Today's Crunchy Headlines & Thoughts
A: More of the same today as GM's insurance segment and other businesses led to an astounding $39B loss. I really hope with this new accounting changing for Level 3 Assets coming Nov. 15th, we are not entering the next version of Enron, Worldcom, & Tyco type surprises. Here are some headlines validating the continuing credit crunch, the falling dollar, and $100 oil. The story is still being written.My thoughts at the end.
WaMu: Expected "Soft Landing" Becomes "Severe Downturn" (Reuters via Calculated Risk)
"The soft landing we were anticipating quickly transitioned to a severe downturn," Chief Executive Kerry Killinger said in a presentation to investors in New York. "This process is painful."Stocks Pull Back As Dollar Tumbles (Yahoo Finance)
Stocks fell sharply and bonds jumped Wednesday after the dollar sank further amid speculation that China will seek to diversify some of its foreign currency stockpiles beyond the greenback. The 13-nation euro hit a fresh record against the dollar -- rising to $1.4729 -- before falling back. The dollar fell not only against the euro but in Asia following a report that a senior Chinese political figure said China should diversify its $1.43-trillion foreign exchange reserves into the euro and other strong currencies.
GM Reports $39Billion Loss on Deferred Tax Charge (Bloomberg)
General Motors Corp., the world's largest automaker, reported a record $39 billion quarterly loss after three money-losing years forced the company to write down the value of future tax benefits.Bottomless Banking (Forbes)
The Detroit-based automaker signaled that it won't generate enough earnings to use the benefits, citing defaults on subprime mortgage loans at GMAC LLC and "more challenging" auto-market conditions in the U.S. and Germany.
As Citigroup faces another massive quarterly write-down of credit derivative assets, questions remain about other banks' exposures, and when the crisis goes from a trading book issue into an industrywide credit quality problem. Morgan Stanley may be on the hook for another $6 billion in write-downs for collateralized debt obligations and other mortgage exposure, according to Fox-Pitt Kelton analyst David Trone. And rumors continue to circulate about Goldman Sachs, which so far is the least scathed of all the Wall Street firms.Within Fed: Resistance To More Rate Cuts (NY Times)
Traders are intensely focused on level 3 reported by the banks, because new accounting rules changing the way assets are valued kick in later this month and could fuel a new wave of write-downs. To hear executives from the banks talk in recent weeks, Wall Street is going through another one of those unprecedented moments where the models that perform so well in good times prove utterly useless when things go haywire.
In an unusually blunt interview, the president of the Federal Reserve Bank of Philadelphia said he already expected growth to slow to an annual pace of 1.5 percent or less. But he said he would not support another rate cut unless the slowdown appeared to be even sharper than that.Crude Oil = $98; Gold = $845 (The Big Picture)
Mr. Plosser suggested that he disagreed with the Fed's decision to lower the benchmark federal funds rate last week, its second rate cut in two months. "I happen to think this decision was a close call," he said.
The Fed recklessly abandons their price stability mandate, and this is what it has wrought: Dollar at record lows, oil and gold near all time highs.Wow, just a lot of crazy things going on right now. I think the biggest concern right now should be the magnitude of write-downs as the truth makes its way to the surface AFTER the accounting rule change takes place on Nov. 15th! I discussed Level 3 Assets on Saturday and told you to expect chatter about this in the media as we near the deadline.
It is the first rule of economics, yet so many idiots pundits cannot seem to to remember it: THERE IS NO FREE LUNCH.
In physics, the corollary is that "every action has an equal and opposite reaction." Why this is too complex for their little frontal lobes is beyond me. It is simple. It is basic. It is easily understood by even supply siders.
Think about all of the brainiacs who have been begging for rate cuts -- and from historically moderate rates -- over the past 2 years. Be sure to thank them for the reckless disregard for your wallet.
What we need to look out for now, is what round 3 of the credit crunch may be caused by. I think it will be lowered valuations for Level 3 Assets. On November 15th, a new accounting rule will require the disclosure of these assets whose market valuations were assigned by in-house models, as the market where they trade in are illiquid and in distress.Even Rick Santelli, talking from the bond pits in Chicago, mentioned how the blogosphere was ripe with talk about the upcoming FASB 157 accounting change! He's right, and its the unknown that worries me. How many more surprises are out there and how many quarters of earnings will be adjusted as the truth comes out? All of a sudden the P/E's of companies that appeared so attractive from a valuation standpoint, will rise significantly as earnings disappear!
It's the balance sheets that will define round 3 of the credit crunch as the value of level 3 assets gets disclosed to investors. Hard to imagine how the assigned valuations of these un-tradable assets rise; instead, expect to see significant write-downs and more distress as we work through this process.
The ABX indices have correctly predicted the carnage in the mortgage markets starting back on October 11th; I first talked about it on Oct. 16th. R-E-S-P-E-C-T the ABX! Investors are STILL pulling bids and its clear the demand for credit protection is high as the ongoing credit crisis threatens holdings that cannot be sold on the secondary mortgage markets. Expect:
a) lending capital to be used for highest quality borrowers
b) lending rates to continue to be disconnected from falling bond yields and fed funds rates
c) risk to continue to be re-priced for residential mortgage backed securities
d) lower quality borrowers to find higher rates
e) very tight lending & underwriting standards
f) secondary mortgage markets to be seized up restricting available capital for loans
...to continue until this situation clears up! I really wish all the news would just come out so we can get through this quicker, but that won't happen. I think the idea of a recession w/out future easing in fed funds rates is the sleeper call to get through this conglomerate of problems. A recession helping to ease the credit problems / weed out bad bets, national housing inventory problem, higher oil prices, higher commodity prices, weakening dollar, avoid bail out / moral hazard, pipeline inflation is becoming clearer each day.
We need to clean the slate as stagflation becomes a very real possibility; recall my post back on April 19th:
What you need to know is that right now we very well could be heading into a period of stagflation; that is high inflation and slowing economic growth via rising unemployment or a recession. The problem with this scenario is that if the fed tries to control one problem they can make the other problem much worse!