Markets as measured by ABX indexes are currently suggesting that most of the residential mortgage backed securities rated below single A, that were issued in second part of 2005 through 2007, are now nearly worthless. This in turn implies that financial sectors woes are not likely to all of sudden stop any time soon... However, pain is likely going to be concentrated in the companies, that decided to retain low grade debt hoping for an eventual recovery instead of selling it at what was considered "fire-sale" prices...

I personally believe that, for example, insurance companies have not yet disclosed the "real" write downs and thus would be very cautious on touching any of the insurers that hold any debt rated below AA. AIG's release last week is a case in the point...

Source: markit.com

VIX index has stopped declining which suggests that fear might be slowly entering investor minds again.

Source: yahoo

Fed rate cutting cycle is over- bonds are looking awfully unattractive at these levels with "real" yields negative across the entire time horizon. This could provide somewhat of a support to equities in the US- but hedging with short positions is an even better idea...

Source: clevelandfed.org

Inflation is clearly spinning out of control. I think that Fed will be forced to start raising rates prior to the year end, which would in turn undermine any short term recovery in economic activity that is now widely expected. For now they seem to be in denial focusing only on the "core rate" which is starting to look like one big joke...

The Consumer Price Index (CPI) rose at an annualized rate of 4.2 percent in March, returning to its recent elevated trend after a respite in February, when it increased only 0.3 percent (annualized rate). The CPI is up 4.6 percent over the past six months. Contrasting the rather sizeable increase in the overall CPI, the CPI excluding food and energy (core CPI) increased only 1.8 percent during the month.

Stay safe and see you at Money Show in Vegas :)
Vad - skepticalcapitalist@gmail.com

"The way to get good ideas is to get lots of ideas, and throw the bad ones away"
Linus Pauling

Some more ideas as promised earlier - now on the short side... Short description of my principles applied in the selection process are here-. Don't forget to do your own due diligence though.

P.S. A much larger number of ideas is due to my belief that short positions should be much smaller in size than the ones on the long side due to possibly violent short term volatility...

CWST-Casella Waste Systems, Inc. together with its subsidiaries, a waste services company, provides collection, transfer, disposal, and recycling services to residential, industrial, and commercial customers, primarily in the eastern United States.

CRWN-Crown Media Holdings, Inc., through its subsidiaries, engages in the ownership, operation, and distribution of pay television channels in the United States.

SUF-SulphCo, Inc., a development stage company, engages in the development and commercialization of technology for the upgrading of crude oil.

LGN-Lodgian, Inc., together with its subsidiaries, operates as an independent owner and operator of full-service hotels in the United States and Canada.

WSBC-WesBanco, Inc. operates as the holding company for WesBanco Bank, Inc., which provides a range of financial products and services.

PWER-Power-One, Inc. engages in the design and manufacture of power conversion and power management products.

LZB-La-Z-Boy Incorporated manufactures and markets upholstered furniture and casegoods furniture products in the United States and Canada.

OSIR-Osiris Therapeutics, Inc., a biotechnology company, commercializes stem cell products from adult bone marrow in the United States.

HOKU-Hoku Scientific, Inc., a materials science company, provides materials and components for the generation of electricity from clean energy technologies in the United States and internationally.

CORS-Corus Bankshares, Inc. operates as the holding company for Corus Bank, N.A. that offers various banking products and services.

FLE-Fleetwood Enterprises, Inc. produces recreational vehicles and manufactured housing primarily in the United States.

TVL-LIN TV Corp., together with its subsidiaries, operates as a local television and digital media company in the United States.

MAXY-Maxygen, Inc., a biotechnology company, engages in the discovery, development, and commercialization of protein pharmaceuticals for treatment of disease and serious medical conditions in the United States.

ABCW-Anchor Bancorp Wisconsin, Inc. operates as the holding company for AnchorBank, fsb that provides various financial services in Wisconsin, Iowa, Minnesota, and Illinois.

Stay safe, Vad

Once again my screener spit up a bunch of new names on both long and short side last week. Below is the list- consider it a list if ideas - do your own due diligence
P.S. For many reasons this list is dominated by healthcare and tech companies...

