Fin/Inv

The Who versus The Times.

Scott Jagow at American Public Media MarketPlace provides an example of a recent FHA insured loan homebuyer: On the flip side...

Denise works three jobs so she can afford her new house. She makes $2470 a month but pays $1328 to service her mortgage. That means 54% of her income goes to the house, leaving her with $285 a week to live on. Doable, but tight. She’s breaking the 30% rule and then some, not to mention she’s still spending out of pocket to renovate the yard, fix the roof and paint.

Apparently 20 year old Denise bought the home for $155,000, and according to the comments, obtained an additional $28,000 on a "203K HUD supplemental loan to renovate the home" for a total of $183,000.

Not exactly up to the new proposed FSA standards of affordability!

Rolfe Winkler has a speech from David Einhorn Einhorn on gold, sovereign default, and more. Here is the pfd of the speech. I don't agree with everything he says, but he is entertaining!

Paul Kiel at Propublica writes: Four Banks in Govt’s ‘Healthy Bank’ Bailout Struggle to Survive.

The government has doled out billions to 687 banks [1] over the past year through a program meant to bolster already “healthy” banks. But an increasing number of those are troubled. Four banks in particular are foundering, including one that has acknowledged its executives cooked its books.

Paul has the details.

It is only fitting that on the 22nd anniversary of Black Monday, the commentator is none other than the Chairman of the SEC at the time, David Ruder. While Ruder provides perspectives on what is presumed pervasive insider trading as it relates to Galleon and otherwise, such as the ability by the SEC to use wiretaps when doing an investigation in concert with the US Attorney's office, the real critical message from Ruder is the systemic risk associated with hedge fund groputhink, or a massive position held by numerous hedge funds that turns out to be wrong, best seen it in the basis trade blow up, the Volkswagen short squeeze and the Citigroup exchange offer.

What I would be concerned about would be a hedge fund or a group of hedge funds engaging in strategies which might have a systemic effect on the market. We had that in the LTCM situation some years ago, not in the current crisis, but I have always thought we need protection against that kind of activity.

And this caveat on comparing today with 22 years ago:

There was tremendous market panic at that time...I for one t think we don't really know what would happen in the next downturn: we have High Frequency Trading, Flash Trading, ECNs and all kinds of activities in the markets which are not really known and are fairly incomprehensible.

Yet all the proponents of HFT of course will claim that, contrary to the former SEC Chairman's warnings, that all is under control.

 

We've been posting on the race to $200 between Goldman Sachs and Apple for a couple of months now. Based on after-hours trading, it looks like Apple will make a nice run for the finish line tomorrow. After blowing away third quarter estimates, Apple is trading up about $13 to $203 as of 5 PM ET. If the gains hold,...

By continuing to buy dollars, the Chinese are in effect undermining part of the Fed's efforts.

After the close today, Apple came out with their earnings, and the market loved them. The stock is trading over $200 (pretty much its lifetime high). I pretty much avoid the "four horsemen" (AAPL, RIMM, GOOG, AMZN) like the plague, so this is simply an interesting news item for me.

My attention is on individual stocks, both long and short. I have been, over the past couple of days (Friday and Monday), loading up on a wide variety of individual positions - mostly on the short side, but also some on the long.

My best cash performer so far in this array is Bank of America, which is also the stock in which I have the largest position. In spite of today's nearly triple-digit advance on the Dow, B of A continued to be weak. Unlike some stocks (like, say, AAPL), B of A is down two-thirds from its peak price, and I think the risk/reward on this is simply terrific.

I have also, for your viewing pleasure, assembled a modest array of some of the Many Faces of Ken Lewis. I'm not sure what it is with these finance guys; John Thain's face was frozen throughout human history, whereas Lewis just seems plain grumpy all the time. Is it fear over sexual inadequacy? It's impossible for me to tell.

So that's probably going to be it for me today. The march higher continues, and I'm busily in the background lining up my various positions. I'll probably get some time this week to share with you some of my favorites.

Quick reads:

• FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show (Bloomberg)

• Einhorn on gold, sovereign default, and more (Winkler)

• The Stock Market Has Never Been This (Intermediate-Term) Overbought (Hussman)

• Builder Confidence Slips in October (NAHB)

• Oil Hits 1 – Year High Above $79 (Reuters)

• Moody’s/REAL Commercial Property Price Indices Off 41% Since 07 Peak (Bloomberg)

• Apple Q4 Results: Big Q, More Macs And iPhones Sold Than Ever Before (TechCrunch)

• Feds to issue new medical marijuana policy (AP)

Anything else worth reading?

Developing story, but, surprisingly, not a dollar negative for once.

Laut den heutigen Daten der Ratingagentur Moodys zu den gewerblichen Immobilienpreisen in den USA geht der Absturz unvermindert weiter! Der Moody’s/REAL All Property Type Aggregate Index (CPPI), ein Preisindex, fiel im August auf 114,06 Indexpunkte bzw. um -2,977% im Vergleich zum Vormonat! Im Vergleich zum Vorjahresmonat stürzten die Preise sogar um -32,8%! Die US-Immobilienkrise bei den gewerbliche Immobilien ist also weiter voll in Aktion!

