Doug Noland Returns

[wndysrf]

Credit Bubble Bulletin ? May 7, 2003

 

I apologize for not posting this past weekend, but recent market events put me on the brink of a nervous breakdown, so an unscheduled trip to Copenhagen was necessary in order to receive the soothing reassurances from many large-breasted, beautiful, tall, stick-armed women.

 

It was, unfortunately, another historic, unsettled week in the financial markets. Unchecked volatility remains everywhere, whether it be currencies, bonds, precious metals, or stock indices. All indications continue to point toward a serious financial system dislocation.

 

For the week, the S & P surged 2%, while the Nasdaq gained 2%. The Transports and Morgan Stanley Cyclical indices rose 3%, while the Morgan Stanley Consumer index added 2%. The small cap Russell 2000 was actually unchanged and the Utilities dropped 1%. The tech stocks were again on fire, with the NASDAQ100 jumping 2%, the Morgan Stanley Networking index 2%, and the Semiconductors 3%. Year-to-date gains for these three indices increased to 17%, 38% and 22%.

 

Individual stocks and sectors continue to make wild and unpredictable moves in what is an acutely volatile and disjointed marketplace. Heated speculation continues in the Asian Exotica Internets, which gained another 14% this week, increasing its gain from the October lows to 600%. Some of the moves this week in this sector were simply breathtaking.

 

The Treasury market melt-up went to new extremes. For the week, 2-year Treasury yields sank 26 basis points to 1.62%, while 5-year yields dropped 23 basis points to 3.00%. The 10-year Treasury enjoyed its biggest weekly gain since July 2002, with yields sinking 29 basis points to 3.88%. The long-bond saw its yields drop 20 basis points to 5.38%.

 

Blowoff week number 45 in the mortgage market has been a raw spectacle. For all practical purposes, it was an unmitigated blowout. Countrywide?s 1st quarter results reflect the size and scope of the Mortgage Bubble Mania:

 

?Loan fundings increased 133 percent over last year to $102 billion. March's pipeline of applications closed at a record $59 billion, $10 billion higher than at the end of December, signaling robust near-term production performance;?

 

?The servicing portfolio continued its uninterrupted climb to $502 billion, an increase of $50 billion since the beginning of the year and up 41 percent over the $355 billion achieved in March 2002. This performance demonstrates the Company's ability to fund more loans than those that prepay from the servicing portfolio -- a noteworthy accomplishment in the midst of the challenges presented by a sustained low mortgage rate environment;?

 

?Diversification businesses contributed $170 million in pre-tax earnings for the first three months of 2003, more than double last year's first quarter. Diversification earnings were fueled by significant growth in the Capital Markets and Banking segments. Diversification pre-tax earnings now represent 32 percent of total pre-tax earnings.?

 

Sub-prime lender New Century Financial continues to set new records:

 

?For the three months ended March 31, 2003, net earnings increased to $45.7 million, or $1.84 per share on a diluted basis, compared with $30.9 million, or $1.21 per share, for the same quarter a year ago, an increase in earnings per share of 52.1%. Total revenues for the quarter increased to $181.0 million, compared with total revenues of $112.3 million for the same quarter a year ago. ?

 

?The April production level represented a 75% increase over April 2002 fundings and a 7% increase over March 2003 fundings of $1.79 billion with 21 funding days.?

 

The vast majority of New Century?s borrowers have poor Credit, while more than two-thirds of this quarter?s originations were two-year adjustable rate mortgages. We don?t see how peddling adjustable rate sub-prime mortgages is a good idea today. Nonetheless, the company has been granted significantly increased Credit lines from Bank of America, UBS Warburg, and Salomon.

 

The Credit Market continues to be in a melt-up mode as corporate and junk spreads continue to collapse, credit insurance costs implode, and self-reinforcing dynamic hedging of the MBS marketplace continues to drive treasury yields to new, record lows.

 

Most attention is directed to recent data indicating that the economy is emerging briskly from what is referred to as recession, and the ease with which the credit markets have opened back up as risk players have staked huge bets on the Greenspan Fed?s attempt to place a floor on the long end of the yield curve.

