Watch the Big Three Banks for Market Answers

[Excerpted from Bill Cara's Daily Report]

Thursday the Swiss government injected $5 billion into UBS (UBS) and the Swiss National Bank bought almost $55 billion in UBS’ toxic assets. A couple days ago, the UK government did the same for HBOS (HBOOF.PK) and Royal Bank of Scotland (RBS), while Germany did the same for Deutsche Bank (DB). In the US, the Treasury and Fed have arranged a quarter trillion dollars in support for a select group of America’s biggest banks.

Why the panic bailouts? The answer lies in the $55 trillion dollar Credit Default Swap market that is unraveling day to day. Banks and central banks are totally focused on the breaks to the credit ring when up to $400 billion of Lehman Brothers CDS obligations come due in the next week, with nobody at the teller window to pay up. Lehman Brothers is, as you know, bankrupt.

What this means is that unspecified banks holding the Lehman CDS derivatives will get nothing, and then they will be unable to meet their obligations to other banks. At stake are the Money Market Funds on deposit in these banks. The entire system could collapse, so banks do not want to be in the position of lending to one another. The credit market has failed.

Economists like Roubini and Feldstein and so many others have no clue what they are doing in setting fires here. If you listen carefully to their rants of economic forces coming to bear to form a perfect storm that can only result in another Great Depression, you will not hear an iota of news. We heard all their theories – the precise same ones – three months ago and more, when the credit ring had not broken because Lehman Brothers had not yet failed, and equity markets were much stronger.

So, what these economists are doing, at this point in time, is almost criminal.

Have you failed to notice that Bloomberg TV is not interviewing the leading bankers who do know what is going down within their walls. These bankers do not want to talk like the former CEO of now dead Lehman Brothers, Dick Fuld, who told the world that his bank was strong when just a couple days later it filed bankruptcy.

Fuld didn’t know how quickly the CDS failures would take down his bank, and now his peers on Wall Street are keeping their mouths shut. Bloomberg reporters are missing the story. But think about it: how is it that finance ministers and central bankers can together inject over $1 trillion into banks in the past week and yet have these few major banks still not lend to one another and still have their stocks teeter on collapse?

This is not an economic story; it’s a financial story that is centered in the viability of the largest banks of the world. These banks are calling loans of hedge fund clients and selling holdings like oil and metal futures. Risk taking has died, and these banks are responsible.

Now, what to do? As I continue to say, keep your head clear of all that crapola you read and hear from mainstream media. They are merely facilitating Speaker’s Corner for every Tom, Dick & Harry who is touting his book or his high-priced banquet speaking engagements. Watch, instead, the price and volume data series for the three biggest banks in the world that control well over 90% of the CDS market: JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC). Several months ago, I listed the extent of their CDS involvement in these pages. Nothing’s changed except Lehman Brothers has failed, and the financial system has moved to the brink of collapse. It will be saved; the only issue is how big will be the burden on future generations.

Watch this chart of the Big 3 players in the CDS market and you will see that Lehman Brothers started to look shaky at the start of May, which caused a plunge in the share prices of the Big 3 until Lehman was forced to declare bankruptcy and Henry Paulson needed to appeal to Congress and the G-7 for emergency help. The fact the crisis was sold to the public as an economic issue and not a crisis and bailout of the banks was another criminal act. These people must think they control all media, but the truth in time comes out.

Following the start of the bailouts in July, the share prices of the Big 3 banks have been volatile, but side-tracking, while other key non-bank stocks have been trashed as no-nothing media Talking Heads ran their mouths. The result is that the pensions and other holdings of Mom & Pop have been hammered beyond all comprehension, and I sit among you saying keep your head about you, there is a turn at the cycle bottom and a new Bull is being born from the injection of mega-trillions from all governments and central banks.

This crisis will soon be over – but first the bankers must show us they have survived the next wave of CDS obligations coming due this week and next. The answer will be in the share prices of JPM, C and BAC. Don’t watch anything else for the answer to how this crisis will be played out this month. Here is the chart again.

I think it is the best judgment at this point in time to wait until the share prices of these banks show a rebound. Then jump on board the equity market rocket. There will be another lift-off, and there are many stocks – I have listed over 100 – that will be passengers on what will be seen as another moon-shot. One of these events will result in the new Bull market being as obvious to you all as it is to me today.

Comments

[look to basics:]

On Friday evening, September 26, 2008, our country went to bed with a Dow Jones Index (DJI) that had closed at 11,143.13. Just short of one year earlier, October 9, 2007, the DJI had closed at its highest ever, 14,164.53. In virtually one full year this indicator of our nation’s wellbeing had dropped 3,021.4 points, or 21.3 %.

As many recognize this was a market adjustment resulting from too many borrowing too much with too little in resources to back the actions.

On that fateful morning, Monday, September 29, 2008, our country’s top politicians decided our government needed to get into the banking business. Just the concept of Uncle Silly contemplating this kind of move generated the biggest stock market plunge this world had ever seen. While the nation, and to some extent the world, watched in horror what was being discussed by Uncle Silly’s Congress the Dow Jones Index (DJI) dropped by a staggering 777.68 points.

The following day our illustrious politicians claimed this disastrous drop represented more than a 1 trillion dollar loss to the financial wellbeing of our nation. Nothing was acknowledged of the 485.21 points recovered on that next day. This was more than a 62% recovery. A recovery that occurred immediately after the previous day’s failure of the ill advised political maneuver.