> Die Entwicklung des CPPI seit Dezember 2000, im Vergleich zum Hoch im Oktober 2007 brechen die Preise im August 2009 für gewerbliche Immobilien um satte 40,55% ein! <

Der CPPI fällt nun schon den 11. Monat in Folge. Im August 2009 betrug das Volumen der Verkäufe 4,8 Mrd. Dollar, beim Hoch im Jahr 2007 wurden gewerbliche Immobilien zum Wert von knapp 70 Mrd. Dollar im Monat gedealt!

Laut dem Flow of Funds Accounts Bericht der FED für das 2. Quartal 2009 betrug das ausstehende Volumen der Kredite für gewerbliche Immobilien 2,5528 Billionen Dollar. Im 2. Quartal 2009 stieg die Delinquency Rates, dies sind Kredite die bereits 30 Tage in Zahlungsverzug sind, für Commercial Real Estate Loans bereits auf 7,91%! Die Charge OFF Rate, also die Rate der bei den Banken komplett abgeschriebenen gewerblichen Immobilienkredite lag bei 2,11%!

Im September 2009 sind laut Daten der Credit Suisse gewerbliche Immobilienhypotheken im Wert von 22,4 Mrd. Dollar mehr als 60 Tage im Zahlungsverzug. Die Delinquency Rates von Zahlungen aus Commercial Mortgage in gebündelten Anleihen stieg im September auf 3,64%, nach 0,54% im Vorjahresmonat nach den Daten von Moody's.

Quelle: Realindices.com, Bloomberg.com

Kontakt: info.querschuss@yahoo.de

Damn, it feels good to be back - and a perfect day for my return I might add. Extremely interesting tape today - let me show you what the Zero was painting today:

That’s right - a complete flat line while we are painting new highs. Sucker rally anyone? As you know my target zone starting at 1100 was hit today (by 2 cents) and that was good enough for me to back up the truck (see previous post). Another reason was the non-participation as evidenced by the Zero Lite - no, it’s not infallable but in my book this was a good enough opportunity to start exposing myself to the short/dark side.

Crude is painting an interesting exponential right now and it stopped right at last year’s Intermediate (4) high. Let’s see if we’ll get a breach of this resistance line or if we keep pushing into the stratosphere. BTW, for the record - I was extremely pissed seeing gasoline retailing at 2.25 in Colorado when we Californians are paying over a buck more per gallon (yes, I know they don’t pay gasoline taxes like we do). I am really starting to wonder why I keep living here - the weather is great yes, but the cost of living are spiraling upwards. I just heard that water cost are going to double in my district - not sure why but I’m confident it’s one of those tax payer squeezing measures of those idiotic politicians who have been running this state into the ground for decades now. Zero foresight and they were spending like crazy during the boom days - and even then they were constantly broke.

As a result an increasing number of Californians find themselves having to move to your local tent city. Of course this rarely makes the news. Just like the long line of Chicago residents who applies for government assistance a few weeks ago - I think the number was around 50,000. Just guess how many application forms the guys in charge brought along for the event? 3000 - that’s right - everyone else had to go home empty handed. Did I hear a peep about this on local or national news? Of course not - I looked very hard - I had to learn this watching french news (Mrs. Evil is from Paris) where they had a long report on this. I encourage all of you to start watching/reading foreign news - it seems that their coverage on the U.S. economy and especially that of the average citizen is a lot more comprehensive than what we get over here.

Okay enough of my bitching here’s the Program Trading Update:

evil.rat/ES: +8.25
evil.rat/NQ: +8.75
geronimo/ES: -2.75

Not happy about geronimo today but I guess after yesterday’s 10 point run I grant it one loser

UPDATE 4:33pm EDT: Looks like AAPL beat expectations as the futures just went apeshit. Oh well, nothing like that sinking feeling when you realize that - for the fourth time now - you’ve been too early shorting the market. Which btw is why I told you guys to not follow me into the abyss - hope you guys didn’t. NQ now at 1768 - ouch…

Big drop in SPY AH to below VWAP. Big blocks pushing lower. What is one missing here?

Submitted by Nic Lenoir of ICAP

The topside resistance of the assumed-to-be bull flag pointed out this morning in EURUSD has held so far. A quick look at the dollar index over the last few days of trading indicates we are facing support here at least in the near term. Even if we cannot claim to have made a bottom in the medium to long term, it looks we should at least retest 75.80 before another wave of selling.

Crude Oil confirms it has lost any correlation with any other market, or reality for that matter. Some people think it is linked to the suicide bombing killing several members of the Iranian guard, personally I think it is simply the market reaching the "euphoria" phase of the bubble. This is when correlations break down, record for number of consecutive up days are broken, and we start hearing about $200 target projections. The latter hasn't happened yet to my knowledge... unless some analysts claim their predictions from last summer ignoring the 75% sell-off that happened in the meantime... We see targets at 80.94 and 91.19 for oil on this move. Personally I would not be surprised if we see the $91 mark. I would rather focus on trying to identify the top however than fueling the fire.

