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I manage the trust assets of a high net worth family along with the main beneficiary, an 87 year old market expert. We operate out of south Florida. I graduated as a hurricane from the University of Miami with a Finance and a Business Law degree. I also received my MBA in Business Administration... More
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  • FDIC Broke? Mortage woes? Collapsing $? What to do?

    Here is an email dialogue between me and an representative at Grant's publishing, it may act as a good start to an important debate, although I was disappoint in the depth of this answers.

    In the mortgage exit strategy section, it states that the Cure rates have fallen dramatically, now at 6.6% overall.  How do they calculate mortgage modification in this statistic.  I would think that a bulk of these loans will never become current, though, they still may not go into foreclosure.

     

    To the best of my understanding, in calculating “cure rates”, a delinquent mortgage that is modified is counted as “cured”.  The Fitch press release states that: “Up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default”


    Under the not so special section, it states that the DIF has only $10.4 bill left.  Assume that Corus Bank will go out of business very soon and its 7 billion loan portfolio is now only worth 4 billion does this mean that 3 billion will be debited from that reserves?  

     

    When the FDIC takes over a failed bank, it immediately tries to sell the deposits to a healthier institution in order to minimize the cost to the DIF.  MB Financial acquired $7B of Corus’s deposits and $3B of it’s assets.  The assets MB acquired consist mainly of cash and marketable securities, leaving another $4B in assets for to be sold by the FDIC in a private placement.  The FDIC estimates that the cost to the DIF will be $1.7B (http://www.fdic.gov/news/news/press/2009/pr09168.html)


    What happens when they are out of money?  


    When the DIF is out of money, they can raise more by levying a “special assessment” on banks.  In May, the special assessment raised $5.5B more to be used by the DIF.  The FDIC is also able to borrow money from the Treasury to help cover losses (http://online.wsj.com/article/SB121977767814673649.html?mod=hps_us_whats_news).


    And, what % of non current loans go into default?  With over 211 billion in reserves it seems that banks have plenty of reserves as long as more 33% of loans don’t default right?

     

    It depends on the loan type, and where we are in the credit cycle.

     


    I agree with your assessment in the You Can’t Print section.  And, given the recent appreciation amongst currencies the rest of the world agrees as well.  In your opinion how would the collapse of the $ play out? People assume that commodities would skyrocket, but if the $ falls dramatically it would kill the world’s exports, put a dagger in most of the world economies, not to mention their reserves, which in turn, would kill demand for oil copper aluminum etc. Right?  Look at Japan how much more can the Japanese economy withstand the expensive YEN, I know Americans won’t pay for 100K Toyotas.  We are addicted to cheap goods and they are addicted to selling them to us, how would a weak $ affect that dynamic?  


                  This is a pretty complex question, and really a matter of opinion.


    Lastly, excuse my ignorance, but how could treasuries be rally so hard recently while the $ is getting sold, don’t you need to buy treasuries in $?
     

    The value of the Dollar does not necessarily relate to the rally in treasuries.  For domestic buyers, the movement of the USD is inconsequential.  Foreign buyers may still want to (or need to) purchase treasuries regardless of what happens to the value of the dollar. 

     


     


    Sep 16 3:43 PM | Link | Comment!
  • GOLD 1300?? Dont buy just yet!!

    GLD consistently finds resistance on average 8.5% above its 40 day MA. In this recent upsurge it hit only 5.5% and is now aprrox. 4% from the average.  Over the past 2 years it has found resistance anywhere from 6.5% to 12%.  Therefore there is a possibility that gold could run 2-6% from here.
    Mort important, there is a very bullish ascending triangle pattern as show below.  GLD broke out at 95.3, as shown by the green arrow.  Based on this pattern   (measuring the blue arrow) it could run 14.13 points from the 95.3 breakout area. This gives us a target of 109.43 (an 11% move!!).  I would think that we need to test this breakout once before it moves towards these target levels.  Buy GLD at 95.3-94.7 with a stop @ 92 (the bottom trend line).

    There is another important bullish technical pattern forming, a large inverted head and shoulders.  This pattern began during the beginning of 08, taking about 18 months to develop, if it breaks to the upside it could be a huge move, many technicians and momentum traders will rush in.  The black arrow measures 31.35 points.  The neckline is somewhere between 100.45 and 99.4.  A break of the neckline would produce a target price of about 131.5 (a 34% move from here).  This is a long to intermediate term pattern and therefore could play several months to play out.

    Non commercial speculative  COT positions, provided by CFTC, has proven to be an accurate contrary indicator for gold. Gold has consistently found resistance as the COTs show 200K contracts net long.  Fridays reports showed 224.676 long ( a record), well into the overbought territory as shown by the red arrow below.  Small spec positions similarly elude to an overbought condition (blue arrow). In addition, commercial traders are trying to lock in these prices more than ever before with commercial net position beyond -250K ( yellow arrow).  Given this information, gold is very frothy and will provide us an opportunity to purchase GLD at our desired price.

    Seasonally gold has a tendency to rally into the end of the  year.  Were are now right smack in the middle of gold bull season. As provided by sentimenttrader.com, the chart below shows from 1980-2007 September has been gold’s hottest month.  Gold’s performance in September in close to 70% positive with an average of 1.9%.  Unfortunately gold has already rallied more than 6%  this September,  eluding to the fact that gold may have already  run it’s September course.  However, there has been a sizable divergence between the long term and short term historical data.  During the past 2 years  gold has rallied 10.1% and 8.9%, respectively, in the month of September. Either way this is prime time for gold.

    What will push gold through the break out levels?  Has to be a weak $.

    Physical demand for gold has been terrible.  The Indian gold festival looks weak.  Jewelry demand is still down ( est. to be down 15% in 2H09) and scrap sales around the world are up substantially ( a record 900 tonnes in 1H09).  Though, South African gold production was the lowest in 2008 since 1922 despite the 276% rise throughout the last 7 years.   Unfortunately, this provides no insight as to the near to intermediate performance of gold.  In my opinion, gold’s performance into the end of the year will depend on $ weakness.  The $ has every reason to go down, Americans are practically routing for $ weakness.  A weak $ reduces the value of our debt, lifts house prices, increases exports demand (jobs), and hurts those who hold most of our $, our competitors.   Given that a weak $ could actually solve our current fiscal situation,which means  the FED, the Treasury and the Obama Administration has no reason to jump in front of the $ depreciation.  As investors we must simply buy tangible things that are priced in $s.  Fitting this profile gold will benefit. Investors have already been reallocating portfolios to position themselves for this move.   However, the public opinion of the $ is getting overwhelmingly bearish. They have not been the best timers, as shown by the chart on the bottom right.  This could lead to a short term $ bounce.

    Trade Buy GLD at around 95.3 with a stop at around 92.  Add to position at 100.5 and again 109.45.  Ride it to at least 131!!

    I currently have no position on the $ or GLD.




    Sep 16 3:28 PM | Link | Comment!
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