Fin/Inv

Spreads were broadly wider in the US as all the indices deteriorated (as IG and HY closed at their wides with the former making its largest jump wider since 10/01). IG trades 7.8bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.3s.d.. At 109bps, IG has closed tighter on 63 days so far this year (217 trading days) and we note that the distance to the average is getting close to its largest since this rally began (a critical break over 9-10bps above the average would suggest we are in a new era. Yesterday's crack of IG not being able to break the 50-day average (while technical nonsense) is notable in that we have not seen an upside break and unsuccessful test of the average since the March rally began in credit.

Indices typically underperformed single-names with skews widening in general but were really just playing catchup from yesterday's moves as from Wednesday's close single-names are actually underperforming suggesting some more weakness is due in the indices. The names having the largest impact on IG are Constellation Energy Group Inc. (-22bps) pushing IG 0.17bps tighter, and International Lease Finance Corp. (+39.58bps) adding 0.25bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 0.42bps tighter, and International Lease Finance Corp. contributing 1.07bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-22bps) pushing the index 0.22bps tighter, and Wells Fargo & Company (+11.25bps) adding 0.12bps to ExHVOL.

Selling was broad-based today but we do note the lowest quality names saw the most selling pressure with CCC and below relatively crushed. There was also some notable selling in the crossover space as BBB-/BB+ names underperformed either side. Utilities (Eletric more than others) saw a safety bid today while Leisure (Gaming, Lodging, and Sports/Rec) were all weaker along with Autos and Builders. Capital Goods were mixed but Transports were very weak. Healthcare also saw a bid and was benefiting from the safety trade (particularly Hospitals & Health Services). Interestingly, Airlines saw some buying today also with UAL and AMR both tighter

The price of investment grade credit fell 0.27% to around 99.6% of par, while the price of high yield credits fell 1.315% to around 92.13% of par. ABX market prices are lower by 0.29% of par or in absolute terms, 0.65%. Broadly speaking, CMBX market prices are lower by 0.81% of par or in absolute terms, 0.26%. Volatility (VIX) is up 5.93pts to 30.75%, with 10Y TSY rallying (yield falling) 10.3bps to 3.4% and the 2s10s curve flattened by 2.4bps, as the cost of protection on US Treasuries fell 2.06bps to 21.865bps. 2Y swap spreads widened 1.9bps to 35bps, as the TED Spread widened by 0.6bps to 0.24% and Libor-OIS improved 0.1bps to 13bps.

The Dollar strengthened with DXY rising 0.65% to 76.408, Oil falling $2.9 to $76.97 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 3.44% today (a 2.98% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.1 to $1044.9 as the S&P is down (1032.3 -2.76%) underperforming IG credits (109bps -0.27%) while IG, which opened wider at 104bps, outperforms HY credits. IG11 and XOver11 are +5.38bps and +5.5bps respectively while ITRX11 is +3bps to 89.25bps.

Dispersion rose +2.2bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

39% of IG credits are shifting by more than 3bps and 49% of the CDX universe are also shifting significantly (more than the 5 day average of 49%). The number of names wider than the index decreased by 1 to 43 as the day's range fell to 6.5bps (one-week average 6.2bps), between low bid at 103.5 and high offer at 110 and higher beta credits (2.81%) underperformed lower beta credits (2.06%).

In IG, wideners outpaced tighteners by around 3-to-1, with 90 credits wider. By sector, CONS saw 73% names wider, ENRGs 29% names wider, FINLs 86% names wider, INDUs 85% names wider, and TMTs 75% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 91.69bps and the latter at 89.34bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 197.47bps from 165.11bps, and remains above the short-term average of 177.82bps, with the HY/XOver ratio rising to 1.38x, above its 5-day mean of 1.35x. The IG-Main spread decompressed to 19.75bps from 16.63bps, and remains above the short-term average of 17.9bps, with the IG/Main ratio rising to 1.22x, above its 5-day mean of 1.21x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 1.9bps to 89.3bps, with 25 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 3.06bps to 95.93bps, with Brokers (worst) wider by 7.92bps to 125bps, Finance names (best) tighter by 23.04bps to 697.02bps, and Banks wider by 6.36bps to 131.22bps. Monolines are trading wider on average by 2.86bps (0.42%) to 5312.11bps.

In IG, FINLs underperformed non-FINLs (2.78% wider to 2.19% wider respectively), with the former (IG FINLs) wider by 5.3bps to 195.9bps, with 2 of the 21 names tighter. The IG CDS market (as per CDX) is 20.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (88.07bps), with the bond ETFs outperforming the IG CDS market by around 4.15bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.63bps to 91.69bps (with ITRX FINLs -trending wider- weaker by 4.5 to 79.5bps) and is currently trading at the wides of the week's range at 76.85%, between 93.44 to 85.88bps, and is trading sideways. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 95.3%, between 72.27 to 65.68bps. ExHVOL underperformed LoVOL as the differential decompressed to 10.51bps from 7.67bps, and remains above the short-term average of 8bps. The Main exFINLS to IG ExHVOL differential compressed to 9.22bps from 12.11bps, but remains below the short-term average of 12.3bps.