Good luck trading,

Nic

The VIX volatility index slipped below 21 earlier today and currently stands at 21.15. This is the closest the VIX has gotten to 20 throughout the entire bull market, and marks a 75% decline from the closing high of 80.86 seen during the financial crisis. The VIX has now been above 20 for 287 consecutive trading days, which is the...

As the trading day rolls to a close, the trade once again is sell dollars, buy everything else. It is no surprise that stocks are trading where they are courtesy of an insane printing press operator and it being the third lowest volume day of the year, but now the buying spree has shifted into 10 Year US Treasuries as well. Nothing can stop the systemic annihilation of the dollar at this point absent a major exogenous event, or constipated European bureaucrats saying enough before one Euro can buy a few hundred million portraits of George Washington.

In the meantime, is anyone trading at all anymore?

Nach den letzten gemeinsamen Exportzahlen fuer August verzeichneten China, Deutschland und Japan Exporteinbrueche gegenueber dem Vorjahr von 22,6 %, 20,2 % und 36,0 % (Abb. 03866). China gelang es, mit 731 Mrd Dollar Exportvolumen in den ersten 8 Monaten 09 an Deutschland (706 Mrd Dollar) vorbeizuziehen, wobei die niedrigen chinesischen Preise noch verstaerkt durch eine brutale Wechselkursmanipulation gerade in der Krise mitspielten. Seit Mitte Februar hat der an den Dollar manipulativ angeseilte chinesische Yan ebenso wie der Dollar bereits 15,5 % an Wert gegenueber dem Euro verloren (Abb. 03781).

Judging by the performance of Motorola (MOT) today, it appears that a lot of traders were watching sports this weekend. Throughout the weekend, broadcasts of the MLB baseball playoffs and the NFL were peppered with ads for a cell phone that mocked many of the features not available with the iPhone. The commercials begin with a series of "iDon't..." phrases...

Rob Fraim is a reader who puts out his own amusing comments each week via email. On the 22th anniversary of the 1987 stock market crash, he put out his recollections from that day, and we are republishing them today, the 20th anniversary of Black Monday.

I found them so interesting that I suggested Rob (who is blogless) post them here. He gladly agreed. Without further adieu, here is Rob’s version of 1987 Crash Revisited:

It looks like the NASDAQ is going to close at another high for the year (we are truly on the other side of the looking glass here, folks). The tinted area is a really mushy zone, since it represents a range from which the market cut away last autumn into the big plunge. Now the market is trying to heave its way through this zone to the upside again. AAPL earnings will certainly be a force (one way or the other) for this index in the morning.

When the financial system almost imploded in the fall of 2008, one of the primary responses by the Federal Reserve was the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The number went from practically zero to a peak of $582 billion on December 10, 2008. The number of swaps outstanding was almost directly correlated with the value of the dollar (much more on that shortly). A graphic representation of this can be seen below:

The topic of skyrocketing liquidity swaps was in fact the headline feature of one of the numerous grillings of the Chairman by the inimitable Alan Grayson as can be seen in the following video:

And while Bernanke was not very interested in getting caught up in providing actual explanations, the Bank of International Settlements just released a major paper titled "The US dollar shortage in global banking and the international policy response" which goes on to demonstrate just how it happened that Fed chief Ben Bernanke in essence bailed out the entire developed world, which was facing an unprecedented dollar shortage crisis due to the sudden implosion of FX swap lines and other mechanisms which until that point were critical in maintaining the dollar funding shortfall for virtually every foreign Central Bank.

The BIS provides the following big picture perspective:

The funding difficulties which arose during the crisis are directly linked to the remarkable expansion in banks’ global balance sheets over the past decade. Reflecting in part the rapid pace of financial innovation, banks’ (particularly European banks’) foreign positions have surged since 2000, even when scaled by measures of underlying economic activity. As banks’ balance sheets grew, so did their appetite for foreign currency assets, notably US dollar-denominated claims on non-bank entities. These assets include retail and corporate lending, loans to hedge funds, and holdings of structured finance products based on US mortgages and other underlying assets. During the build-up, the low perceived risk (high ratings) of these instruments appeared to offer attractive return opportunities; during the crisis they became the main source of mark to market losses.

How exactly did this improper perception of funding risk manifest itself?

The accumulation of US dollar assets saddled banks with significant funding requirements, which they scrambled to meet during the crisis, particularly in the weeks following the Lehman bankruptcy. To better understand these financing needs, we break down banks’ assets and liabilities by currency to examine cross-currency funding, or the extent to which banks fund in one currency and invest in another. We find that, since 2000, the Japanese and the major European banking systems took on increasingly large net (assets minus liabilities) on-balance sheet positions in foreign currencies, particularly in US dollars. While the associated currency exposures were presumably hedged off-balance sheet, the build-up of net foreign currency positions exposed these banks to foreign currency funding risk, or the risk that their funding positions (FX swaps) could not be rolled over.

Once again, the specter of everyone (and in this case it really means everyone) doing the same trade: sound familiar? This is eerily similar to what happened to basis traders in late 2008 (nothing pretty) when the balance of the trade was so skewed to one side, that there was nobody willing or able to take the opposing side, leading to massive wipe outs for everyone who participated. It is also comparable to the situation prevalent in equity markets currently.

