Problems In Credit Markets Continue:

February 21 – Financial Times : “Credit markets were thrown into fresh turmoil yesterday as the cost of protecting the debt of US and European companies against default surged to all-time highs. The sharp jump, which rivalled the market swing at the height of last summer’s credit shake-out, came as investors unwound highly leveraged positions in complex structured products. The move was in part prompted by fears of further unwinding as investors rushed to exit before conditions worsened. ‘There’s a domino effect taking place,’ said Mehernosh Engineer, credit strategist at BNP Paribas. ‘We are unwinding three years of excesses in the space of three days.’ The cost of insuring the debt of the 125 investment-grade companies in the benchmark iTraxx Europe rose by more than 20% to as high as 136.9 basis points… That compares with about 51bp at the start of the year.”

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February 21 – The Wall Street Journal (Carrick Mollenkamp): “The global financial crisis, sparked by troubles in risky mortgage investments, is rapidly spreading into a much larger area: the market for securities tied to the credit of the world’s corporations. U.S. and European indexes that track the likelihood of corporate defaults are flashing red as traders and investors fret about the outlook for the global economy and the possibility of blowups among some $6 trillion in complex securities tied to the value of corporate bonds… While defaults among companies remain relatively low, the indexes’ moves could prove to be self-fulfilling prophecies, incurring heavy losses for investors and making it even harder for people and companies to borrow money. Adding to the anxiety: Analysts can only guess at the volume of investments tied to the indexes, who is holding them and what it would take to trigger a full-scale selloff.”

February 20 – Bloomberg (Abigail Moses and Shannon D. Harrington): “The cost of protecting corporate bonds from default soared to a record as investors purchased credit-default swaps to hedge against mounting losses in the $2 trillion market for collateralized debt obligations. ‘The market is full of rumors of unwinding of CDOs, and the price action suggests that people believe the rumors,’ said Peter Duenas-Brckovitch, head of European credit trading at Lehman… ‘It sort of has that Armageddon feel, and the market is feeding on itself.’ Constant proportion debt obligations, which package indexes of credit-default swaps, may have to unwind about $44 billion of assets, UniCredit SpA analyst Tim Brunne in Munich said… Some so-called synthetic CDOs that sold credit-default swaps on an estimated $1 trillion in debt also are at risk as investors grow concerned about plunging market values, Morgan Stanley analysts led by Sivan Mahadevan wrote… ‘The mark-to-markets on these have got to be pretty nasty,’ said Byron Douglass, an analyst at Credit Derivatives Research LLC… ‘I would imagine that as spreads go wider, more and more CDOs are probably being unwound.’”

February 19 – Financial Times (Chris Hughes): “Credit Suisse cast itself as the champion of risk management and transparency among investment banks when it unveiled record annual profits last week. But Tuesday’s revelation of a $2.85bn mark-down in its trading book has undermined the reputation for prudence that it has so assiduously tried to cultivate. Losses in the… bank’s structured credit book emerged early last week, although Brady Dougan, the chief executive, says he was unware of the situation when he presented its results on February 12. The difficulties centre on the bank’s trading inventory in residential mortgage-backed securities (RMBSs) and collateralised debt obligations (CDOs)… As the losses worsened, the bank was unaware of what was going on… The result – a $2.85bn hit on the trading book which, after adjusting for lower revenue-related bonus payments and tax, will dent first quarter net income by $1bn.”

February 20 – Financial Times (Gillian Tett): “US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch. The use of the Fed’s Term Auction Facility…saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress… However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.”

February 21 – Bloomberg (Aaron Kirchfeld and Neil Unmack): “Dresdner Bank AG, Germany’s third-largest bank, agreed to rescue its $18.8 billion K2 structured investment vehicle, joining Citigroup Inc. and HSBC Holdings Plc in putting capital at risk to bail out investment funds… Dresdner…will provide a credit line to enable K2 repay all of its senior debt… Dresdner will cut the size of the fund, which has been reduced from $31.2 billion since July, according to the statement.”