Quick October Thoughts
There was a lot of discussion of the October movements and we note that IG closed September at 102.25 and HY at $91.5. So the compression trade 'appears' to have worked during the month as IG is wider and HY higher in price (especially when you add in the carry). However, given the more delat-hedged compression HY-IG trade of between 3x and 6x (broad range but just as an idea if investors wanted DV01- and beta-neutrality), the 6bps widening in IG does not really cover the 18bps tightening in HY and when you consider the drop in carry from the more realistic 'hedged' compression trade, it was not a good month for the compression hunters. Add to this the very recent volatility in the HY-IG differential and we suggest that those in compression trades will be getting increasingly nervous.

As an aside, we also see intrinsics wider in both HY and IG over the month, so HY's move has compressed the skew on the month but signals more compression at play than outright buying and with the basis having compressed so dramatically in the last two weeks, we suspect that the reach for yield is done for now.

We also note that despite all the talk about the dollar-stocks relationship, DXY is actually lower on the month as stocks are lower on the month (reinforcing our view that this relationship is both asymmetric and more intraday momo than anything systemic). Gold and Oil up large on the month as TSYs have also been sold as single-name CDS wideners have outpaced tighteners by around 2-to-1 and low beta names have dramatically underperformed high beta.

ABX is a little better but CMBX a little lower in price as builders are considerably wider and REITs wider but less so. ENRG name outperformance on the month reflects the move to 'safety' as TMT and INDUstrials are underperforming on the month with CONSumers also weak.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes (today)

CDR LQD 50 NAIG +3.6bps to 88.49 (41 wider - 3 tighter <> 17 steeper - 33 flatter).
CDX13 IG +5.12bps to 108 ($-0.22 to $99.65) (FV +2.61bps to 106.98) (94 wider - 20 tighter <> 43 steeper - 82 flatter) - Trend Wider.
CDX13 HVOL +10bps to 195 (FV +6.36bps to 195.55) (26 wider - 2 tighter <> 6 steeper - 24 flatter) - No Trend.
CDX13 ExHVOL +3.58bps to 80.53 (FV +1.46bps to 79.94) (68 wider - 27 tighter <> 58 steeper - 37 flatter).
CDX13 HY (30% recovery) Px $-1.35 to $92.09 / +38.9bps to 715 (FV +10.81bps to 641.36) (79 wider - 14 tighter <> 22 steeper - 76 flatter) - Trend Wider.
ITRX12 Main +3bps to 89.25 (FV +0.15bps to 84.87) (57 wider - 54 tighter <> 35 steeper - 89 flatter) - No Trend
ITRX12 HiVol +4bps to 144 (FV +0.48bps to 135.62) (17 wider - 10 tighter <> 6 steeper - 24 flatter) - No Trend
ITRX12 LoVol +2.68bps to 71.96 (FV +0.05bps to 69.19) (40 wider - 55 tighter <> 66 steeper - 29 flatter) - Sideways Trading
ITRX12 XOver +5.5bps to 516.5 (FV -9.21bps to 520.01) (16 wider - 27 tighter <> 19 steeper - 26 flatter) - Trend Wider
LCDX12 (65% recovery) Px $-0.7 to $98.65 / +22.6bps to 577.88 - Trend Wider.
MCDX12 +5bps to 105bps. - Trend Wider.
CDR Counterparty Risk Index rose 4.01bps (4.32%) to 96.88bps (10 wider - 4 tighter).
CDR Government Risk Index fell 0.39bps (-0.85%) to 45.85bps..
DXY strengthened 0.65% to 76.41.
Oil fell $2.83 to $77.04.
Gold fell $2.1 to $1044.9.
VIX increased 5.93pts to 30.69%.
10Y US Treasury yields fell 11.1bps to 3.39%.
S&P500 Futures lost 2.81% to 1031.8.

Here is the monthly Fannie Mae hockey stick graph ...

Click on graph for larger image in new window.

Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.45% in August, up from 4.17% in July - and up from 1.57% in August 2008.

"Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans. These rates are based on conventional single-family mortgage loans and exclude reverse mortgages and non-Fannie Mae mortgage securities held in our portfolio."

Just more evidence of the growing delinquency problem, although these stats do include Home Affordable Modification Program (HAMP) loans in trial modifications.

Stocks did indeed close near their lows, trending lower through most of the session. By day's end, we saw the number of stocks making new 20-day lows across the NYSE, NASDAQ, and ASE stay over 2200--remarkable given yesterday's solid bounce.

I took a look at what has happened historically after we've had three consecutive days of 20-day lows exceeding 2000. Going back to late 2002, which is how long I've kept these data, we find only 39 instances of such weakness. The next trading day, the S&P 500 Index (SPY) has averaged a gain of about 1% (24 up, 15 down). I find no significant upside or downside edge after such a relief bounce.