What is now unquestionable, and what will be made clear shortly, is that the dollar trade is precisely what the basis trade, or any other trade, would have ended up being for any and every Central Bank that had a funding mismatch in dollars after the Lehman bankruptcy (all of them), had the Federal Reserve not stepped in and become the lender of last resort to the entire world.

The Prehistory

How did it happen than in 8 short years virtually every bank would become reliant on the Fed's wanton printing of dollars for their very survival?

The origins of the US dollar shortage during the crisis are linked to the expansion since 2000 in banks’ international balance sheets. The outstanding stock of banks’ foreign claims grew from $10 trillion at the beginning of 2000 to $34 trillion by end-2007, a significant expansion even when scaled by global economic activity (Figure 1, left panel). The year-on-year growth in foreign claims approached 30% by mid-2007, up from around 10% in 2001. This acceleration took place during a period of financial innovation, which included the emergence of structured finance, the spread of “universal banking”, which combines commercial and investment banking and proprietary trading activities, and significant growth in the hedge fund industry to which banks offer prime brokerage and other services.

At the level of individual banking systems, the growth in European banks’ global positions is most noteworthy (Figure 1, centre panel). For example, Swiss banks’ foreign claims jumped from roughly five times Swiss nominal GDP in 2000 to more than seven times in mid-2007 (Table 1). Dutch, French, German and UK banks’ foreign claims expanded considerably as well. In contrast, Canadian, Japanese and US banks’ foreign claims grew in absolute terms over the same period, but did not significantly outpace the growth in domestic or world GDP (Figure 1, right panel). While much of the increase for some European banking systems reflected their greater intra-euro area lending following the introduction of the single currency in 1999, their estimated US dollar- (and other non-euro-) denominated positions accounted for more than half of the overall increase in their foreign assets between end-2000 and mid-2007.

Taking a step back: how do countries traditionally express long positions in dollars, and how does it happen that what by definition should be a hedge trade, could get so out of hand.

We first introduce concepts related to an internationally active bank’s investment and funding choices. Consider a bank that seeks to diversify internationally, or expand its presence in a specific market abroad. This bank will have to finance a particular portfolio of loans and securities, some of which are denominated in foreign currencies (eg a German bank’s investment in US dollar-denominated structured finance products). The bank can finance these foreign currency positions in several ways:

1. The bank can borrow domestic currency, and convert it in a straight FX spot transaction to purchase the foreign asset in that currency.
2. It can also use FX swaps to convert its domestic currency liabilities into foreign currency and purchase the foreign assets.4
3. Alternatively, the bank can borrow foreign currency, either from the interbank market, from non-bank market participants or from central banks.

The first option produces no subsequent foreign currency needs, but exposes the bank to currency risk, as the on-balance sheet mismatch between foreign currency assets and domestic currency liabilities remains unhedged. Our working assumption is that banks employ FX swaps and forwards to hedge any on-balance sheet currency mismatch. That is, a bank funding in domestic currency (option 1 or 2) is likely to do so as described in option 2. Importantly, the second leg of the swap in option 2 is not that different from funding a position through foreign currency borrowing in the first place (option 3): in both cases, the bank needs to “deliver” foreign currency when the contractual liability comes due.

There is much more to this congruity, however for those seeking the full story we refer them to the actual paper. The key issue is that over the years, banks managed to accumulate a substantial amount of funding risk as a result of positions set to take advantage of the Fed's dollar destructive generosity:

Funding risk is inherently tied to stresses across the global balance sheet: mismatches between the maturity, currency and counterparty of assets and liabilities. Quantifying this risk requires measurement of banking activity on a consolidated basis, preferably at the level of the decision-making economic unit (ie individual banks). Data designed to identify vulnerabilities in banks’ funding patterns would ideally include, for both assets and liabilities, a complete breakdown of positions by currency, maturity and counterparty type, along with the relevant risk characteristics and off-balance sheet positions.

For a much more detailed analysis of dollar funding applicability we again refer readers to the original source, however in essence what the BIS did was to analyze the variance between domestic and foreign offices/balance sheets vis-a-vis domestic operations of various banks, and how dollar funding via FX swaps or otherwise was hedged on bank balance sheets, as well as funding maturity mismatch for dollar assets.

We use this dataset to investigate how banks fund their foreign currency investments, and to derive their funding requirements across currencies and counterparties. While not at the individual bank level, the advantages of these data are that they provide (i) the consolidated foreign assets and liabilities for each banking system, (ii) estimates of the gross and net positions by currency, and (iii) information on the sources of financing (ie interbank market, central banks and non-bank counterparties).

One of the key findings of the BIS paper is that the host countries of foreign banks have massive international operations, which traditionally are funded in the reserve currency - the dollar:

Looking at these data from the perspective of host countries shows just how large banks’ international operations really are. Table 2, where the column headings now indicate host countries, shows the gross and net international asset position of each country, and compares these to banks’ cross-border claims (here, including banks’ cross-border interoffice positions as well). The table distinguishes between positions booked by offices of “domestic” and “foreign” banks in each host country. In five countries (BE, CH, DE, JP and UK), banks’ cross-border positions accounted for almost half of that country’s external assets at end-2007, and as much as a quarter in five other countries (CA, ES, FR, IT and NL). The offices of foreign banks alone accounted for nearly 40% of the United Kingdom’s external assets. In contrast, positions booked by the home offices of domestic banks were much larger in the case of Belgium, Germany, Japan and Switzerland.