Long:

HMIN-Home Inns & Hotels Management, Inc., together with its subsidiaries, engages in the development, lease, operation, franchise, and management of an economy hotel chains in the People's Republic of China.

BVF-Biovail Corporation, a pharmaceutical company, engages in the formulation, clinical testing, registration, manufacture, and commercialization of pharmaceutical products utilizing various drug-delivery technologies in the United States and Canada.

FFIV-F5 Networks, Inc. and its subsidiaries engage in marketing, selling, and servicing products that optimize the delivery of network-based applications

EME-EMCOR Group, Inc., together with its subsidiaries, provides electrical and mechanical construction and facilities services worldwide. It engages in the design, integration, installation, start-up, operation, and maintenance of various electrical and mechanical systems,

CELL-Brightpoint, Inc. distributes wireless devices and accessories, as well as provides customized logistic services to the wireless industry. Its logistic services include procurement, inventory management, software loading, kitting and customized packaging, fulfillment, credit services and receivables management, call center and activation services, Web site hosting, e-fulfillment solutions, and other services.

WYE-Wyeth engages in the discovery, development, manufacture, distribution, and sale of pharmaceuticals, consumer healthcare, and animal health products. It operates through three segments: Pharmaceuticals, Consumer Healthcare, and Animal Health.

NCTY-The9 Limited, through its subsidiaries, engages in the development and operation of online games, and Internet and Web site related businesses in the People's Republic of China.

OC-Owens Corning, through its subsidiaries, produces residential and commercial building materials, and glass fiber reinforcements and other similar materials for composite systems.

MRX-Medicis Pharmaceutical Corporation, together with its subsidiaries, operates as a specialty pharmaceutical company in the United States and Canada.

CCJ-Cameco Corporation engages in the development and production of uranium worldwide. It operates in four segments: Uranium, Fuel Services, Electricity, and Gold.

BMY-Bristol-Myers Squibb Company (BMS) engages in the discovery, development, licensing, manufacture, marketing, distribution, and sale of pharmaceuticals and other health care related products worldwide.

SRP-Sierra Pacific Resources, through its subsidiaries, engages in the generation, transmission, and distribution of electric energy in southern Nevada. It operates in three segments: NPC Electric, SPPC Electric, and SPPC Natural Gas.

SEB-Seaboard Corporation operates as a diversified agribusiness and transportation company worldwide.

WLP-WellPoint, Inc., through its subsidiaries, operates as a commercial health benefits company in the United States. It offers various network-based managed care plans to the large and small employer, individual, Medicaid, and senior markets.

Stay safe, Vad

"The only real mistake is the one from which we learn nothing"
John Powell

Hopefully, anyone who read my previous articles or may be even my biography knows that I despise all and any form of socialism, and as a rule don't put any trust in government's ability to accomplish anything productive... But the scary part now is that I am now starting to believe the recent actions taken by Federal Reserve here in the United States are starting to resemble a very unique form of socialism that could be defined as simply dangerous or even borderline reckless, and this does not bode well for the long term health of our economy...

Consistently excessive government intervention in the form of aggressive unnecessary interest rate cuts, unnecessary bailouts of "private companies" and provision of implicit government guarantee for the "riskiest" players of the whole economy (investment banks), is simply outrageous and thus can not go unpunished in the long run.

It is also becoming very clear to me that the currently widespread belief in Federal Reserve's powers to magically "guide" the economy out of recessions is quickly starting to undermine the entire fundamental basis of our market based capitalism. In a true capitalist society, market participants should be expected to only receive a return on their capital that is directly related to the level of risk they are willing to take on. Excessive risk has to be punished by failure; otherwise the whole system fundamentally breaks down- period!

I don't know how could anyone say that this is still the case today? With short term "risk free" interest rate of 2% currently firmly below the inflation level of roughly 4%- most of the nation's "worker bees" savers are being severely punished by the negative "real" returns on their hard earned money. This Fed induced redistribution of "real wealth" from the poor retirees living on fixed income, and lower income and middle class workers who keep most of their savings in money market and other low yielding investments, to the "debt hungry" spenders of all income levels is not only unfair but also dangerous. I mean, why in the world would anyone "save" the money and earn a negative "real" interest, if it is easier and more pleasant to simply borrow all you can, and then enjoy the life style you never really deserved in the first place?

