Wednesday, February 28, 2007

Warnings

Yesterday's global stock market weakness is a warning bell of worse to come, not some passing "expected correction".
  1. The yield curve inversion (Fed Funds minus 10 year Treasury yield) has now reached 75 basis points, a situation that statistically signaled a recession 80% of the time.
  2. Real estate (an extremely important sector, see Feb. 25 post below) is continuing to weaken. The ABX indexes are still plunging and serious weakness is now apparent all the way to the AA tranches. This is not just market psychology, either. The underlying mortgage-backed securities are all reporting interest shortfalls (the amounts can be found on the same link as PDF documents). Take a look also at the CMBX indexes linked to commercial mortgages - they are plunging now, too: the BB tranche went from a spread of 200 bp to 322, the BBB- from 75bp to 155 bp and the BBB tranche from 50 bp to 112.
  3. The CDX indexes of US credit default swaps just took massive hits yesterday. The high yield (aka junk) category spread jumped by a massive 40 bp to 252 bp and the investment grade by 5 bp to 35bp. I think there is much more weakness ahead for the CDS sector as the virtuous cycle turns vicious.
  4. Both the yen and the swiss franc strengthened considerably against the dollar (yen from 120.50 to 118.20, the franc from 1.24 to 1.22). Their carry trades, the providers of extra cheap global financing for speculative purposes, are in unwinding mode.
  5. Speaking of unwinding, financial leverage has reached every nook and cranny of the planet from Australian mines to Zimbabwean stocks. It took years for this condition to arise and the reversal won't just cause a solitary hiccup.
Most of the money lost in markets is due to "bargain hunting" or "doubling down" after strong exit signals are mis-interpreted as buying-opportunity corrections. Don't try to catch falling knives.

4 comments:

  1. When I heard about the currency rate changes, especially the yen--I immediately thought of the carry trade you've been talking about. Definitely looks like some unwinding is in order for that area.

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  2. You can also look at the EUR/JPY cross FX rates. Though not as immediately important as the USD/JPY any weakness of the euro vs. the yen will only aggravate things further.

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  4. Why Banks are going Out of Business?

    Since late 2006, 288 banks closed their doors, while other major banks are in the process of bankruptcy. Indy mac, countrywide, washington mutual, chase wholesale and lately on the verge of a merge wells fargo and wachovia, just to mention some. People are terrified to loose all their savings, so they’re saving money in their homes instead. That is a scary situation for america and the whole world. Which leads me to this question: What is happening to the world?

    Remember 5 years ago?
    We used to spend money on real estate investments, luxury cars, vacations and we still had some money left, money wasn’t an issue. Back then some people looked at all these spending as a temporary ride, while others thought this dream will last forever. The problem was that 90% of us thought this dream will last forever, unfortunately the banks were part of this category and that’s where the economy crisis started.

    We can blame each other or we can blame ourselves, but looking for faults will not fix anything. Many people are completely innocents, they just wanted to have a more comfortable lifestyle, but others (banks, mortgage brokers, loan officers, real estate professionals, etc) wanted to get rich from these innocent people. Why innocent people need to pay the price? Unfortunately that is how the system works in america; rich people’s money always will play a roll over the ones that don’t have as much.

    We’ve trusted banks with our money, our investments and our homes. If you think about it for a second you don’t trust anybody in this world like that, so why do we trust banks? No one can understand really why, but many will blame the false advertisement and promises that banks kept on delivering to us through television, radio, newspapers, internet and other sources of advertisements. Banks are a multi billion dollar organizations that run the world, but today it’s a little different.

    It’s hard for us to accept changes in life, but this change topped every other small change that we were afraid from. No body ever expects something like this to happen in the year 2008, but we have to learn how to live with this change. Many people have predicted this change to last for about 5 years or more, some say it will last for 2 or 3 years, but no body really knows.

    Some of the questions that you’re probably asking your self today are:
    Who will tell us what to do with our money?
    Who will tell us what is the right investment for our money?
    Who will tell us how much money we have?
    Who will loan us money when we need it?
    Who will help us sleep well at night?
    Who will help us finance our homes?
    Who will help us build businesses?

    We have so many questions and no ones to talk to, because now these banks are fighting for existence. There are some organizations that operate by the government and they can help you with your money, but don’t ever forget that you are the master of your own mind and use it to your benefit. More important you need to learn how to live with this change and make the best of it.

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