What is notable from the above table is just how massive foreign banks' USD-funded positions are, especially when viewed from the perspective of various GDP numbers. The 6 countries that make up the core of the Eurozone all have foreign dollar denominated claims which are well over 100% of their respective GDPs! These countries took on an amount of Dollar exposure that would take on a country's entire GDP to fund and then some. And the fact that they have done so with the complicity of the Federal Reserve is staggering and a clarion call for a global risk regulator which is distinctly separate from the US Fed, which prompted this intractable risk taking in the first place.

As for how this funding mismatch manifests itself in practice, the BIS had this insight:

Foreign currency assets often exceed the extent of funding in the same currency. This is shown in Figure 3, where, in each panel, the lines indicate the overall net position (foreign assets minus liabilities) in each of the major currencies. If we assume that banks’ on-balance sheet open currency positions are small, these cross-currency net positions are a measure of banks’ reliance on FX swaps. Many banking systems maintain long positions in foreign currencies, where “long” (“short”) denotes a positive (negative) net position. These long foreign currency positions are mirrored in net borrowing in domestic currency from home country residents (recall equation (1)). UK banks, for example, borrowed (net) in sterling (some $550 billion in mid-2007, both cross-border and from UK residents) in order to finance their corresponding long positions in US dollars, euros and other foreign currencies. By mid-2007, their long US dollar positions stood at $200 billion, on an estimated $2 trillion in gross US dollar claims. Similarly, German and Swiss banks’ net US dollar books approached $300 billion by mid-2007, while that of Dutch banks surpassed $150 billion. In comparison, Belgian and French banks maintained a relatively neutral overall US dollar position prior to the crisis, while Spanish banks had borrowed US dollars to finance euro lending at home, at least until mid-2006.

Taken together, Figures 2 and 3 thus show that several European banking systems expanded their long US dollar positions significantly since 2000, and funded them primarily by borrowing in their domestic currency from home country residents. This is consistent with European universal banks using their retail banking arms to fund the expansion of investment banking activities, which have a large dollar component and are concentrated in major financial centres. In aggregate, European banks’ combined long US dollar positions grew to roughly $700 billion by mid-2007 (Figure 5, top left panel), funded by short positions in sterling, euros and Swiss francs.15 As banks’ cross-currency funding grew, so did their hedging requirements and FX swap transactions, which are subject to funding risk when these contracts have to be rolled over.

And here comes the first estimate ever attempted at quantifying the Fed sponsored "Dollar Destructive" moral hazard: the upper bound of the total loss in the case of a major liquidity event occurring with the Fed's complicit bailout on the table would amount to a staggering $6.5 trillion from a dollar duration funding mismatch alone! This is an astounding, unfathomable and untenable number. Yet it is likely the same now as it was at the onset of the Lehman crisis.

Taken together, these estimates suggest that European banks’ US dollar investments in nonbanks were subject to considerable funding risk at the onset of the crisis. The net US dollar book, aggregated across the major European banking systems, is portrayed in Figure 5 (bottom left panel), with the non-bank component tracked by the green line. By this measure, the major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).

The Crisis

So what exactly was the chain of events that ended up with the Fed having to singlehandedly bailout the rest of the world?

The implied maturity transformation in Figure 5 became unsustainable as banks’ major sources of short-term funding turned out to be less stable than expected. Beginning in August 2007, heightened counterparty risk and liquidity concerns compromised short-term interbank funding (Taylor and Williams (2009)), visible in the rise of the blue line in the lower left panel. The related dislocations in FX swap markets made it even more expensive to obtain US dollars via currency swaps (Baba and Packer (2009a)), as European banks’ US dollar funding requirements exceeded other entities’ funding needs in other currencies.

European banks’ funding difficulties were compounded by instability in the non-bank sources of funds as well. Money market funds, facing large redemptions following the failure of Lehman Brothers, withdrew from bank-issued paper, threatening a wholesale run on banks (Baba et al (2009)). Less abruptly, a portion of the US dollar foreign exchange reserves that central banks had placed with commercial banks was withdrawn during the course of the crisis. In particular, some monetary authorities in emerging markets reportedly withdrew placements in support of their own banking systems in need of US dollars.

Market conditions during the crisis have made it difficult for banks to respond to these funding pressures by reducing their US dollar assets. While European banks held a sizeable share of their net US dollar investments as (liquid) US government securities (Figure 5, bottom right panel), other claims on non-bank entities – such as structured finance products – have been harder to sell into illiquid markets without realising large losses. Other factors also hampered deleveraging of US dollar assets: banks brought off-balance sheet vehicles back onto their balance sheets and prearranged credit commitments were drawn. Indeed, as shown in Figure 5 (top right panel), the estimated outstanding stock of European banks’ US dollar claims actually rose slightly (by $248 billion or 3%) between Q2 2007 and Q3 2008. It was not until the fourth quarter of 2008 that signs of deleveraging emerged.