What *is* particularly noteworthy is that such weakness has tended to occur during periods of heightened volatility. The standard deviation of next day returns following three days of significant weakness has been 3.63%, nearly three times the level of the remainder of the sample. Such heightened volatility was evident as far as 20 days out, doubling the level seen during other periods in the market.

That suggests that, whether or not weakness is finished, the recent levels of heightened volatility may persist into next week.
.

Die heutigen Meldungen des Statistischen Bundesamts sind wie Keulenschlaege auf die deutsche Binnenkonjunktur. Waehrend die deutschen Medien die immer total irrefuehrend und nur auf Umfragen beruhenden positiven Meldungen der Gesellschaft fuer Konsumforschung (GfK) ueber das angeblich boomende Konsumklima gross herausstellen, hat bisher kaum eines der on-line Medien diese Nachrichten aufgegriffen. Alle schweigen sich aus: Spiegel, Handelsblatt, Welt - alle schweigen sich aus.

In what could have been the biggest piece of news today, yet making little headway into the media, the Fed announced that it is adopting a policy statement supporting "prudent commercial real estate loan workouts." And even though in traditional Fed fashion, the statement says a lot but is even more vague, some of the implications from a more nuanced read have very serious adverse implications for commercial real estate. The section:

Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications. In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined.

seems to imply that the Fed is now encouraging active loan workouts as a matter of policy. The other implication is that firms with CRE exposure can no longer rely on the Fed as a perpetual guarantor of risky exposure. Not only that, but in adopting a new policy strategy, the Fed is acknowledging the major problem that CRE writedowns will represent for banks, yet is telling banks to resolve problems on their own, while subsequently they will "not be subject to criticism for engaging in these efforts."

The implications of this Fed action for the economy could be staggering as the $3.5 b,quadr,trillion CRE market will likely not receive the same largesse that residential real estate has been the recipient of ever since the conservatorship of the GSEs. And the biggest loser in all of this will be banks that still have not used the massive risk rally to offload whole loan and CMBS CRE holdings, and moreover, still have these marked at par or close thereby.

As Wilbur Ross and George Soros pointed out earlier, the trouble for CRE is just starting. If the Fed is unwilling to recreate QE for CRE, in the same way that it continues to bail out residential exposure, then look for a major double dip in the economy. The only wild card is why the Fed is letting this happen, although if the political backlash against just QE 1 is any indication, then it likely would not have been able to pass additional liquidity measures regardless.

Full Fed policy statement can be found here.

Everyone at the evil lair is wearing party hats today as we banked some major coin. This evil megalomaniac closed the day 40% up - which might be a personal record. Of course much of that ill gotten gain will soon have to be relinquised and I tell you why:

The Zero shows a solid down day again on all fronts. What’s also important to note is the signal strength of today’s drop versus the signal during yesterday’s pop higher. A reasonable point of view would be that the trend has now changed to the downside - but - I don’t want to be hasty here - let’s see how far Monday’s snap back will get us.

Also apparent on the late day portion of the Zero Lite chart are various bullish divergences. We are quite oversold here folks and I got an inkling we’ll be pushing into Minute {2} early next week. I would point towards Monday had the ole’ buck breached 76.58 today - but so far no takers yet to push this thing higher. We shall see…

Program Trading Update:

evil.rat/ES: +18.75
geronimo/ES: -5.5

Evil.rat had a monster day today - geronimo not so much as it got stopped out early in the day. Fortunately we had lowered our stop settings a day earlier.

I leave you rats with a little goodie:

Wer wartet mit Besonnenheit
Der wirt belohnt zur rechten Zeit
Nun das Warten hat ein Ende
Leit euer Ohr einer Legende

He who is prudent and can wait
Will be rewarded when the time is right
Now your wait has come to an end
Lend your ear (attention) to a legend

Enjoy your weekend and Happy Halloween!!! Crank it up!

Mole

What an ugly day. Today marked the 142nd time since 1900 that the Dow went down at least 2% on a Friday (when the following Monday was not a holiday). On the following Monday, the Dow has averaged a decline of 0.31%, with positive returns 49% of the time. Since the bear market that started in October 2007, this has...

Submitted by Nic Lenoir of ICAP

Today's PMI data was very strong. There are experts in econometrics much more knowledgeable than I will ever be calling for further strength in production numbers that will lead to a turn in unemployment into Q1 2010. I don't dispute their models or the indicators they look at. However I can't come to terms with it. I think this is in great part because the business cycle which is supposed to lead us out of this recession is at odds with a much longer and bigger cycle: the debt cycle. I know this flies in the face of 50 years of econometrics that has made people a lot of money trading, but this is mainly due to the fact that the debt cycle is so long and stretched over time that we don't really have data to measure its impact on previous cycles. It coincides in a sense with the Kondratieff cycle, but transposed into today's financial markets, the burst of the debt bubble is a lot more pronounced. Basically modern technology and financial engineering has made it very easy to securitize credit and source funding or financing globally, so that the extent of the debt bubble has been allowed to grow far beyond what could have happened 50 years ago. There is also obviously the global aspect of it. Because financial markets are more and more global, so is the crisis.