 

However, what is really afoot in the credit markets is a massive unwinding of bearish bets accumulated by the Derivative Sphere. An acceleration of truly momentous proportions, as key risk players struggle to save whatever hedges are left protecting the Structured Debt Pyramid. In a sense, the recent meltup in the risk marketplace has decimated the critical liquidity lifeline. Without these hedges, cash flows will be non-existent on the next systemic crisis which evolves.

 

Evolution and innovation among certain mechanical trading programs have also created profound changes in the Financial Sphere, as self-reinforcing momentum programs tend to exacerbate large moves in the commodity and financial markets. The longer these programs egg on the speculative impulses accommodated by the central bank, the more fragile markets become to unexpected shocks.

 

May 4- Maniacal Times (Genny Diggins): ??Bond insurers have been taking tremendous losses in their structured finance hedging programs due to ongoing self-reinforcing Program Trading in the credit swap markets,? Moody?s Investors Service has warned that many credit insurers are heavily exposed to the structured finance markets, have seen an estimated $270bn of hedges to the collateralised debt obligation (CDO) and credit default swap (CDS) markets evaporate in the months of March and April 2003. To date, offshore Pyramid Players underwriting insurance for MBIA, Ambac, and Financial Security Assurance have virtually disappeared, leaving the key risk underwriters in the CDO/CDS marketplace essentially unhedged and fully exposed..?

 

It is today important to recognize that the next time we have a financial dislocation, Greenspan will finally recognize that he has lost control of the Credit system unlike at any time during his extended term. While the banking system struggled in the early nineties under its worst crisis since the Great Depression, Greenspan was content to look the other way as Wall Street and the GSEs took dominant control of the Credit mechanism. With each subsequent financial crisis, Alan Greenspan was quick to act aggressively in the best interests of Wall Street and the leveraged speculating community. He maintained at all times the power to keep the Bubble expanding. He was king, his power absolute, and he meted out his favors on the likes of JP Morgan and Citigroup.

But the environment has changed profoundly. Program Robots have now taken over, and they are likely to prove to be an unsurmountable object to be reckoned with once the next leg to the downside commences. The Fed?s reckless permissiveness and negligent lack of leadership has spawned record levels of complacency and wild speculative excess. The risk markets will never be the same.

 

Measures of stock market risk (volatilities) and many Credit market spreads have contracted to the lowest levels of all time. We can?t help but to think that today there is acute downward pressure on the dollar during a time of extreme financial market complacency. Similar post-Bubble crises that wrecked havoc on other financial systems (and economies) invariably lead to collapsing currencies. Hopefully the dollar will prove the exception and stage a dramatic rebound, but we certainly haven?t seen much in the way of fundamental developments that support a bullish view. With the U.S. Credit system in full meltup mode and the economy perceived to be in recovery mode, we shudder to think how the dollar will react when and if the economy and the credit markets turn back to the downside.

 

In conclusion, I will make a general comment on the stocks of JP Morgan and Citigroup. These stocks must be watched carefully. As key risk players in the U.S dollar derivative market, we would not be surprised to see these stocks suffer huge declines. However, we find it most disconcerting the credit market recovery and the ongoing blowoff in the mortgage finance Bubble, means that there has yet to be any meaningful de-leveraging in the highly speculative Credit market (agencies and mortgage-backs!), and consumer spending is basically at even higher record levels. While the dollar has declined significantly, there has yet to be anything remotely resembling panic selling, and the general economy is not that weak. And, importantly, interest rates are at historically low levels. For those who believe that we have now well past the worst of the July 2002 financial crisis, I can only say I hope you are proved correct. I, however, fear we remain quite early in the long term adjustment process. We expect the surprise going forward will be a newfound cautious consumer and much more nervous lenders. These are the ingredients for recession ? not a ?double-dip? but The Great Recession. Thus far, the U.S. consumer has repeatedly exhibited a Pavlovian response to Washington and New York?s ?confidence game.? But, like the Prince?s stock purchases and Greenspan?s rate cuts, we think the confidence trump card has been gamed by the Program Robots too early, too often, and much too aggressively.