Why would one try to earn a "normal" return on your money in the stock/bond market, if you could add a 20/1 leverage, put up only a modest amount of your own equity at risk and go for the "all or nothing" bet at the expense of the "sucker" savers who might not even earn enough money to provide a "zero" return when adjusted for inflation? I mean, with this kind of leverage you can make twenty bets using the same amount of equity and thus even if one or two deals blow up, you are still guaranteed to make enough money to buy a new house in Greenwich every few years or so.... The only market participants who suffer in this case are once again the "sucker" savers who unknowingly financed one's "leverage" by investing into seemingly safe "money market" funds. What a joke...

For the first time in my life, despite being a ruthless capitalist I normally am, I feel that some of the "blame the Wall Street" media whining is actually somewhat justified... In the country that prouds itself on being the "mother of true capitalism" the "always low rates" entitlement mentality of the financial services industry is quickly becoming something of an incurable decease. I am not exactly sure how did we end up here in the first place, and who exactly is to blame for this nonsense, but this dangerous game of musical chairs is starting to look awfully scary...

Continued...

Banks and financial institutions that just yesterday were screaming that they were somehow "duped" into lending at outrageously low interest rates, are now once again willingly lending to many of the same players at rates, that not only do not compensate them for taking on the actual risk, but which are also in many cases even below the inflation level? Yes, you heard m correctly- the banks are that dumb!? Do they really believe that this artificial inter bank lending interest rate of 2% or "prime rate" of 5% is here to stay? How long could this really go on? Are we going to be in the same "credit crisis" boat 12 months from now when the rates are virtually guaranteed to be higher?

What does really change when you let the exact "same client X" refinance a loan he/she could not afford yesterday to a new, artificially lower "affordable" rate today? Remember, "client X's " income did not get any higher; the value of the underlying collateral did not go up and the only reason this whole "transaction" was made possible, was the fact that Fed "artificially" reduced rates to a level that was now temporarily affordable? So ok, what's wrong, you ask?

Let's fast forward 12 months from now- Fed Funds rate and with it Bank's cost of funds are now 2-3% higher, but this temporarily affordable "client J's" asset is now sitting firmly on the bank's balance sheet (no more selling it off in a "CDO") and still paying an "artificially low" interest rate that could now very well be even lower than what it actually costs the bank to fund it...?

How is that for a business model? So what's the solution- surely once again lower interest rates? Not so fast- how much lower could you really go- it's already below the inflation level...

In my opinion, if nation's economy can not function normally at a "growth neutral" Fed Funds rate of roughly 5-6% (real GDP 2-3% growth plus inflation 2-3%), than this economy is full of excesses that have to be worked out. Restoring some common sense and destroying the "low rate entitlement" of the financial services industry would go a long way towards making US economy safer, stronger and more balanced.

We simply can not continue to assign blame for the "asset bubbles" like "high oil prices" and "real estate mania" to everyone in the world instead of trying to look back into our own backyard. High food and oil prices are a not a direct result of "growing demand" from place like India and China, but rather simply a spillover effect of the completely incompetent monetary policy. Remember, inflation "always and everywhere is purely a monetary phenomenon"- I personally learned this first hand, when as a child I had to learn to quickly add up prices of my basic groceries first in single digits, than in thousands and finally in millions. May be now it's time for Ben Bernanke as well to actually make a trip to the past and learn that printing money is rarely a preferred solution...

But until that happens, as a rational "capitalist" I should probably go get another mortgage, borrow heavily against all of my assets and safely "diversify" into a few of these 20/1 leverage "all-or-nothing bets" on the continued "inflation driven bull market" for the next several quarters or so. Even if few of these bets "blow up", I am sure that some poor retiree from Indiana, will unwillingly help me out, with his/her negative "real" investment returns from a money market fund more than offsetting the excess returns I will earn on my money...