Albert Edwards had a great piece the other day discussing the renewed importance in a post-bubble environment of the business cycle. This line of thought has also been outlined by the Global Macro Investor in the past. It relies a lot on the example given by Japan, or the 70s. One could argue that unlike the case of Japan which benefitted of the strong economy of the 90s to have a more robust business cycle due to exports, our current global economy will lack an engine to drive the cycle. The risk is that the consumer has retrenched enough in the US and in Europe that the business cycles becomes a restocking of shelves carrying products there is not necessarily much demand for. I will not even entertain the argument regarding China and the rest of Asia becoming the leading engine of growth for the rest of the world. China has about 40% over-capacity. While there is no doubt that most of the growth in this "new world" will come from emerging markets, and especially Asia, production capacity is already far above demand so growth there can be digested without employment. That's especially bad since we have to turn around tax receipts and deficits, and many assets that have been re-inflated via excessive liquidity need a strong underlying economy to justify current valuations.

That leaves only two choices for governments: let the debt cycle take its course. Bankruptcies will rise further, real estate will devalue another 30%, equities will lose 65%, and we will start with a clean sheet. That will wipe out the baby-boomers who are the main asset holders. Note by the way that the correlation between the number of 45/55 year-olds in our society and equities is historically positive. The other solution is to print as much as needed to prevent that from happening. It will be very difficult because leverage will only find people with sound balance sheets who will pour the resources into assets, driving asset inflation at the expense of sound economic recovery. Also despite what politicians may think asset inflation is a lot worse for the lower and middle class than is the debt cycle, or maybe they are just cynical. In the end, there is little chance that governments will be able to coordinate their actions like they did last fall, because fear then was a lot greater than now, when consequences of today's actions can in fact be more dramatic than they were then... In the end I think we will experience cycles of injection and draining of liquidity trying to dance between the two evils.

That bring us to today's markets. Part of what has driven the sell-off recently is the fear of a pull-back in liquidity. China is trying to move away from excessive lending which has been out of control in the first half of the year, Brazil is talking about taxing foreign investments, Europe is oscillating between hawkish rhetoric and the fear of a strong Euro, and we have the FOMC next week, though I think it's a non-issue for now. We are obviously in a phase were authorities try to give the impression that liquidity will be controlled or pulled. More important than liquidity, it's the sentiment of infinite liquidity they are trying to squander. After testing the resistance on the Dax yesterday we had the follow through sell-off expected. The AUDUSD is very similar which is why I have added the chart today. S&P is back close to the bottom of the short-term bearish channel is breaking the key 1,032 support. After such a powerful move, I think we finally bottom between 1,025 and 1,012 in the S&P future for the short-term, before consolidating between 1,025 and 1,065. During that consolidation one would observe subdued strength on the upside compared to the recent sell-offs, and momentum indicators retracing around 60 for RSIs, before we accelerate and go test the main intermediate support highlighted on the daily chart around 942.

 

Good luck trading,

Nic 

Brilliant!

The Daily Show With Jon Stewart	Mon – Thurs 11p / 10c
For Fox Sake!
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

Remember that rally yesterday? All gone and then some ...

Click on graph for larger image in new window.

From Doug Short of dshort.com (financial planner).

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The S&P was off 2.8% today ...

A great interview on Tech Ticker: "Still a Very Shaky Sort of World Recovery," FT's Martin Wolf Says

Martin Wolf, chief economics commentator for The Financial Times, talks about the U.S. and world economy.

"It's very difficult to believe in a really strong consumer-led recovery in the U.S.. I think this is still a very shaky sort of world recovery."

And on the stock market:

"I think the market actually did a probably not unreasonable job - that is why I think it is not much of a bubble - of anticipating what was going to happen. And you sell on the news, isn't that the story? You buy on the hope and you sell on the news. We now know there is a reasonable recovery. By the way, in the early phases of a recovery, 3.5% annualized growth is not sensational by American standards. And remember if the U.S. is going to reduce its unemployment we will want to see annual growth - not annualized growth - of 4% to 5%."
emphasis added

And from Bloomberg: Wilbur Ross Sees ‘Huge’ Commercial Real Estate Crash (ht James, others)

Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”

I'm not sure this is the beginning of a "huge crash" - prices are already down 41% from the peak according to the Moody’s/REAL Commercial Property Price Indices!

Note: on CRE, also see MIT Professor David Geltner discussion on the CPII and the differences between price declines for healthy and distressed properties: Where we are in the aggregate: A two-year anniversary ...

Over at Bespoke Premium, we just put out a report on November seasonality and the typical returns for the Dow in the last two months of the year. Next Monday marks the first trading day of November. Below we highlight the Dow's performance on the first trading day of November over the last 50 years. As shown, the average change...