February 20 – Bloomberg (Neil Unmack): “Standard Chartered Plc abandoned a plan to refinance its $7.15 billion Whistlejacket Capital Ltd. structured investment vehicle, the largest SIV run by a bank to collapse. The London-based bank blamed the ‘continuing deterioration in the market’ for its decision… Whistlejacket will become the sixth SIV to default if it doesn’t make a payment by Feb. 21 when a three-day grace period ends…”

February 22 – Bloomberg (Christopher Condon): “Northern Trust Corp. agreed to provide capital to some of its money-market funds if they suffer losses on debt issued by Whistlejacket Capital LLC and White Pine Finance LLC. The… bank may provide as much as $229 million to eight funds managing net assets of $85.7 billion…”

February 20 – Bloomberg (Patricia Kuo and Edward Evans): “KKR Financial Holdings LLC, Kohlberg Kravis Roberts & Co.’s $18 billion publicly traded credit fund, delayed repaying some of its asset-backed commercial paper and started restructuring talks with its creditors…. About half the debt will be due by March 3 instead of Feb. 15, with the rest owed on March 25. The talks come less than six months after the fund received a $230 million cash infusion from investors after being hurt by losses on residential mortgages…”

February 21 – Bloomberg (Darrell Preston): “The collapse of the auction-rate bond market, where state and local governments go to raise cash, demonstrates that regulators are no match for Wall Street. Hundreds of auctions have failed this month, sending borrowing costs as high as 20 percent because dealers from Goldman Sachs Group Inc. to Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped using their own capital to support the sales. Regulators, who allowed the manipulation of bids and lack of information to persist even after two probes in the past 15 years, are now watching a $342 billion market evaporate at the expense of taxpayers. Inadequate disclosure ‘may have masked the impact of broker-dealer bidding on rates and liquidity,’ Martha Haines, head of the Securities and Exchange Commission’s municipal office, said… ‘The large numbers of recent auction failures, which are reported to have occurred due to a reduction in bidding by broker-dealers, appears to indicate those concerns were well founded.’”

February 22 – Bloomberg (Jeremy R. Cooke): “California, Florida schools and the operator of John F. Kennedy International Airport joined a growing list of municipal borrowers exiting the U.S. auction-rate bond market as record failures push taxpayer costs higher. Thousands of auctions run by banks to set rates on the debt failed this month as investors shunned the securities and bankers refused to submit bids, sending interest costs to 10% or higher on some bonds. Auctions covering as much as $26 billion of bonds a day failed to attract enough buyers since Feb. 13…”

February 22 – Bloomberg (Jenny Strasburg): “AQR Capital Management LLC’s largest hedge fund fell almost 15% this year through Feb. 15 as market swings tripped up computer models the managers use to make trades… The assets of AQR’s Absolute Return fund dropped to $2.9 billion last month from $4 billion in the fourth quarter… Quantitative managers who rely on computers to make trades have struggled as global equity markets declined…”

February 20 – Bloomberg (Pierre Paulden, Caroline Salas and Jody Shenn): “A year ago $20 million would have gotten Luminent Mortgage Capital Inc. access to $640 million in loans to buy top-rated mortgage-backed securities. Now that much cash gets the firm no more than $80 million. ‘There’s nobody out there trying to lend money on securities,’ said Luminent CEO Trezevant Moore. Six lenders are offering five times leverage… while a year ago, 20 banks extended 33 times, he said. Wall Street firms, reeling from $146 billion in losses on their debt holdings, are fueling a credit crisis by clamping down on lending to investors and hedge funds that use borrowed money to purchase securities.”

February 21 – Bloomberg (Christopher Condon and Michael McDonald): “State regulators are scrutinizing sales of auction-rate securities by closed-end mutual funds as investors complain they can’t get out of the investments, which were billed as the equivalent of cash. Massachusetts Secretary of State William Galvin asked nine fund companies for information about failed auctions that left investors unable to sell their holdings, his office said in a statement yesterday. Ohio Attorney General Marc Dann may file lawsuits after state funds bought the securities, spokeswoman Jennifer Brindisi said yesterday in an e-mail. ‘I wanted something as good as cash, and now I’ve got a lot of money in there that I needed to get at quickly,’ Aaron E. Some, an investor in Delray Beach, Florida, said… The investor said he has $4.5 million tied up in auction-rate securities issued by closed-end funds.”

February 21 – Bloomberg (Hugh Son): “MasterCard Inc., the second-biggest payment-card network, said it may be unable to sell about $252 million in auction-rate securities because of a ‘failure’ of the bidding mechanism… ‘There may be no effective mechanism’ for selling the securities, which are collateralized by U.S. student loans, the firm said.”

February 20 – Financial Times (Robert Cookson and Gillian Tett): “International regulators are stepping up pressure on the financial industry to introduce a clearer system for settling contracts after a corporate default in the $45,000bn credit derivatives market. In particular the New York Federal Reserve and UK’s Financial Services Authority are urging industry associations such as the International Swaps and Derivatives Association…to introduce binding rules about how credit default swaps (CDS) contracts are settled in default. The moves come amid growing expectations that corporate bond default rates will rise sharply in the next couple of years. It also comes amid signs that some mainstream investors are becoming uneasy about the ability of the CDS infrastructure to withstand a wave of defaults – particularly as settlement procedures are still relatively untested. Settlement has become a particular concern because the CDS market has expanded so dramatically this decade that the volume of derivatives contracts can sometimes be ten times bigger than the underlying cash bonds on which the CDS are based.”