As that week progressed it developed, with increasing certainty that the Senate was going to take a more positive attitude on the ‘bailout’ folly. Even to the point of adding significantly to its cost. The DJI reflected this increasing certainty with increasing drops, on Wednesday, 19.59 points and Thursday, 348.22 points.

During Senate debate on Friday, citizens watched and listened as many negative comments were made on the Senate floor, sparking a cautious rally of 360.73 points right up until the voting started. As soon as it became painfully apparent foolishness was going to prevail they turned and ran. Before closing that evening all gain was lost along with 157.47 additional points, ending the day on a drop of 518.2 points from the high reached in an earlier futile spirit of hope that sanity would prevail.

During the following five trading days investors expressed their satisfaction/confidenc... in what had and was being done. While our politically driven leaders bumbled around we watched the DJI drop by another 1,874.19 points.

Assuming that the earlier drop of 777.68 points represented over one trillion dollars in financial resources, then it should be noted somebody had just thrown away another two and a half trillion or so dollars of this nation’s assets.

Over the weekend of October 11th and 12th, our desperate nation was fed just enough information about a “new” approach to this burgeoning disaster to spark a spectacular rally on Monday, October 13th. The DJI recovered a startling 936.42 points. Hope had been reborn.

On Tuesday, the 14th, a continuation of the previous day’s euphoria generated an early rise of 535.31 points. Then as more information about this “new” approach started coming to the surface, it was becoming apparent the nation was hearing nothing more than another verse to the same song. The DJI then went into a tumble of 607.93 points, ending the day down by 76.62 points.

Then came Wednesday, the 15th, and the horror of our “leaders” ineptitude started to really sink in. We watched another trillion plus dollars evaporate as the DJI took another massive one-day hit of 733.08 points.

Earlier it was mentioned that just a couple weeks short of a full year was spent reducing the DJI by 3,021.4 points.

DATES LOSS
October 9, 2007 to January 10, 2008, 1,311.44 points
From January 10, 2008 to April 10, 2008, 271.11 points
From April 10, 2008 to July 10, 2008, 1,352.96 points
From July 10, 2008 to September 26, 2008, 85.89 points
From September 26, 2008 through October 15, 2008, 2,565.22 points

In the 244 days of active trading from October 9, 2007, through September 26, 2008, the DJI dropped an average of 12.38 points per day, totaling losses of 3,021.4 points. This looks to be a reasonably steady and rational level of adjustment to our problems. Something that one could expect from a functional FREE market.

This was a 21.3% adjustment, spread over virtually a full year, 244 days of trading. Special note should be taken of the fact that the last 56 days of trading, through September 26, 2008, accounted for only 85.89 points of the 3,021.4 points loss. Just 2.8% of this total loss occurred in the final 56 free market trading days. That was an average of 1.53 points loss per day.

This describes a free market adjustment that allows citizens at least some opportunity to adjust to the downturn. What follows describes what typically happens when you remove the ‘free’ from free market.

In the 13 trading days of active trading since September 26, 2008, the DJI dropped from 11,143.13 points to 8,577.91 points at the close on October 15, 2008. A total of 2,565.22 points lost. Based on Uncle Silly’s assertions following the one-day drop of 777.68 points this amounts to the evaporation of nearly FOUR TRILLION dollars of this nation’s monetary assets. That represents over THREE HUNDRED BILLION dollars loss for the people of this nation each and every one of those days. By generally available figures, that comes to over $1,000 per day for every man woman and child in this United States. That means that $13,000 for you and each member of your family has just vanished in the less than three weeks since Uncle Silly decided to do away with the ‘free market’ concept for the financial concerns of our nation.

This artificial form of politically directed control for our nation’s financial safety is proving to be a disaster of humongous proportions.

ARE WE EVER GOING TO CLEAN OUT THE DIRTY LAUNDRY?

2008 Oct 17 04:19 AM

[James Wilson:]

I beleieve this banking take over has been planned. The amount of the interest due each year on the National Debt almost demands that all interest collected from now on go straight to the Federal Reserve. The interest alone on the National Debt will consume 20% of the U.S. Budget in a few years. The take over will infact be by the Federal Reserve Bank.

But that is just my hummble opinion.

2008 Oct 17 07:31 AM

[kevincei:]

I would submit that there is a truth to the facts layed out by Roubini etc. Problem started with easy credt. There is a debt bubble. Every tom dicK and harry got overextended. CDS market is now threatening the solvency of all banks. In reality most of these banks are already insolvent and hence their inability to lend.
www.guardian.co.uk/bus...
Next storm is coming from Eastern Europe. Hungary and few other countries are teetering on collapse.
www.ft.com/cms/s/0/3e2...
South Korea is having severe debasement of their currencies. All of their banks have been downgraded as to their credit ratings. These were the banks who were trying to buy Lehman. Obviously any bank jumping to buy others are having a ton of problems themselves.

According to Roubini this is not a financial crisis. It is a global credit and debt crisis. We will never be able to lend ourselves out of this. It is probably criminal to pump bullishness and bring poor suckers into this stock market destroying wealth. The truth is there will not be any meaningful recovery of stocks for years to come. Only continued wealth destruction.
Waht is coming is worlwide deflation and destruction of debt. There is nothing out debt laden governments can do except to disrupt the normal market forces.
www.minyanville.com/ar...

2008 Oct 18 11:55 PM