Bernanke’s Magic Hat

March 14, 2008

“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew, and act anew. We must disenthrall ourselves, and then we shall save our country.” Lincoln’s Second Annual Message to Congress, December 1, 1862.

Bernanke’s Magic HatJust as President Abe Lincoln inherited a country at a historic crossroad, so has Chairman Ben Bernanke. Lincoln thought well outside the box by and was able to reach into his hat-o-tricks and pullout some magic. Fortunately, his efforts eventually united a broken and disparate country laying the foundation for greatness. Now it is Mr. Bernanke’s turn.

So far, Academic Ben has shown some magic of his own. Reaching deep inside, we see that his hat-o-need-a-miracle is full of all sorts of wondrous solutions…..From traditional rate cuts to tapping the lesser known discount window and all the way back again, the Fed Chief has been wrangling with just how to get some breathing space between today and an eventual foreclosure of the good-ole U. S. of A. In an effort of global proportions, the latest move to avert an all out economic nosedive was to bring together a global consortium of governments in the hopes of providing the liquidity to allow for the banking sector to work its way through the short term. The unfortunate fact is that it appears as if Mr. Bernanke is not convinced that the U.S. can actually pull this one off alone.

According to Bloomberg reports,

In a Florida speech directed to bankers last week, he Fed Chairman Ben Bernanke requesting that lenders “forgive portions of mortgage debt held by homeowners at risk of defaulting.”

This is not a good sign as it is smelling like our sugar-daddy is running out of ideas and we dare say…options. This last move was historic in size and depth. “What else is does Bernanke have in his tall hat?” is weighing on the minds of many investors. Here is a novel idea…how about an immediate pullout of U.S. troops from IRAQ which, at last report, was costing us….(from )

There is a growing concern that there will be a failure and that the latest moves are set to help avert the impending reality. Rumors aside, the probability is growing that a major catastrophe is brewing and the longer the credit markets are locked-up, the higher the likelihood.

Do not confuse this and assume it is the rant of a perma-bear, looking to profit from scare tactics. Rather, I hope it is the voice of financial responsibility and the economic reality. We are still setting up for problems if this latest magic trick does not quickly do the job by acting like Super Drain-O in unclogging our financial plumbing.

What is left to be yanked out of Bernanke’s Hat? Perhaps rate cuts that will lower mortgage rates for the new legion of renters. As this would bring down the dollar’s value, we could find ourselves looking for Read more

Federal Reserve Actions: Goose Eggs

March 13, 2008

Remember that game we used to play as children? Now the Fed is playing: Cut, Cut, Cut, Cut, GOOSE, Cut, Cut – GOOSE!

Below is a great chart from Investor’s Business Daily that illustrates how the recent actions, policies and interventions have helped(?) the equity markets. While the Fed’s primary goal has been to restore liquidity to the credit markets, the collateral damage from the sub-prime and housing malignancy has negatively effected the dollar and equity markets. Nothing new here.

If we were grading the Fed on originality: A-
If we were to give a grade on effectiveness: D-

So far, as far as the market is concerned, the Fed Plan(s) have come up as Big Fat Goose Eggs !

(Click to Enlarge)

Remarks from the March 4, Independent Community Bankers of America Annual Convention in Orlando, Florida that are rather frightening:

A recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50 percent of the principal balance, with legal, sales, and maintenance expenses alone amounting to more than 10 percent of principal.

50%? 50%? So, they are showing a 40% reduction in value for the subprime debt and another 10% for the miscellaneous administration.iTunes Subscribe

With the time period between the last mortgage payment and REO liquidation lengthening in recent months, this loss rate will likely grow even larger. Moreover, as the time to liquidation increases, the uncertainty about the losses increases as well. The low prices offered for subprime-related securities in secondary markets support the impression that the potential for recovery through foreclosure is limited.

The loss rate will likely Read more

Bernanke’s Junk Exchange

March 12, 2008

Just when you least expect it, the hat is taken out to the street, looking for some help. This, the latest in a series of moves to try to open up some of the clogged credit markets. Overall it was a good thought as it had the intent of propping up a market and keeping the dollar from further decline.

Unfortunately, it took a GLOBAL BAILOUT this time to move the markets off of their lows. Now we are watching every news item to see if the next shoe is going to drop and the markets take back much of what they provided on Tuesday.

There are several scary rumors floating around the message boards that there may be a problem on the credit desks like:

Yahoo boards: “I am hearing HSBC’s CDS desk is refusing to quote LEH, BSC and GS CDSs.”

Time to look for cover and hedge up the portfolio. Look at (SDS) (SKF) and (QID) as some short-ideas that will give you the best bang for the short buck. Don’t be surprised over the next few days when when you hear all sorts of horrible news/rumors all leading to the failure of a brokerage or bank. This is a major stress test that has been in the making.

Yesterday’s action was based on the a huge short cover after a huge bailout plan. But the bailout is a credit-swap that has our government eating the crap in exchange for fully backed paper.

How long can we do that for?

More on Bernanke’e Magic Hat later….