Please feel free to send me your comments at skepticalcapitalist@gmail.com, Vad

"Maybe you don't like your job, maybe you didn't get enough sleep, well nobody likes their job, and nobody got enough sleep... Maybe you just had the worst day of your life, but you know, there's no escape, there's no excuse, so just suck up and be nice. "
Ani Difranco

For everyone who has been struggling to understand why the market (especially homebuilders and financials) rallied lately below is my skeptical capitalist opinion for what its worth... Remember, it's not wise to fight the Fed, regardless of what your opinion of the job Ben and Co could be doing- for example I think that they are behaving irresponsibly, but that doesn't mean I should be holding all cash!

Four main observations:

1. AAA ABX Indices which track the value of residential securities have recovered to the levels not seen since January, which is in itself an astounding fact... I am a little surprised about the scale of this recovery and think that a lot of it could be explained by the short covering rally and the improved liquidity driven by Fed's acceptance of some of the highly rated securities as collateral. Let's leave the discussion of whether the fact that only AAA and AA rated staff recovered, and that the securities rated below A have not really budged much, for a different discussion. But too me there are many signs out there that make it pretty clear that this rude Fed intervention (read inflation) is THE driver of this artificial market recovery and thus we are destined to pay for it in the future...

source: markit.com

2. I am also tracking various housing related web sites and data with an intent of trying to predict how far are we from the bottom in nominal prices... From what I am seeing so far- price declines have accelerated, but at a certain level- which seems to be related to the roughly the nominal prices at the actual level of sales in the second half of 2004 - buyers are willing to step in. I don't want to overload you with all the data and facts that support my conclusion but that's what I am seeing and hearing so far. Thus, I personally, expect prices to stabilize at level of around early 2004 (which is only 5-10% below most asking prices today) and stay flat for a while

source: Zillow- one of representative homes I tracked for 2 years...

3. Spreads on the commercial securities have also tightened dramatically (good for prices). Improvements again are concentrated in the higher rated tranches and point to substantial smaller risk of further write downs... What's more, there could be even some gains that banks will be able to recognize in the next few quarters if gains continue. Again, I think these gains might be temporary but would explain why banks are bouncing back...

source: Markit

4. Here is another opinion- commodities have topped out for the foreseeable future. I personally sold out even from my O&G servicing plays on Monday and now think that the correction is going to be extremely painful with many retail investors being too late to the game as usual- lot's of pain is yet to come on that front- including the super "hot" fertilizer stocks like MOS and POT

source: bloomberg

All-in-all, if I had to summarize the current situation- I would call it a "Fed" induced "artificial" rally with painful paybacks coming later this year. For now, buy tech, healthcare, industrials and sit and enjoy this temporary "green" color on your monitors :)

P.S. But if you are a retiree on fixed income or someone who has a lot of money in money market funds- you have a right to be really pissed off at the job the Fed is doing as your money is simply being INFLATED AWAY

Stay safe and cheers, Vad
Skepticalcapitalist@gmail.com

"In matters of style swim with the current, in matters of principle-stand like a rock"
Thomas Jefferson

Someone famous once said "Invest in inflation. It's the only thing that is going up" and you know what- I could not agree more. In this world of fiat money one thing is guaranteed - your money will be worth less tomorrow than today. As you might have guessed from my previous posts I am not a great believer in politicians' abilities to guide/understand the economy in general, and definitely get extremely irritated when some of the most vocal and most popular of them try to give advice to the Fed. This advice usually says something like this:" I can't believe you have not reduced rates yet... What the hell is taking you so long-my constituents are suffering and you are doing nothing about it... etc." I think there should be a prize of some sort that is awarded annually to a politician that actually asks to increase rates for once- the only problem is - this prize could go unclaimed for years...

I've posted my opinion on the subject of Fed's rate cuts many times in the past and instead of reinventing the wheel will just repost some of my previous thoughts as I think they have not yet lost their relevance...

I think the next few weeks will determine the direction of where the world largest economy will be heading for the next few years. If you read most of the mainstream press it sounds like this direction is clear- another rate cut, followed by shallow recession and bright future from thereon forward. Not so fast...It's definitely easy to be a politician and make it look like all of the world's economic problems could be magically wiped off the face of the Earth by a swift downward hand movement of a wizard called Ben Bernanke...

