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

I hear that the stimulus package just started in May and its effect will be felt over the next three months.

To this I will say c’mon guys, that stimulus package is already in the full force for the two full months. In early March we all knew how much it will be and when it will come (and if we qualify, unlike me, for example). Most people have credit cards and can pre-spend the check in advance.

That’s what they did, the just released data show that consumer credit in March rose $15 bln, well above expected and above $5 bln in January. I assume that most people are making the best efforts to manage their finances and if they increase debt in the face of obvious economic difficulties I assume they do it within the margin set by this check in the mail. So those who planned to spend the check are already doing so.

The second category of people are those who don’t have any credit lines left and can’t pre-spend the check. I assume that those people have horrible debt situation and whe they get the check it will go straight to pay the pile of bills. Those people will not spend much when they get this check.

And the third category of people are those who don’t plan to spend it at all. It will go to savings, to reduce debt, to pay for the college for the Fall and stuff like that.

Looking at all this I think I can estimate that about $60 bln of the $110 bln stimulus package will be spent and the rate of spending is set in March, i.e. about $15 bln/months. So the last dime will be spent during the 4th of July fireworks. The recession, which is interrupted by now, will resume in July. Plan accordingly.

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 🙂

Please read this nice post from sudden debt about rotten Friday job report. I’ll just add few comments.

As you know after the crash of Communism a lot of manufacturing jobs in US were outsourced to China and replaced with service jobs. The difference between manufacturing and service sector feels during downturns.

Suppose you have a manufacturer who lost 10% of sales. What he will do? He will just fire 9% of factory workers, as simple as that.

Now suppose you have an auto dealer who lost 10% of sales. Suppose he employs 10 people. Will he fire one them? No, he will switch three of them to work part-time (and cut health insurance to all three). This way he has more flexibility to cover Saturdays and evenings. Sometimes the car manufacturer has a promotion and he will give those 3 guys more hours for a week or two. If he loses another 10% of sales he will switch another three of them into part-time. As you see the payroll statistics will show no lay-offs from this firm.

Look at the chart of long-term T-bonds:

The last 3 minimums made a very clear neckline for a potential head-and-shoulders, but the chart happily bounced again to start the next run up. Until yesterday. The chart fell back to the neckline. If it bounces it’s all fine. If it falls through down we’ll have a nasty downfall of treasury bonds in the face of deteriorating economy. The consequences could be pretty nasty.

What’s the reason? Please read here.

Just after I’ve made two posts here and here saying that in the case the stock market does not flop back to bull mode the current level already looks like an exhaustion point after which the bear programming should continue. I also copied two messages from other board here where Charmin says that the current point is very similar to June of 2001. Everything that happened in the last two months is very, very typical for the bear market.

Well, apparently Bernanke is reading the charts as well, and I suspect that he’s reading the charts much better than I do. He made the announcement to expand TAF by another $50 bln. Remember this post? Where Bernanke says he’s now accepting catshit as TSLF collateral? Well, today he announced that even miceshit is accepted. The Fed coffers must be quite smelly now 🙂

The time of this announcement was incredibly damaging for bears. Surely the stocks rally with a danger that the technical parameters of the bear market will be broken. As millions of people are trading by those charts you can expect an extended rally that will fly away from any fundamentals. Bernanke does read the charts, this is why Bernanke put is so real.

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