February 20 – The Wall Street Journal (Rob Curran): “Options can offer investors protection against sharp moves in the value of their stock. But some observers think surging demand for options may be increasing the frequency of big market swings. Through options, investors get the right to buy or sell stock at fixed prices. The Wall Street banks that broker those deals end up taking the other side of the trade. If their clients make money, the banks lose. To offset that exposure, banks have to ‘delta hedge.’ That means selling stock when clients make bets that prices will fall and buying stock when clients stake out positions that will pay off if prices rise. The more a stock rises or falls, the more a bank must buy or sell to hedge its risk. As a result, brokers are buying when markets rise and selling when they fall, and they’re doing so in greater volumes. That may well be exacerbating stock moves in each direction, said Lars Kestner, a managing director in equity derivatives at Deutsche Bank…”

February 21 – Bloomberg (Jody Shenn): “Bank of America Corp., Citigroup Inc., and the eight other U.S. commercial banks with the largest portfolios of mortgage-backed securities boosted holdings of ‘non-agency’ home-loan bonds by $48 billion last quarter as prices were tumbling, according to Barclays Plc analysts.”

February 21 – Bloomberg (Pierre Paulden): “The ratio of high-risk, high-yield loans trading at distressed levels has surged to 8.13%, the highest in five years, from 4.65% at the end of January, according to Wachovia Corp. Distressed loans, defined as those that trade below 80 cents on the dollar, may have a 25% chance of defaulting within a year…”

February 22 – Bloomberg (David Mildenberg): “GMAC LLC, the lender partially owned by General Motors Corp., agreed to loan as much as $750 million to its residential mortgage unit as it seeks to sell a business that finances vacation resorts. Residential Capital LLC borrowed $635 million under the agreement yesterday…”

February 20 – Bloomberg (Bryan Keogh): “A record 41 companies with high-yield, high-risk credit ratings are in danger of breaching terms of their loan agreements within 12 months as the slowing economy cuts into corporate profits, Moody’s… estimates.”

February 18 – Bloomberg (Gonzalo Vina and Jon Menon): “Northern Rock Plc, which suffered the first run by U.K. bank depositors in more than a century, may remain nationalized for years to come, according to the chairman appointed by Prime Minister Gordon Brown’s government. ‘We are clearly talking about a period of some years,’ Ron Sandler…said…”

Food Inflation:February 19 – Financial Times (Chris Flood and Javier Blas): “Coffee, cocoa and tea markets are nearing boiling point, with prices at multi-year peaks as supportive demand and supply conditions and fears about foodinflation have fuelled high levels of speculative buying. ‘Tight fundamentals tend to exacerbate speculative investment,’ says Nestor Osorio, executive director of the International Coffee Organisation…”

February 19 – Financial Times (Javier Blas): “Tea prices are likely to jump to an all-time high this year, underpinned by production disruptions in Kenya… In the latest sign of rising global food inflation, wholesale tea prices surged last year to an annual average of $1.95 a kilogram, a 6.5% increase from the previous year and the highest annual level since 2002. Average tea prices “are expected to reach even higher and possibly record levels” in 2008 following a 10% reduction in shipments from Kenya…”

Metals:

Gold surged 4.8% to $946, and Silver jumped 5.4% to $18.03. May Copper rose 7.5%. April Crude gained $3.64 to $99.09. March Gasoline jumped 3.5%, and March Natural Gas gained 2.1%. March Wheat increased 2.1%. The CRB index surged 3.8% to a new record (up 11.1% y-t-d). Coffee jumped to a 10-year high, increasing y-t-d gains to 19%. The Goldman Sachs Commodities Index (GSCI) rose 3.5% to a new record (up 8.2% y-t-d and 46.8% y-o-y).

China continues to deal with two main concerns: Record inflation, and what to do with all of those devaluating dollars?

February 19 – Bloomberg (Nipa Piboontanasawat): “China’s inflation accelerated to the quickest pace in more than 11 years after the worst snowstorms in half a century disrupted food supplies. Consumer prices rose 7.1% in January from a year earlier… Food prices soared 18% after blizzards paralyzed transport systems and destroyed crops.”