The chart below present the change in reported and projected corporate Revenues and EPS (excluding financial companies), and highlights the dramatic improvement in the economy expected by analysts over the next 2-3 quarters. In the next quarter things for companies get dicey with both revenue and EPS expected to be flat with Q4 of 2008. Whether or not this is attainable will be seen shortly. Yet where it does get just a little amusing, is 2 and 3 quarters in the future, when EPS are projected to increase by 23% and 20% respectively, while everyone hopes sales can wave a magic wand, and with skeleton crews of employees and no growth capex investments, are assumed to grow by 11.2% and 9.5%. Additionally, analysts are now forced to actually really ramp up their expectations in order for stocks to grow incrementally from here. If readers believe that corporate revenues in Q1 of 2010 can grow sales by more than 10% from Q1 2009 (while continuing to fire people), then by all means, buy stocks.

This is ridiculous and anyone who believes it deserves to eat The White House Dog's used food:

The administration's blog post argued that Clunkers helped to lower auto prices on the rest of the vehicle market as well, a fact the administration said Edmunds ignored.

What a total load of crap.

First, I personally walked into dealerships during the "CFC" program time, and every single one of those dealers was literally screwing everyone who walked into the door.

Normally, you can buy an American car for $100 or so over invoice price.  I have, in fact, not purchased one vehicle for more since I started buying cars!  My last "new" American vehicle, a 2002 Suburban, was bought during the 0% "craze" following 9/11 and even with the 0% financing I bought it for $1,000 UNDER factory invoice.  I saw no dealer willing to sell at anything approaching that number this time - they were all selling at full sticker, and two had their own "supplemental rip-off stickers" on the windows that they refused to negotiate on yet were full of junk (the usual "undercoating" and "fabric protection" for $250 garbage.)  People literally got robbed to the tune of $2,000, $3,000 and sometimes more than the rebate was worth on these so-called "deals."

Second, this "program" destroyed the low end resale market.  It literally took all those cars and crushed them!  If you were in the market for such a clunker as the only car you could afford they all disappeared for the duration of that program.  This did severe damage to sections of the used-car market and the consumers dependent on it.

This program was nothing other than a royal screwing of the American Consumer and a sop to the UAW, and that's a fact.  Edmunds got this exactly right and the White House is pissed off that they got called on their incessant lies by a very influential auto industry publication.

Well, boo-freaking-hoo Barry.

A few worthwhile reads before the weekend:

• Credit Ratings Now Optional, Firms Find (WSJ)

•  Why the Goldman Sachs-AIG Story Won’t Go Away (Bloomberg)

• Victory for Obama Over Military Lobby (NYT). Now what about Banking Lobby?

• Why Didn’t Inventories Go Up? (Norris)

• Mortgage Payments Declined in Q3 (Real Time Economics)

• Fed’s Regional Chiefs ‘Fight’ for Monetary Policy Independence (Bloomberg)

• 5 Nightmare (not forecasts) Scenarios for the Economy (MoneyWatch)

• Investors Sense Rout in Stocks After 8-Month Rally (Bloomberg)

• For Equestrians, a Buyer’s Market in Horses (NYT)

•  Scott Brown on Why America Is Finally Ready for Doctor Who (Wired)

Its the weekend, I am getting ready for some extensive travel — time to fire up the Tardis!

What are you reading (in or out of a small blue police box)?

According to an article published by the Associated Press, the billionaire investor, and bondholder Carl Ichan agreed today to support CIT's restructuring and provide it with a billion dollar credit line- even if they do file for bankruptcy.   

For weeks Ichan has been chomping at the bit on CIT's restructuring heels- even offering to buy minority debt holders at sixty-cents on the dollar.

On Wednesday, CIT got a $4.5 billion line of credit from lenders and bondholders; in addition to the $3 billion in financing provided earlier this summer.

Yesterday marked the final countdown, as CIT bondholders could agree to a debt exchange for new debt terms and stock- but the results of the vote are still pending.

Goldman announced this morning it would shave some debt off the top, in exchange for a fee, of course.   

This afternoon, Ichan changed his views on the offer after CIT agreed to changes- namely its decisions regarding the board of directors if it files for bankruptcy.

The CIT Group is the financier to some 2,000 venders which supply over 300,000 retail stores- according to the National Retail Federation.

With all the funding, lines of credit and promises- its like Christmas or Chanukah for the debt riddled CIT Group. 

But they'll still file for bankruptcy- or "shoot their eye out... kid..." like Ralphie in A Christmas Story.

 

 

Time to drag this out.... from quite some time ago.....

Thanksgiving came early this year. It was yesterday, Thursday October 29, 2009. The reason we know this is the after Thanksgiving shopfest known as Black Friday started today.

No doubt some of you who forgot to stuff yourselves with turkey and pumpkin pie yesterday are demanding proof of this occurrence. I can certainly oblige.

Please consider

Sears Starts Black Friday NOW! Promotion Today

Posted on 10/30/09 @ 7:56 am PT

Every week between now and Black Friday, Sears.com will have several doorbusters from their Black Friday ad available only for just a few hours. This week's sale runs from 5pm this afternoon until noon tomorrow (central time). Here are the doorbusters available this week:

Once again, these items will be on sale starting at 5pm CT today. You can also save $5 off a $50 purchase with coupon code SEARS5OFF50.