The truth, as usual, is that popular opinions always swing too far. Rate cuts are rarely followed by a period of short term market out performance and thus problems will not just simply go away. What's more in most recent rate cut cycles the decisions when to start cutting were relatively simple (9.11, debt crisis etc) and most of the time were on target. The more difficult decision is when to stop cutting rates and that's where we might've had less success with the outcome- at least some of the current problems are due to what many believe was one of the few mistakes Alan Greenspan has made- cutting rates too low.

This time Ben's decision is neither easy nor warranted by a consistent pool of homogenous data. There wasn't a major stock market crash (5% YTD decline is merely a correction), corporate earnings outside of financial sector are still climbing (albeit very slowly). What's more oil has just hit a new all time high just a few weeks ago, copper is pushing multi months highs, wheat is at all time high as well. Inflation overall is still stubbornly high and is above or in the higher range of the desired 1-2% corridor; dollar is pushing all time lows against the euro, agriculture bubble is only getting fluffier every day, rents are still climbing, consumers are still spending...

The question now is whether all of the above is just a lagging indicator of the irrational behavior from the excesses of the last five years. Liquidity struggles of the last six months have not yet been resolved completely even though normality is slowly coming back into the financial system. So the real issue is whether Ben is going to bow under pressure and will swim with the current of the "cutting mood" or will he acknowledge that maintaining price stability is the most important role that Fed plays and that buckling under popular pressure is the easiest way for introducing unnecessary volatility and excesses into the otherwise well functioning economic machine. Inflation beast has not been defeated yet and until that occurs everything else (growth or unemployment) to me is less relevant.

Playing with size of cap of Freddie's and Fannie's mortgage portfolios, accepting new forms of collateral for the Repo agreements as well as introducing new regulation into the lending world are purely matters of style and thus in this case my advice for Ben would be to swim with the current. Let politicians have their time in the light- it's not worth fighting over.

However maintaining price stability IS the matter of PRINCIPLE and standing like a rock is the only appropriate stance that Ben Bernanke should take. I've been wrong before, but I hope that Ben and Co will now realize that dropping Fed Funds rate any further is simply going to add more gasoline to the "commodities bubble" fire. We have to be realistic- inflation expectations have to be brought under control until it's too late. And the best way to do it would to finally buck the market desires and DO NOT cut rates, otherwise, Paul Volcker might just have to eventually take on Ben's job and expectations for a V shaped recession could very well become a W or may be even WW one...

My neutral stance towards the equities is starting to turn somewhat bearish due to the fact that too many mainstream "talking heads" started to sound bullish again and decline in the VIX index shows that people may be starting to feel too optimistic again...

P.S. I've had some issues with the portfolio tracking system here at MSN where some of the holdings showed up one day and disappeared the next one, which made it difficult to assess what my holdings actually looked like. It will probably take several weeks just to clean my portfolio up and bring it back into the correct long/short/cash balance. For now, I have exited most of my O&G/alt-E plays (SLB, DO, NE, JASO, ESV) and incurred some losses on the short side...

Feel free to e-mail me at skepticalcapitalist@gmail.com

"Nature gave men two ends - one to sit on and one to think with. Ever since then man's success or failure has been dependent on the one he used most" George R. Kirkpatrick

It's been full four weeks since I decided it was time to go long the market. At the time being bullish was quite unpopular, as fear was still ruling the market and thus it was a relatively easy call for me that in hindsight seem to have been precisely on target. However, situation today is different- for the first time in quite a while, when people ask me whether I am now bullish or bearish, I say that I am not yet sure...

And there are a number of reasons why. On one hand my skeptical mind simply refuses to comprehend how one could expect the economy to hold up well in a face of so many challenges? Residential construction is virtually at stand still, commercial construction is showing signs of severe strain. Banks are struggling to repair their balance sheets and are so risk averse now, that in some cases they refuse lending without tangible collateral to even some of their best clients. Retailers and restaurants seem to be struggling with a strong headwind of rapidly rising costs and slowing consumer spending.