Banks reacted to the dollar shortage in various ways, supported by actions taken by central banks to alleviate the funding pressures. Prior to the collapse of Lehman Brothers (up to end-Q2 2008), European banks tapped funds in the United States; their local US dollar liabilities booked by their US offices, which included their borrowing from Federal Reserve facilities, grew by $329 billion (13%) between Q2 2007 and Q3 2008, while their local assets remained largely unchanged (Figure 6, left panel). This allowed European banks to channel funds out of the United States via inter-office transfers (right panel), presumably to help their head offices replace US dollar funding previously obtained from the market.

In a nutshell what happened is that short-term sources to sustain the massive dollar funding mismatch disappeared virtually overnight, and CBs were suddenly facing a toxic spiral of selling increasingly more worthless assets merely to satisfy currency funding needs in an environment where all of a sudden nobody was willing to provide FX swap lines. So what happens next...

The Fed Bails Out The World

No, that is not an overstatement: had the Fed not stepped in, the rest of the world (which optimistic pundits tend to forget exists in their bubble view of the US market as the one and only) would have simply collapsed as the $6.5 trillion dollar funding gap closed in on itself, causing a indiscriminate selling off of all dollar denominated assets. The implosion of the basis trade would have seemed like a picnic compared to what was about to ensue had the Fed not stepped in to perpetuate the Fiat banking way of life.

The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.

And here is the chart that started off this article in more regional detail:

And it gets worse: the Fed's printing press single handedly guaranteed the way of life for the UK, the Eurozone and Switzerland with unlimited funding! Whether the Fed was within its rights to bet the American way of life in order to mitigate the stupidity of Europe is a question best left to politicians. And politicians take note: the Fed's actions were to the benefit of "banks around the world including those that have no US subsidiaries or insufficient eligible collateral to borrow directly from the Federal Reserve System."

On 13 October 2008, the swap lines between the Federal Reserve and the Bank of England, the ECB and the Swiss National Bank became unlimited to accommodate any quantity of US dollar funding demanded. The swap lines provided these central banks with ammunition beyond their existing foreign exchange reserves (Obstfeld et al (2009)), which in mid-2007 amounted to [TD: a meager and very much underfunded] $294 billion for the euro area, Switzerland and the United Kingdom combined, an order of magnitude smaller than our lower-bound estimate of the US dollar funding gap.

In providing US dollars on a global scale, the Federal Reserve effectively engaged in international lending of last resort. The swap network can be understood as a mechanism by which the Federal Reserve extends loans, collateralised by foreign currencies, to other central banks, which in turn make these funds available through US dollar auctions in their respective jurisdictions. This made US dollar liquidity accessible to commercial banks around the world, including those that have no US subsidiaries or insufficient eligible collateral to borrow directly from the Federal Reserve System.

The quantities of US dollars actually allotted through US dollar auctions in Europe provide an indication of European banks’ US dollar funding shortfall at any point in time (Figure 8). Most of the Federal Reserve’s international provision of US dollars was indeed channelled through central banks in Europe, consistent with the finding that the funding pressures were particularly acute among European banks. Once the swap lines became unlimited, the share provided through the Eurosystem, the Bank of England and the Swiss National Bank combined was 81% (15 October 2008), and it has remained in the range of 50–60% since December 2008.

Concluding observations

One angle of preliminary concluding remarks is provided by the cautiously worded prose of the BIS:

The recent financial crisis has highlighted just how little is known about the structure of banks’ international balance sheets and their interconnectedness. The globalisation of banking over the past decade and the increasing complexity of banks’ international positions have made it harder to construct measures of funding vulnerabilities that take into account currency and maturity mismatches... The analysis shows that between 2000 and mid-2007, the major European banking systems built up long US dollar positions vis-à-vis non-banks and funded them by interbank borrowing, borrowing from central banks and FX swaps. We argue that this greater transformation across counterparties in fact reflected greater maturity transformation across these banks’ balance sheets, exposing them to considerable funding risk. When heightened credit risk compromised sources of short-term funding during the crisis, the chronic US dollar funding needs became acute, particularly in the wake of the Lehman Brothers bankruptcy.

In contrast to many previous international financial crises, it was banks’ international exposures to other industrialised countries that deteriorated, and the global interbank and FX swap funding structure which seized up. The build-up of such stresses at the global level can only be identified by tracking the extent of cross-currency funding, and by implication, banks’ reliance on short-term interbank and FX swap positions. What pushed the system to the brink was not cross-currency funding per se, but rather too many large banks employing funding strategies in the same direction, the funding equivalent of a “crowded trade”. Only when examined at the aggregate level can such vulnerabilities be identified. By quantifying the US dollar overhang on non-US banks’ global balance sheets, this paper contributes to a better understanding of why the extraordinary international policy response was necessary, and why it took the form of a global network of central bank swap lines.