BlackFriday.Org has the following leaks.

Sears Black Friday Ad Leaked

October 27th 2009

The first major black Friday ad of 2009 has arrived and it's from Sears. This year Sears is having an incredible black Friday sale with over 599 doorbusters! Some of the doorbuster deals include a Panasonic Blu-ray Home Theater System for $399.99, a Kenmore 3.5-cu ft. High Efficiency Washer/Dryer Pair for $579.98, and a Kodak CD-80 10.2 MegaPixel Digital Camera (3x zoom, 2.4" LCD) for just $79.99.

Harbor Freight Black Friday Ad Released

October 26th 2009

Our third black Friday ad for 2009 has arrived and it's from Harbor Freight. We only received the few couple of pages of the advertisement but we expect to have the rest of it within a few days. Also, we should be posting the Ace Hardware, Sears, and Kmart ads within the next week or two, so be sure to check back or join our email list for the latest updates.

Thanksgiving Holiday Schedule Canada vs. US

Inquiring minds just might be interested in Canadian Thanksgiving calendar dates.



Is it any wonder the Canadian economy is in so much better shape than ours? Look at how many extra shopping days they get. This is outrageous. I propose we move Thanksgiving up to August 1 to rectify this anomaly and make up for some of the past lost shopping days in the US.

Over time our economy will recover if we leapfrog Canada now to make up for past lost shopping days, population adjusted. Once we are back on an even keel, I propose both countries settle on September 22 to keep our respective economies humming in sync.

Hint to new readers: please don't think I am serious.

Black Friday: How Much Will It Matter?

Marketing Daily is asking Black Friday: How Much Will It Matter?

In some ways, there's something comforting about the way retailers are gearing up for Black Friday, that make-or-break kickoff to the holiday season. Stores like Target are already shoving aisles of Christmas items in between the Halloween costumes. And advertising circulars are already being leaked to deal-finding websites, creating a buzz retailers count on to build traffic.

But there are also signs that this holiday season - the second consecutive year of dreary economics lessons - will be different.

Retailers, for the most part, will consider it a big win if they can sell at least as well as they did last year, Leon Nicholas, director of retail insight at Management Ventures, based in Cambridge, Mass., tells Marketing Daily, "We don't expect to see as many flashy price points, as more stores have locked in already-low pricing. I don't think we'll have the assortment we've had in the past. And in many ways, Black Friday is becoming more of a cultural event about browsing than buying, with people surfing the web for deals and ideas."

Stores are encouraging that, Phil Rist EVP/BIGresearch, says, "by making Black Friday earlier and earlier each year," with many events and web-only sales starting on Thursday. "We'll see even more of that this year."

But 86% of the shoppers in the survey say that unless they can get a discount of at least 20% or more, they won't buy. (In fact, a quarter of those say that unless discounts are in the neighborhood of 50%, they won't open their wallets.) And 38% say they shop late deliberately, because that's when they believe they will find the best bargains.

That may make for a bleak Black Friday. With so many consumers still worried about jobs, Nicholas says, "you may see them buying heavily at discounters, where they believe inventory will be limited. But while you may see a lot of people walking through stores like Macy's, they won't be buying yet. Retailers have trained them to wait longer."

Good News

If you forgot to have turkey and pie yesterday, please don't fret. You can do so every Friday between now and Friday, November 27 comfortable in the knowledge that some store will be announcing an early start to Black Friday.

Of course, retailers spreading this affair out are going to diminish the importance of it all. One Black Friday might be special, five consecutive black Fridays is another matter. How much turkey and pie can one eat? By the time the official Black Friday begins, people will be tired of turkey, turkey a la king, turkey pot pie, and flaming turkey wings.

However, this is a good thing. The more people that become numb to these marketing efforts the better off we will all be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

William R. Hawkins (formerly an economics professor at Appalachian State University, the University of North Carolina-Asheville, and Radford University) argues that America is repeating the mistakes which led to the fall of the Hapsburg empire:

Spain was the first global Superpower...With Spain as its political base, and gold and silver flowing in from its American colonies, the Hapsburg dynasty became the dominant power in Europe. It controlled rich parts of Italy through Naples and Milan, and Central Europe from the Netherlands through the Holy Roman Empire to Austria. In the 16th century it added the far distant Philippine islands to its empire. The Hapsburgs held off the Ottoman Turks, whose resurgent wave of Islamic conquest in the 16th century swept across the Balkans and nearly captured Vienna.

The Hapsburgs went into decline in the 17th century, and while any such momentous event has many causes, for our purposes the focus will be on the economic collapse of Spain, which not only sapped the empire of strength but served to build up the power of its rivals.