Even formerly "recession proof" healthcare industry (excluding biotech for now) seems to have caught on a deadly decease of rapidly rising costs combined with decreasing revenues driven by massive simultaneous top drug patent expiration and decreasing population of people who can actually paid for provided services (hence insured). The list can go on pretty much forever, with virtually every industry in the US Economy, except probably agriculture and oil & gas, experiencing severe turbulence. And let me tell you something, I am a great believer of a concept that without healthy and well functioning credit market, all the other sectors of the economy are bound to slow down (read Jon Markman's most recent article on the banking sector)

However, here is the flip side of the coin. Federal Reserve has embarked on the most aggressive rate cut series in recent history. And while I personally believe that these moves will come back to haunt us in the years to come due to the spiraling out of control inflation expectations, one can not underestimate the impact this monetary stimulus is making in the short term. It is pretty astounding, but even though earnings of the all companies that reported so far (about 30% of firms) are down 20% year over year (according to WSJ's market data center) , if we exclude the negative impact from financial sector ($36B y-o-y shortfall so far), earnings have actually increased slightly!?.

And while the strength in basic materials and oil and gas sector earnings could be easily explained by what's looks increasingly looks like another bubble in the making, actual earnings in the technology, telecom and industrial sectors have been coming in handsomely above the last year's level. Technology sector's earnings are running 9% above last year, telecom-48% and industrial- 3%. Considering all the headwinds- these numbers are quite startling.

It increasingly looks like the weak dollar and higher oil prices are actually starting to make a tangible positive impact on competitiveness on several sectors of the US economy that seem to have been written off a while ago like "good-old" manufacturing. Yes, you did not misread what I just said- positive impact. Now let me explain what I mean.

About a week or so ago I had an opportunity to spend a few hours talking to the CEO of a small manufacturing company based in the Southeastern United States. Just like many other businesses around the country they have been hurt badly during the recent years because outsourcing. The lost business first to Mexico and most recently to China...What's more, he gave me a concrete example of one large contract lost to China several years ago. They initially quoted this piece of business at $1.60 a pound with a cost of goods of roughly $1.20. In contrast, their Chinese competitor quoted it at $.60 a pound, and even with shipping to the final destination in the US the final cost was only $.90. So you get the picture- it was not even really a contest- all of the business was gone within months- case closed...

Now fast forward to today and the picture is quite different- Chinese labor salaries have been increasing in healthy double digits for the last several years, currency has been steadily gaining on the dollar at the pace of 7-10% a year and finally - yes here is where the high oil prices come in play- transportation costs have simply spun out of control...So let's get back to the same little company in Tennessee- the same order that was once lost because of the almost a 80% difference in costs- has not only closed the gap dramatically because of the rising salaries and rising currency, but when transportation costs were added back- this gap became virtually nonexistent- it is now only about 5-10%...

This cost advantage is now is simply not sufficient to justify all the risks related to outsourcing to China. What's more, after you make adjustments for the increased inventory levels required to support the multi-week shipping cycles, and account for unpredictable shipping costs, the outsourcing case becomes even murkier. You get the picture...

Now, I am in no way trying to say that all the manufacturing is going to come back to the US, as most of the manufacturing done in China today, has a labor content that is a lot higher than the example I just mentioned. What's more- I am pretty sure most of the jobs lost are never coming back- period. But don't forget- manufacturing leads the business cycle- usually losing millions of job in a normal recession. But this time around, at least for now, the tide of heavy manufacturing job losses seems to be turning the other way. What's more we can reasonably expect that many of the European and Japanese manufactures will actually continue to expand their capacity in the US which means potentially adding net new jobs over the long haul.

And the same can be also said about the technology jobs- Indian IT salaries have been increasing dramatically and in combination with higher inflation you can expect the slowing tide of IT outsourcing to again cushion the US economy.

Now here is the punchline- assuming the job market keeps holds as it has so far - the initial recession might be a bit milder than market is currently expecting. Yes, once again I said the initial one :), I think that Fed will have start raising rates again before 2008 is over and we will be into another cycle of pain once that occurs, but for now- my mood is still quite neutral as opposed to the bearish one...