Why is this critical? We are now back at a time when the only gains in the stock market are at the expense of dollar destruction, with a concomittant funding for dollar denominated assets. In one short year since the collapse of Lehman we have gone back to the same dollar funding risk exposure as was on the books in these days before Dick Fuld's empire unravelled. While whether or not the Federal Reserve stepped beyond its bounds in practically bailing out not just Goldman Sachs, but as this paper has proven, virtually the entire world, is not up to us to decide. However, a critical topic is: have we learned anything from the implications of an unprecedented dollar funding gap, which is likely back to record levels once again? What is obvious is that the Fed's current policy of a weak dollar, contrary to its repeated lies otherwise, is simply enhancing the dollar funding moral hazard: and the breaking point will come sooner or later with disastrous consequences.

As the H.4.1 discloses weekly, the Fed's liquidity swaps are now back to almost zero. This means that foreign Central Banks believe they have the FX swap and dollar maturity situation under control. They thought the same before Lehman blew up. And they were wrong. As the DXY continues tumbling ever lower to fresh 2009 lows, the trade de jour is once again the dollar funding one, although unlike before when the Yen was the carry currency of choice, this time it is the dollar itself, positioning banks for the double whammy of not just a dollar funding shock, but one coupled with a potential massive and historic short squeeze. If and when an exogenous event occurs, not even $6.5 trillion in Fed swap lines will be sufficient to bail out the world economy. It is time someone in Congress asks the Chairman all the pertinent questions that evolve from this analysis and how he is prepared to handle its next, much more vicious, and likely terminal, iteration.

Full BIS paper.

If so, it would target the October 2nd low (click chart to enlarge):

From Bloomberg: U.S. Commercial Property Values Fall 3% in August (ht James)

The Moody’s/REAL Commercial Property Price Indices fell 3 percent in August from July, bringing the market’s decline to almost 41 percent since its peak in October 2007, Moody’s Investors Service said in a statement today. ...

“We can’t call a bottom at this point, but it’s an encouraging sign to see the deceleration in the decline,” said Connie Petruzziello, a Moody’s analyst and co-author of the commercial property price report.
...
August was the 11th consecutive month the commercial property index fell.

The August report was based on prices for 73 properties that sold during the month and for which Moody’s has previous price records.

Here is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index.

Notes: Beware of the "Real" in the title - this index is not inflation adjusted - that is the name of the company (an unfortunate choice for a price index). Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - only 73 repeat sales in August - and that can impact prices.

Click on graph for larger image in new window.

CRE prices only go back to December 2000.

The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

This shows residential leading CRE (although we usually talk about residential investment leading CRE investment, but in this case also for prices), and this also shows that prices tend to fall faster for CRE than for residential.

My friend on the Hill has confirmed the Washington Post's claim that the big banks have lost their bid for exemption from state regulations.

But only in the House. My friend says that the too big to fails are going to try to kill the bill in the Senate.

As the Post summarizes the battle in the House:

The House Financial Services Committee is expected to vote Tuesday to let state governments protect bank customers by imposing restrictions that go beyond existing federal laws, according to congressional and industry sources.

The move would roll back a doctrine called preemption that has allowed big banks to answer solely to federal regulators. The banks argue that operating under a single set of rules is more efficient and results in lower prices for customers. But the Obama administration, which is pushing for the change, regards preemption as a cause of the crisis because it prevented state regulators from quashing obvious abuses.

The change essentially would unleash 50 additional regulators on the largest banks.

Large banks have fought bitterly against the proposal, which they regard as one of the most problematic components of the administration's financial reform plan, but they have been unable to sway House Democrats.

Call your Senator and demand that state banking regulations be allowed to be as tough as the state wishes.

GoodMorning! Full Render #2 from blprnt on Vimeo.

Hat tip Flowing Data

Excerpts posted with permission from Campbell Surveys

In September the housing market took a major turn to the upside, according to respondents to the Campbell/Inside Mortgage Finance Monthly Survey of Real Estate Market Conditions. Real estate agent survey respondents reported average residential property prices rose 6% from August to September ...

The reported month-to-month price increase of 6% was driven by high demand for REO –also commonly referred to as foreclosed properties--according to transaction data reported by survey respondents. ...

The average price for non-distressed properties remained nearly constant between August and September. ...

Strong demand for moderately priced REO caused time-on-market for these properties to decline markedly. In August, damaged REO stayed on the market an average of 9.4 weeks; by September, time-on-market had declined to 7.0 weeks. For move-in ready REO, time-on-market declined from 8.0 weeks in August to 5.9 weeks in September. In contrast, average time-on-market for non-distressed properties rose from 13.0 weeks in August to 14.2 weeks in September.

First–time homebuyer demand for properties continued to be strong in the month of September. First-time homebuyers accounted for 42% of home purchase transactions in September. ...

Many agents indicated an REO buying frenzy in local markets, especially California. “Entry level REO's are taken by the storm! Many multiple offers!” exclaimed a California agent. “Low inventory and high demand are resulting in 20-60 offers on most properties in the entry level to moderate price points. First-time homebuyers have difficulty competing with investors and high down-payment buyers,” reported another real estate agent located in California. “Banks and listing agents are pricing these REO's at liquidation prices to encourage a bidding war and it's working,” wrote a real estate agent located in Florida.