The demands of empire required a strong and growing economy, but Spain did not keep up with the economic expansion that was taking place in other parts of Europe. Madrid’s financial base fell out from under its empire. Spain could continue to consume in the short term because of the flow of precious metals from American mines, but it could not produce the goods it needed at home, which in the long-run proved fatal to its standing as a Great Power and as an advanced society.

Spanish imports were double exports and the precious metals became scarce within weeks of the arrival of the American treasure fleets as the money flowed to Spain's many creditors. What industry there was, along with banking and shipping, was in the hands of foreign owners. As a modern historian, Jaime Vicens Vives, has concluded, “This was one of the fundamental causes of the Spanish economy's profound decline in the seventeenth century, maritime trade had fallen into the hands of foreigners.” This, plus the “opening of the internal market to foreign goods,” produced a “fatal result.” Spain's exports were at the same time under heavy pressure by competitors in third country markets. A nation that cannot control its domestic market will seldom be able to sustain itself in foreign markets, which are inherently less accessible and more unstable.

Yet, Spanish leaders were deluded by a sense of false prosperity. This is testified by the statement of a prominent official, Alfonso Nunez de Castro in 1675: “Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody.” A few years later, the Madrid government was bankrupt. The Spanish nobleman had foolishly elevated consumption, a use for wealth, above production, the creation of wealth.

Historians have traced the flow of Spanish gold and silver across the markets of Europe. Those who “served” Spain by establishing industries to manufacture goods for the Spanish market gained the money. Spain’s rivals, France, Holland (which started a successful revolt in 1568) and England, prospered by their trade surpluses, and reinvested the money to expand their own capabilities. Another modern expert on Hapsburg history, Henry Kamen, has cited contemporary sources who referred to 17th century Spain as “the Indies for the foreigner.” The military empire of the Hapsburgs became the economic colony of other powers, or, to use a current phrase, Spain was the “engine of growth” for the rest of the continent.

Where there were jobs and prosperity, there was also rapid population growth, and rising tax revenue. Rival powers were able to field and finance military forces that could defeat the once superior Spanish forces both on land and at sea. The irony of this is that Spain was ruled by a warrior aristocracy tempered by centuries of constant warfare against Islamic hordes and Christian heretics. These nobles looked down on merchants and manufacturers and disparaged their mundane professions only to find that without a strong domestic business class they could not afford the fleets and armies that guarded the empire they had built.

Today, the American “empire” is also trying to consume more than it produces. The U.S. trade deficit is nearing Spain’s nadir of imports being double exports. Both government spending and private consumption are financed heavily by debt. Washington is printing money, the modern equivalent of digging gold out of the ground, rather than earning the means to pay its bills. And the political and military elites are apparently indifferent to the fate of domestic business and industry. Americans must learn ... from the Spanish experience ... and take corrective action while they still can.

Hat tip to Chuck Graves.

By George Washington of Washington’s Blog.

Preface:  Please read to the end to see the humorous quote.

I have previously debunked numerous false arguments used to defend the too big to fails. See this and this.

But the apologists for the TBTFs are now arguing that breaking up the beached whales … er, giant banks … will harm America’s ability to compete with foreign banks.

Joshua Rosner (managing director of an independent financial services research firm), has written an important essay debunking this argument:

Those who argue against a more proactive reduction in risk and size of TBTF institutions will, as always, revert to an argument that strikes a natural chord in every American’s heart: ‘Doing so would create an unleveled international playing field for our institutions relative to their international competitors’. Level playing fields are a worthy goal, but this is not a relevant argument. Instead, this tired bromide must be resoundingly dismissed on several counts:

• Those countries with the largest banks as a percentage of GDP (Iceland, Ireland, Switzerland) demonstrated that a concentration of banking power can cause significant sovereign risk and tilt global economic playing fields away from that country.

• The likely breakups of ING, Lloyds and KBC suggest that it is we who seek to support an unlevel playing field where we subsidize our TBTF banks while other nations recognize the policy failures of moral hazard. If we continue down this path we will likely be at risk of violating international fair trade regimes.

• When the “unlevel playing field” argument is cited, keep in mind this reasoning supports the disadvantaging of 8000+ community banks relative to our largest banks, all in the name of protecting big banks from governmentally- subsidized international competition.

• There is no longer any evidence that, beyond a cost of capital advantage that comes with implied government support, there are sustainable and tangible economies of scale arising from being the largest. The financial supermarket concept has been proven a failure. The only ones who benefit are the high-level executives.

• We must demand that our legislators no longer allow unelected officials at the independent Federal Reserve to sign international accords created by the TBTF banks through supra-national bodies like the Basel Committee.

• Are we to believe that if we did not have such large and globally dominant firms, US borrowers might be paying more that the 29% interest that several of the TBTF firms are now charging on their card accounts? Perhaps we should think about what advantage our population has gained as a result of our financial institutions being such a large part of our economy or being globally dominant.

• Since when did we accept a national strategy of following rather than leading? When we do what is right, others follow. As example, consider the bank secrecy havens – they made money for a bit. Now, even the Swiss and the Cayman authorities are coming around to our view.