 

Huge leveraged bets are now in play for the upside. The environment seems primed for disappointment for the leveraged Riverboaters, directional momentum Commodity Robot Traders, Matrix Speculators, and all the rest. Retrenchment towards risk aversion has, regrettably, been postponed one time too many.

[BarBu]

!Excellent!

[DrStool]

Seems Mark got his creative juices back!

[h2orush]

Well, That's a mouthful!

 

Market tried to rally today, couldnt, and was down slightly. Homebuilders were in full launch mode. Check BZH, RYL, and LEN. This group set for another liftoff to new highs?

 

Not sure what happens from here, hoping for a downside move, but have a long/short portfolio just in case. Thanks Pile!

[BeerMarket]

WFMI says 2003 will be at low end of previous estimates. Time to go long junk food?

 

This Q was blamed on everything from the war to the "Easter shift" (I think I worked that once) to the blizzards and other storms, of which they named several in particular.

 

It's everything but the economy, stupid!

[The End]

I'll open swing waves around 7 pm est. I have to go teach little kids how to hit a round ball with a stick. :grin:

[TheDeepBlueSea]

Speaking of financial risk, does anyone still look at the TED spread

(Treasury - Eurodollar, not Turner in gay porn) as a risk measure?

 

Or has it been superseded by the credit spreads?

[roidrage]

Whole Foods getting hammered AH

[Guest jrmfl]

still laughing, priceless mark.

 

i'd suggest you are back with a vengance, even if it's irregular, it took the first paragraph to figure it out... ya got me.

 

thanks again for making an otherwise dreary day less so.

[anjing bau]

Glamis may be ready to pass on the leadership baton in the PM sector....

 

Nem looks strongish

 

[Sphinxter]

Spank-tacular!

 

Thanks!!!!

 

[realist]

AbbyJoeHo aka "ApeWoman" has nailed it again. Perfect signal to indicate another end to the BMR. Anyone heard from "Zoran the Great" lately? Perhaps he ventured over to the DONGside finally.

 

Here is a great commentray from a real underground timer; Irwin Yamamoto:

 

Easy money's been made

Commentary: Nasdaq war rally over; move to cash now

 

KAHULUI, Maui, Hawaii (YamamotoForecast) -- "I searched through the carnage of the Nasdaq and found some pretty good deals -- but now's the time to capture profits and move back to cash.

 

Those betting on a new bull market for the Nasdaq aren't paying attention to the fundamentals. "

 

http://cbs.marketwatch.com/news/story.asp?...%7D&siteid=mktw

[rog]

Whole Foods getting hammered AH

What a suprise! In the middle of a recesion consumers decide that $5 for 3 ounces of wheat might not be a good idea.

[wndysrf]

Attn: Riverboaters

 

Effective immediately, I will no longer be shorting stocks. I just compiled my 2002 trades for my tax return amendment, and I was astounded at the number of nickle and dime losses, compared to the huge percentage gains obtained on my gold stock longs and the occasional home run shorts on QLGC and NVLS.

 

I will now focus my attention on gold stocks only for long plays.

 

No more shorting.

 

When the market gets smoked, I will load the boat on the long side with Supermodels and Financials.

 

But for the most part, the big money will be made by grabbing the likes of VGZ, GSS, BGO, HL, SIL, and PAAS for the usual parabola runs which occur once or twice a year.

 

More money can be made in a short time that way.

 

In between, I'll sit on the sidelines and wait for the "big gold play" or the "Supermodel Rehab Emerge" play.

 

I've been eyeballing the homebuilders and the mortgage companies for shorts. Problem is, everybody else is also, so they keep squirting higher.

 

What a way to lose your shirt, time and time again. I've never seen so many extended boner rallies in my trading career.

 

Who the hell wants to short in this environment??

 

Nobody is paying attention to gold, except ThorAss and Charmin.

 

I'll go to the less crowded playground.

 

Enough is enough.......

[PileDriver]

Major (MASSIVE) top in the process of being slowly and painfully put into place here.

 

I shudder to think what comes after once its done completing.

 

No worries here, I have kids and have learned patience and how to deal with the ridiculous in the short term.