Please feel free send me e-mails at skepticalcapitalist@gmail.com

"One cannot and must not try to erase the past merely because it does not fit the present"
Golda Meir

I've been taking a short vacation on the West Coast and thus fell back slightly on my blogging- it's time to catch up... I'll start tonight with some important headlines and quotes from various sources that I think might be pointing to a slightly different tilt in my portfolio over the next few weeks.

First, key developments in the overall economy- as I pointed out before- values of both commercial and residential real estate securities have recovered dramatically since the Bear Sterns fiasco. They (values) held up quite well even after a steady flow of negative news on the real economic front in the last several days. And while this should theoretically be considered very good news for large banks, I believe that one of the threats, that seem to have been largely ignored during the past several weeks, could easily become a source of headline troubles again- I am talking about the potential downgrade of ABK and even may be of MBI...On one hand despite the bigger that expected headline loss of $1.66B, S&P said that it won't downgrade ABK's debt. On the other hand - shares hit a new all time low and so did its actual credit default swaps.

"Credit default swaps on Ambac Assurance Corp started trading for the first time at an upfront cost of 11 percent, in addition to annual premiums of 500 basis points, according to data provider CMA DataVision... This means it would cost $1.1 million as an upfront payment to insure $10 million in debt for five years, in addition to annual payments of $500,000"

I think that both S&P and Moody's are definitely smoking something if they believe ABK really deserves AAA rating? AAA means probability of losses on the secure debt is close to zero- do you think that if GE reported negative earnings for 9 months they would still be AAA? Both debt and equity markets definitely disagree with jokers at S&P and Moody's... The more I look at the most recent actions of debt rating agencies, the more I begin to agree with many critics- they really have no clue about what's really going on out there. And while the potential downgrade probably won't have a severe impact on large players who already raised lots of fresh capital, it could very well force some of the smaller banks out of business...

And if the bond insures woes weren't' enough- quick mention of some other potential sources of trouble-First, the leveraged buyout related bust seems to be only starting, and thus the 80-90 cents on the dollar price for LBO related debt is not quite a bargain...

"

April 23 (Bloomberg) -- The looming wave of bankruptcies is unlikely to be kind to bondholders. And they have only themselves to blame... Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents."

How about another few potential sources of joy for banks :)?- Credit cards and home equity lines...

"Standard & Poor's said delinquencies on home-equity lines of credit issued in 2005 and 2006 shot up in March, underscoring continued trouble in the U.S. economy...S&P said that 9.19% of lines issued in 2005 and 11.45% of loans issued in 2006 are delinquent, up 6.49% and 6.51% from February. Serious delinquencies, where lines are 90-days plus overdue or in foreclosure, shot up 8.83% and 8.75% for 2005 and 2006, respectively, representing 5.3% and 6.34% of the years' total issuance"

"April 22 (Bloomberg) -- Target Corp., the second-largest U.S. discount chain, said it wrote off an annualized 8.1 percent of its credit-card loans in March as consumers grappled with job losses and the biggest housing slump in a quarter century. Defaults during the month totaled $55.5 million, the Minneapolis-based retailer said in a regulatory filing today. The annualized charge-off rate was 6.8 percent in February"

And to finish it off, how about a quote from a bellwether of US economy- UPS... Things seem to have gotten a bit worse in March...

"UPS's first quarter results illustrate the dramatic slowing in the U.S. economy. At our investor conference on March 12th, we told you that volume growth in January had been up 3%. But in the six weeks prior to the conference, it had been negative... We also said if these trends persisted through March, we would not achieve the earnings guidance we had provided for the quarter. [The] trends did continue. Many have become sharply more negative in the last two months. ... The great unknowns are the severity and the duration of the current economic slowdown. Many of our customers have tightened their belts resulting in a shift away from our premium air products to ground shipments"

But it's not all doom and gloom- most of the tech sector seems to be holding up quite well and earnings are still growing handsomely there year over year... There are also some indications that most industrials could whether the recession "ok" driven by lower dollar...More on that tomorrow...

skepticalcapitalist@gmail.com

What a joke! A little cheer up video for all the "booya's" out there... Next time when he comes on the show- FLIP the channel or at least MUTE it out...

And to finish it off - another "economic expert"- on recession. (P.S. Politics aside I agree with him on NAFTA though...:)