• We are already at a disadvantage given that the largest foreign banks operate in the US without any tier one capital requirement and yet mostlarge foreign banks have not built a bricks and mortar presence here. Nobody screams about their undercapitalization nor has that undercapitalization caused deposits to migrate to foreign banks.

What fake excuse will the apologists for the TBTFs throw out next?

That breaking up the giants and letting small and mid-sized banks, credit unions and state public banks compete fairly will shift the Earth’s gravitational field as deposits shift away from the money centers?

Note: Rosner has a funny and potentially effective idea for putting pressure on Congress. He suggests that we all call our representatives and ask how much the lobbyists have paid them to destroy America’s economy by propping up the too big to fail banks.

Rosner’s actual language is somewhat over-the-top:

If leadership won’t add such language [reigning in the TBTFs], call your elected official and ask how much they actually receive when they agree to put on the kneepads.

In what would could pass for Cohen & Steers' worst nightmare, Wilbur Ross today said that he anticipates essentially an Armageddon for US commercial real estate. What we fail to see is how this is news... What we fail to see even more is how the hell REITs are still trading where they are? It must be all those non-cash dividends, the staggering debt loads and the exploding cap rates which make them such an attractive proposition. As Ross points out: "All of the components of real estate value are going in the wrong direction simultaneously. Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up." Which begs the question: just because everyone knows the potential fall out associated with CRE, yet no proactive steps are taken to moderate these adverse developments, save a hope that the Fed will inflate debt sufficiently before 2012 when the refi crunch hits in earnest, does this make REITs a strong buy as BAC/ML has been claiming for months on end?

Some more perspective from Bloomberg:

Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”

U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007, Moody’s Investors Service said Oct. 19.

Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said in an interview on Bloomberg Radio that he would use “extreme caution” before putting money into commercial real estate, especially office space, because properties are losing tenants.

“I think it’s going to take quite a while to work itself out,” Ross said.

As of Oct. 15, Ross said he had spent less than $100 million of at least $1.5 billion available to him under the Public-Private Investment Program, an investment pool of private and government money for purchasing distressed assets from financial institutions.

Ross is not alone in his CRE gloom, and was joined most recently by billionaire George Soros:

Billionaire George Soros, speaking today at a lecture organized by the Central European University in Budapest, said a “bloodletting” may be coming for leveraged buyouts and commercial real estate.

“The American consumer will no longer be able to serve as the motor for the world economy,” said Soros, 79.

Yet every story has two sides. And while we have beat the dead horse which is the avalanche of endless Merrill upgrades, which have led to the lone bright light in the firm's investment banking/underwriting revenue, a different angle is provided by REIT manager Cohen and Steers which must be looking at today's action with just a bit of trepidation. We point you to their most recent investment commentary. We also suggest you swallow the blue pill before reading this.

REITs have rebounded significantly from their lows in March (although they are still 50% below their February 2007 peak) largely because of the aggressive steps they have taken to repair their balance sheets and trim expenses. In this, they are substantially ahead of domestic private operators, which have limited access to capital and will require additional equity capital to recapitalize. In fact, we expect a number of cash-strapped private companies to address their capital needs by launching REIT IPOs—a development we welcome, as it will expand our investable universe.

We believe that the next phase of the recovery cycle—acquisitions—will likely begin next year and extend through 2014. REITs will be in a position to take advantage of buying opportunities, most likely from distressed private sellers. Acquisitions will be followed by a recovery in economic fundamentals characterized by an improvement in occupancies, rising rents and resumption in REIT top-line growth. Our best estimate is that this will begin to occur in the second half of 2010. [Ross and Soros on one side; Cohen and Steers on the other... not sure who we are going with on this one just yet]

In the meantime, as real estate valuations seek out firm ground, we will maintain our focus on well-capitalized REITs with healthy balance sheets, and pursue select opportunities among companies we believe are undervalued, but have sound business models and strong management teams.

 

Courage, neocon style.

Yes, 3.5 is a lot better than zero. But what we need is a string of numbers about twice that high.

From the WSJ: CIT, Icahn Reach Tentative Deal Over Lender's Restructuring

As part of further discussions with CIT, Mr. Icahn has agreed to back down while the company restructures in bankruptcy court. ...

The company plans to file for bankruptcy in New York as soon as Sunday night or early Monday, said people familiar with the matter. CIT is poised to enter bankruptcy with enough creditor support to approve its reorganization plan and shorten its stay in Chapter 11 ...

... CIT asked bondholders to vote on a prepackaged bankruptcy plan, which would give most bondholders new debt it values at 70 cents on the dollar, and all the equity in a restructured company.

This debt-for-equity swap makes the most sense and would allow CIT to continue to operate.

Note: CIT provides financing for about one million small businesses, so a prepackaged bankruptcy that allows the company to continue to operate would be helpful. Small businesses are already having trouble obtaining credit, and this might be impacting hiring plans (see from Melinda Pitts at Macroblog: Prospects for a small business-fueled employment recovery )