Despite reporting strong increases in both average prices and number of transactions, real estate agents responding to the survey gave a hint of looming problems caused by rising unemployment. For the third month in a row, the survey’s inventory index showed rising inventories of short sale properties, while inventories of REO properties were flat or declining.
emphasis added

As we've discussed before, there is a buying frenzy right now in the existing home market, especially at the low end. Unfortunately existing home sales add little to the economy (compared to new home sales). And the impact is even less than usual right now because many of the marginal buyers are using the first-time homebuyer tax credit as their downpayment, and have little additional money to spend on furniture or upgrades.

For the economy, the numbers to track are housing starts, new home sales, and residential investment - not existing home sales.

The persistent belief among some of the erstwhile loyal Bushies that they still represent the majority, that their supporters are the "real America", is, well, deranged.

All in all, there seems to be a growing number of players determined to party like it's 1937.

The Oct Nat’l Assoc of Home Builders index, an index measuring home building sentiment, was 18, 2 pts below forecasts and down from 19. Present conditions fell 1 pt while future expectations fell 2 pts. Prospective Buyers Traffic fell 3 pts as the West, South and Midwest regions dropped with the West showing the biggest fall of 3 pts. The Northeast saw a gain of 1 pt. The uncertainty of the fate of the home buying tax credit likely had an impact but whether the number was 18, 19, 20 or 21 is splitting hairs as 50 is the breakeven among builders viewing things as good or poor. The high in the last cycle was 72 in June ‘05 and got as low as 8 in Jan ‘09.

The TICK that is specific to Dow 30 stocks ($TICKI, above) moves much quicker than the NYSE TICK, given the fact that the Dow issues trade frequently and are prominent components of baskets of stocks that are involved in program trading. When we see persistent negative readings in $TICKI, with values of -20 and lower, it suggests that multiple large traders are selling baskets of stocks--a nice short-term gauge of shift in sentiment, in the case of the recent market.
.

The carry trade in full force as the dollar keeps hitting new lows (DXY at 75.31), the VIX breaking below 21 and the S&P moving over 1,100 as limit orders are engaged on yet another low volume day. The USD has moved from purgatory and is about to enter the first circle of Bernanke hell.

Ron Griess of The Chart Store asks:

The weekly low on the S&P was 32 weeks ago during the week ending March 6, 2009.

From that low (666.79) to yesterday’s high (1,096.56), the S&P was up 64.46%.

When is the last time the S&P had a 32 week ROR of that magnitude or higher?

Answers after the jump

=======================

The top 50

Beginning Date Ending Date 32 week return
1 12/10/32 7/22/33 93.47%
2 12/3/32 7/15/33 93.10%
3 3/4/33 10/14/33 90.68%
4 2/25/33 10/7/33 87.68%
5 11/26/32 7/8/33 85.02%
6 2/11/33 9/23/33 78.99%
7 2/4/33 9/16/33 78.13%
8 6/4/32 1/14/33 77.91% The 1932 S&P bottom
9 3/11/33 10/21/33 77.08%
10 4/8/33 11/18/33 76.78%
11 4/1/33 11/11/33 74.44%
12 11/5/32 6/17/33 73.16%
13 2/18/33 9/30/33 72.76%
14 12/31/32 8/12/33 69.18%
15 4/2/38 11/12/38 65.79%
16 1/21/33 9/2/33 65.65%
17 4/15/33 11/25/33 64.49%
18 3/6/09 10/16/09 64.45% (2009)
19 6/11/32 1/21/33 63.76%
20 12/24/32 8/5/33 63.02%
21 1/28/33 9/9/33 62.94%
22 1/7/33 8/19/33 60.95%
23 11/12/32 6/24/33 60.76%
24 10/29/32 6/10/33 60.57%
25 1/14/33 8/26/33 60.45%
26 3/25/33 11/4/33 59.77%
27 11/19/32 7/1/33 59.63%
28 4/6/35 11/16/35 59.36%
29 12/17/32 7/29/33 58.39%
30 3/23/35 11/2/35 58.23%
31 3/30/35 11/9/35 57.16%
32 3/16/35 10/26/35 56.79%
33 4/22/33 12/2/33 56.43%
34 3/18/33 10/28/33 56.37%
35 7/2/32 2/11/33 56.16%
36 5/28/32 1/7/33 55.74%
37 4/13/35 11/23/35 55.44%
38 6/25/32 2/4/33 55.41%
39 10/15/32 5/27/33 53.55%
40 10/4/74 5/16/75 53.40% The 1974 S&P bottom
41 10/22/32 6/3/33 52.53%
42 8/13/82 3/25/83 52.52% The 1982 S&P bottom
43 7/9/32 2/18/33 51.38%
44 6/18/32 1/28/33 51.16%
45 8/20/82 4/1/83 51.03%
46 4/9/38 11/19/38 50.17%
47 4/20/35 11/30/35 50.06%
48 12/6/74 7/18/75 49.97%
49 6/1/35 1/11/36 48.08%
50 8/6/82 3/18/83 47.66%