The mounting losses from mortgage papers forced financial institutions to raise capital. While capital inflows seem to be healthy the dangerous trend is developing.



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Hi All! I want to share with you that I was cordially invited to start my own blog at Wall Street Examiner. You probably know this site very well as Russ Winter is contributing there as a blogger and Lee Adler is posting his excellent daily reviews for subscribers.

This is the location of my new blog, it’s titled “The yellow brick road” and I’m opening with a new installment of “Where is my recession?” serial.

Please share your feedback, do you like it, is it working well. I’ll continue to announce every post here for easy transition and I think I will keep this site for all posts that I will consider not applicable for WSE

You probably know that I like to add the outstanding commercial paper from CP release and banking credit from H8. To some extend it is mixing apples and oranges together but the result looks very reasonable to monitor the trend. It matches what you would expect.

short term credit

What you see here is that the sum made a top at $11,322 bln at the end of March. By the end of April it stands at $11,189 bln. The credit contraction is only starting now.

I think the troubles of the “subprime” meltdown made all the attributes of a typical recession visible by December-January, but the mainstreet economy fell behind the market turbulences and only now is showing the first tentative signs of the slowdown.

Update: instead of sitting here all night and preparing an extended overview of various bonds issued recently with all interest rates out there I’m cheating, I’m taking a shortcut. All you need to know is here, Fannie Mae raised $7 bln at 8.25%, Freddie Mac will likely do the same.

Wait a minute, the average prime mortgage rate as compiled by Freddie Mac is 6.05%. So those guys are losing 2.2% on every prime mortgage they write. Those are the two most important corporations in our economy and they are in the tailspin that eventually will be stopped by the bail-out. Bernanke cuts rates to 2%, where are those rates? This is what the credit crunch is, the inability of the Central bank to control interest rates on almost anything except treasuries. This is what “pushing on the string” is – Federal reserve can’t push money into economy

At April 30 I’ve posted “Kiss this rally goodbye“. Well, I was wrong by 2 days and 18 points in the S&P. I’ve said that the peak will be 1404 at April 30 but now it looks like the real peak was fixed at 1422 at May 2 (both intradays). After yesterday 3.5% carnage in financial stocks they are tumbling by another 2% today. Financial sector is a leader in rallies and falls, so we won’t see that May 2nd 1422 level for months and, who knows, maybe years or even many years.

What happened? In this post 2 days ago (and the follow up discussion) I’ve suggested that Feds will have to make sacrifices in order to save the bond market. That had to do something nasty to scare the money out of stock market into bonds. My proposal was that the Feds will either suggest that they will allow Countrywide to fall or they will hint of possible rate hike.

Yes, they made a hint that the rate hike is possible, that worked very well – I was right. Second, the SEC declared that investment banks will now have to disclose the liquidity levels. That worked even better. The market is tanking exactly as Bernanke wants it to.

Yes, we know that Bernanke put exists for the bulls. Now we know that Bernanke call for the bears exists as well. Those who think that he will allow the stock market to rise at the expense of the treasury bonds are terribly mistaken. He will make all necessary sacrifices

The trouble in BOA-CW deal came at interesting moment. As I’ve noted here, the T-bonds are at the most critical juncture in 10 months. Too much complacency (VIX sub 20 for a while) and too much T borrowings are about to produce a major T-bond “sell” signal.

There are three major buyers of T-bonds: domestic investors looking for safe heaven, FCBs and speculators. If the chart bends the third group will be out, the first group will shrink. The T-bonds will fall until they find a firm support, but that could be a disaster for the economy.

I’ve demonstrated my concern. Now Bernanke needs to show his concern. The very good and sure way to save the treasury market will be to let Countrywide to fail. They are not so important for the economy and it would be a fair price to save the rest of us. Think of it as of timely sacrifice 🙂

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