still reaching peak home prices. The only difference this time is median prices are down by 50% and there is no buffer anymore. First, let us discuss notice of defaults and foreclosures:

 Bloomberg: Mexico’s Calderon Declares Emergency Amid Swine Flu Outbreak  

April 25 (Bloomberg) — Mexican President Felipe Calderon declared an emergency in his country’s swine flu outbreak, giving him powers to order quarantines and suspend public events. 

Authorities have canceled school at all levels in Mexico City and the state of Mexico until further notice, and the government has shut most public and government activities in the area. The emergency decree, published today in the state gazette, gives the president authority to take more action.

“The federal government under my charge will not hesitate a moment to take all, all the measures necessary to respond with efficiency and opportunity to this respiratory epidemic,” Calderon said today during a speech to inaugurate a hospital in the southern state of Oaxaca.

At least 20 deaths in Mexico from the disease are confirmed, Health Minister Jose Cordova said yesterday. The strain is a variant of H1N1 swine influenza that has also sickened at least eight people in California and Texas. As many as 68 deaths may be attributed to the virus in Mexico, and about 1,000 people in the Mexico City area are showing symptoms of the illness, Cordoba said.

Obama’s Visit

The first case was seen in Mexico on April 13. The outbreak coincided with the President Barack Obama’s trip to Mexico City on April 16. Obama was received at Mexico’s anthropology museum in Mexico City by Felipe Solis, a distinguished archeologist who died the following day from symptoms similar to flu, Reforma newspaper reported. The newspaper didn’t confirm if Solis had swine flu or not.

The Mexican government is distributing breathing masks to curtail the disease’s spread. There is no vaccine against the new strain of swine flu, health authorities said.

Museums, theaters and other venues in the Mexico City area, where large crowds gather, have shut down voluntarily and concerts and other events canceled to help contain the disease. Two professional soccer games will be played tomorrow in different Mexico City stadiums without any fans, El Universal newspaper reported. Catholic masses will be held, the newspaper said, although church officials urged worshipers to wear breath masks and to avoid contact.

Schools will likely remain closed next week, Calderon said in the Oaxaca speech. The decree allows Calderon to regulate transportation, enter any home or building for inspection, order quarantines and assign any task to all federal, state and local authorities as well as health professionals to combat the disease.

“The health of Mexicans is a cause that we’re defending with unity and responsibility,” Calderon said. “I know that although it’s a grave problem, a serious problem, we’re going to overcome it.”

Normal Airport Operations

Mexico City’s international airport, which handles about 70,000 passengers each day, is operating normally, said Victor Mejia, a spokesman. Passengers are given a questionnaire asking if they have flu symptoms and recommending they cancel their trip and see a doctor if they do. The measures are voluntary, Mejia said, and no case of swine flu in airport passengers, workers or visitors has been confirmed.

Authorities throughout Central America have issued alerts to prevent the outbreak from spreading. Guatemala ordered tighter control yesterday of its northern border with Mexico, according to EFE. Gerberth Morales, who’s heading the Guatemala government’s response, said no cases of swine flu have been reported in his country, the Spanish news agency reported.

Brazil is intensifying vigilance in ports, airports and borders to check travelers’ health, luggage, aircrafts and ships in a preventive action against the outbreak in Mexico, the Agency for Sanitary Vigilance said on its Web site.

 Live Avian Flu Virus Placed in Baxter Vaccine Materials Sent to 18 Countries 

"Baxter International Inc. in Austria ‘unintentionally contaminated samples with the bird flu virus that were used in laboratories in 3 neighbouring countries, raising concern about the potential spread of the deadly disease’. Austria, Germany, Slowenia and the Czech Republic – these are the countries in which labs were hit with dangerous viruses. Not by bioterrorist commandos, but by Baxter. In other words: One of the major global pharmaceutical players seems to have lost control over a virus which is considered by many virologists to be one of the components leading some day to a new pandemic." 

Or, put another way, Baxter is acting a whole lot like a biological terrorism organization these days, sending deadly viral samples around the world. If you mail an envelope full of anthrax to your Senator, you get arrested as a terrorist. So why is Baxter — which mailed samples of a far more deadly viral strain to labs around the world — getting away with saying, essentially, "Oops?"

But there’s a bigger question in all this: How could this company have accidentally mixed LIVE avian flu viruses (both H5N1 and H3N2, the human form) in this vaccine material?

Was the viral contamination intentional?

The shocking answer is that this couldn’t have been an accident. Why? Because Baxter International adheres to something called BSL3 (Biosafety Level 3) – a set of laboratory safety protocols that prevent the cross-contamination of materials.[enphasis added – mine] T – 30 Minutes to Stress Test: Above or Below 3% Tangible Common Equity? (Chart) Stress-Tested Banks May Struggle as Bad Assets Triple Stress Test: Not Very Stressful (Interesting GDP projections) Durable Goods and Global Trade – Going to the Charts… Notice of Financial Default: California Develops a Mortgage Tsunami Patter Reminiscent of the 2007 Subprime Collapse. Alt-A and Option ARMs Unite. Bloomberg: Mexico’s Calderon Declares Emergency Amid Swine Flu Outbreak Live Avian Flu Virus Placed in Baxter Vaccine Materials Sent to 18 Countries "The Great Influenza" by John M. Barry 

"The Great Influenza" by John M. Barry

Page 112: The virus may also adapt indirectly, through an intermediary. Some virologists theorize that pigs provide a perfect “mixing bowl,” because the sialic-acid receptors on their cells can bind to both bird and human viruses. Whenver an avian virus infects swine at the same time that a human virus does, reassortment of the two viuses can ccur. And an entirely new virus can emerge that can effect man. In 1918 vetinarians noted outbreaks of influenza in pigs and other mammals, and pigs today still get influenza from a direct desentant of the 1918 virus. But it is not clear wether pigs caught the disease from man or man vaight it from pgs.We know that the virus he found in swine descended directyl from the 1918 virus, the virus he found in swine descended directly from the 1918 virus, the virus that made all the world a killing zone. It is still unclear whether humans gave the virus to swine, or swine gave it to humans, although the former seems more likely.

Page 446: By then the virus had mutated into mild form, or the swine’s immune system had adjusted to it, or both, since the virus alone seemed to cause only mild disease. Shpe did demonstrate that with B. influenzae as a secondary invader it could still be highly lethal. Later he would show that antibodies from hman survivors of the 1918 pandemic protected pigs against this swine influenza.

 GM Employee Stock Fund Dumps All Company Shares

If the people on the inside are dumping…the guillotine has dropped.

New Reality Check

So, just in case you feel a sudden urge to join the permabulls, panicky short-sellers, serial bottom-callers, and greater fool investors who’ve helped drive the market up 25 percent since it hit oversold extremes in early March (aided, of course, by relentless Washington cheerleading and smoke-and-mirrors earnings announcements), below are (just) three reports that put a slightly different spin on this allegedly bullish new reality.

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