February 22 – Bloomberg (Nipa Piboontanasawat and Li Yanping): “China… said inflation will remain at a high level in the first half of 2008 and the central bank will use interest rates to control prices. China ‘needs to bring out monetary policy to control demand expansion and stabilize inflation expectations,’ the People’s Bank of China said…”

February 20 – Bloomberg (Tian Ying): “China’s passenger car sales rose 19.8% in January on demand ahead of the Chinese new year. Automakers in the country sold a total of 661,900 cars during the period…”

February 19 – Bloomberg (Belinda Cao): “China will explore more channels to invest its $1.5 trillion currency reserves, the world’s biggest, for ‘higher returns,’ the central bank said. The government will allow local companies and individuals more leeway to convert their yuan holdings into foreign currencies to invest overseas…”

India is set to become the third largest economy in the world by 2020

February 19 – Bloomberg (Subramaniam Sharma): “Salaries in India are set to rise at the fastest pace in the world this year as a real-estate boom and the addition of capacities spur demand for skilled people, Hewitt Associates Inc. said. Wages in India will rise an average 15.2% this year, the sixth successive annual increase of more than 10%…”

February 22 – Bloomberg (Kartik Goyal): “India’s inflation accelerated more than expected to a six-month high in the first week of February as prices of vegetables, fruits and lentils rose. Wholesale prices climbed 4.35%…from a year earlier…”

Global Inflation:

February 20 – Bloomberg (Jennifer Ryan): “U.K. money supply growth unexpectedly accelerated in January, the Bank of England said. M4…rose 12.9% from a year earlier, compared with 12.3% in December…”

February 21 – Bloomberg (Simon Kennedy): “French inflation accelerated in January to the fastest pace in at least 12 years, led by higher food and energy costs. Consumer prices climbed by an annual 3.2%, up from 2.8% in December…”

February 21 – Financial Times (Ralph Atkins): “An inflation-beating 5.2% wage increase secured by German steelworkers… stoked fears that stubbornly high eurozone inflation pressures would prevent the European Central Bank from cutting interest rates in the near future.”

February 21 – Bloomberg (Simone Meier and Joshua Gallu): “Swiss producer and import prices jumped to the highest level in almost 20 years in January, adding to signs that inflation pressure is mounting. Prices for factory and farm goods as well as imports increased 3.7% from a year earlier, the biggest gain since Sept. 1989…”

February 22 – Bloomberg (Flavia Krause-Jackson and Giovanni Salzano): “Italy’s inflation rate for frequently bought goods such as food and gasoline surged to the highest since in more than a decade… Consumer prices for frequent purchases jumped 4.8% in January from a year earlier…”

February 19 – Bloomberg (Jacob Greber): “Australian inflation may accelerate to almost 4% as a labor shortage worsens, central bank official Malcolm Edey said… The striking thing is the contrast between domestic and international conditions,’ Assistant Governor Edey told business leaders… ‘The Australian economy to date has stayed robust and the main domestic challenges are those of strong demand, tight capacity and inflationary pressures.’”

So whats going on?

The global repercussions of last summer sub-prime melt down are still rumbling. We have yet to see what will really be revealed as to the write-downs financial institutions are going to have to take.

Inflation around the world is still rampant (yet another reason to own gold and silver), and shows no signs of slowing down.

Bernanke’s attempts at re-starting the economy are having a predicatable effect, he adds money to the money supply, the dollar continues its slide.

Emerging markets are still growing, including China, India, and especially Brazil, but all are dealing with the spectre of global inflation.

The globe is still flooded with dollars, and they are sloshing around violently trying to find a home. Money changers in China don’t even want to take dollars anymore, and thats a bad sign.

February 22 – Bloomberg (Hamish Risk): “Mathematical models that traders use to calculate prices in the $2 trillion market for collateralized debt obligations don’t work anymore, according to UBS AG. The so-called correlation model, which shows the odds of one default by an investment-grade company spreading to others in a group, now exceeds 100%…said Geraud Charpin, a structured credit strategist at UBS… ‘The banks realize the model doesn’t work and it needs to be changed,’ Charpin said… Banks are changing the model by reducing the amount of money they expect to recover when a company defaults to 30% from 40%. That means they have to protect against bigger potential losses by purchasing more credit-default swaps, driving prices of the contracts to the highest on record.”

So much for Wall Streets Boy Wonders.

Jim Rogers, speaking to a group of Fund Managers in Japan, said that the US Economy ‘Is completely out of control.’

A pretty grim diagnosis.

The solution is sound money. Value money.

Gold and Silver.

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This entry was posted on Friday, February 29th, 2008 at 2:37 pm and is filed under 3 - Understanding The Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.