Saturday, June 6, 2009

The Household Driven Deflation?

In his daily report yesterday, David Rosenberg had some pertinent things to say about deflation, not the least of which was debunking Melissa Francis' preconception that inflation is equivalent to commodity price increases. The key issue is the differential between absolute and relative price increases: in many ways the current inflation scare is even less moot than the panic in the summer of last year, when it became painfully obvious that neither retailers nor final-state manufacturers have pricing power (think excess capacity: if the manufacturing ISM is any indication, this pricing power is only going to get further obliterated in the coming months, eating away directly at the bottom line, and making the forward EPS ramp up even more of a mirage in the manufacturing sector; also worth pointing out that non-manufacturing ISM actually fell by 2.6% to 44.4%). For a full discussion of this topic, we refer readers to Rosie's June 5 "Breakfast With Dave" piece.

A more relevant observation is Rosenberg's presentation of the Household Debt-To-Net Worth ratio (chart below), which is currently at an all time high of 26%. Rosenberg estimates that depending on where this ratio normalizes (either the pre-bubble 20% level, or the long term average of 16%), it would involve a debt elimination of $3-5 trillion. This delta is simply too big to be absorbed by taxpayers: "A goodly chunk of this excess debt — bringing credit into realignment with the permanently new and lower level of household net worth — is going to have to be paid down (or defaulted on). This is the lingering deflation risk that the bond bears have yet to factor in."

But what about all the excess cash flooding the system? As has been discussed on numerous occasions, even with the Quantitative Easing cash factored in, we are now in a much worse place from a mortgage interest perspective, and with every incremental increase in far maturity yields, consumers lose additional household value in the form of home equity (if you couldn't sell your half a million dollar house when mortgages were 4.5%, good luck trying to do so at the same price at 5.5%). On the other hand, the stimulus spending focus on infrastructure projects (and an ungodly amount of pork spending) has little hope of creating absolute inflation pressures: rebuilding highways and bridges by retaining minimum wage contractors does nothing to facilitate wage increases, and the unemployment number rising ever higher simply indicates that anyone harboring thought of a raise in this employment-supply glutted environment will be sorely disappointed for a long, long time.

As for the money multiplier effect - just take a look at the latest excess deposit reserve number. That's right: $838 billion in cash which nobody has any interest borrowing. In fact, the latest consumer credit number jives perfectly with a reversion to the mean as expected by the chart above. The bottom line - the U.S. consumer does not buy Bernanke's belief (nor Wall Street's consensus of almost 50% who say that the Fed Funds rate will be higher than 0% in three months).

One last point worth noting out is the amusing lose-lose situation (as Rosenberg presents it) which the Fed has painted itself with regard to Treasuries: "if the Fed doesn’t step in and buy more government bonds, investors are going to conclude that there is not enough demand to absorb all of the new supply coming on stream. Yet, if the Fed were indeed open to the idea of expanding its bloated balance sheet further, then the ‘monetization of debt’ would cause the inflation-phobes to panic and sell their long-duration paper."

So yes, all in all an admirable effort by the fed to give the impression that debt is deflating, happily gobbled up by the equity market. Of course it all occurred on the back of a plummeting dollar. It is inevitable that this trend will reverse promptly once the U.S. finds itself in an increasingly more problematic trade vacuum, as Japan and Europe realize they actually need to export products. In the prisoner's dilemma game of monetizing debt, Bernanke and Obama have defected against every single player, without repercussions yet, and have already lost any potential benefit from this action. It is our belief, that the next round will see defections by all those who have realized the Fed is now acting purely for its own, unitary interest. Politically destabilizing events like the parliamentary crisis in the UK, the IMF bailout of Eastern Europe, and others will only accelerate a wave of monetary backlash against the US. Then at some point the coincident dollar revaluation combined with the increasingly more trigger-happy bond vigilantes, and the consistently deleveraging consumer will expose the debt deflation for the mirage it was, and the equity market which has been in its own little world for way too long will finally get reacquainted with gravity. Sphere: Related Content

RIEF Performance Still Below Par

RenTec up 22 bps for the first week of June, compared to 2.36% for the S&P. Maybe Simons, sick of being on the wrong side of the beta trade, has thrown in the towel and readjusted his portflio to generate the same relative beta performance as the market has exhibited, and is still failing? For how much longer? Sphere: Related Content

Saturday Reading

  • Must read 1: Revenge of the nerd: quants demystified (Newsweek)
  • Must read 2: Learning from the great crash of 1929 (Bear Market Investments)
  • Must read 3: Mauldin: The new, new normal (Big Picture)
  • Must read 4: The other side: the government's negotiation tactics with Chrysler now exposed (WSJ)
  • Oops, there goes the expected closing date on the Citi exchange offer (FT, hat tip Brian)
  • Labour suffers humiliating election wipe out (Telegraph)
  • Gordon Brown expensed two of his second homes to British taxpayers (Telegraph)
  • Florida stands to lose $1 billion because of Lehman bankruptcy (
  • Jefferson county set to halt services, shut buildings (Bloomberg, hat tip SB)
  • Weinstein Co. to restructure, hires Miller Buckfire (WSJ)
  • Bond market rout lifts mortgage cost (AP)
  • Alexei Kudrin has nothing but love for B- rated US Treasuries (Reuters)
  • Teri Buhl: The real money is in flipping bank charters, not houses (Dealbreaker)
  • Men's Wearhouse affiliate buys Filene's Basement in bankruptcy (Bloomberg)
  • Detroit billionaire Roger Penske buys Saturn, to revamp dealership model (WSJ) [another preferred man sweetheart deal?]
  • Hedge fund transparency measure dies in Connecticut (WSJ)
  • Setser: The return of Brettonw Woods two (or Bretton Woods 2.1?) (CFR)
  • The age of diminishing endowments (WSJ)
  • Hummer deal snag: two Chinese agencies against acquisition of the company (NY Post)
  • Uber Wonkish: Lots of interest lately in quant/stat issues. Some good high level reading from Taleb (Fooled by randomness)
  • Attempting to explain market behavior: Daniel Kahneman on behavioral economics

  • Must watch: Marcy Kaptur interrogates Ben Bernanke (hat tip Ian)

With big gratitude to Steve, Gwyneth and Sherrie for their donations

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I Know My Own Needs

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Friday, June 5, 2009

The (Futile) Task Of Projecting Unemployment

Some realistic downside projections: U3: 17-21%; U6: 30-37%.

Best case scenario: U3: 14-17%; U6: 26-31%

And here is what Bernanke, and everyone else who wonders where we are headed, should be looking at:
"If the job market does not turn around by late summer or early fall of 2009, the projections easily exceed the Great Depression. At that point the only way to prevent catastrophic economic conditions would be through massive inflation of the US dollar achieved by either congress allowing the Federal Reserve to issue its own debt, or by accelerating the rate at which the Federal Reserve monetizes US debt while funneling the newly printed dollars into wages so that the money can circulate within the economy."
Yes, wage inflation is wonderful, however recent data indicate that just the opposite is happening, and the only people who have seen their base pay increase are, ironically, Wall Street bankers, however, at the expense of losing their bonuses. Which is why bank excess reserves are likely to continue skyrocketing as literally boxes full of cash continue gathering dust, while a deleveraging consumer spends his money on guns and ammo.

And here, for some more data on why the unemployment number, is for the most part, rubbish.

Hat tip Distressed Lookout Sphere: Related Content

TGI Failure Friday: #37

Bank failure # 37 for the year was Bank of Lincolnwood, Lincolnwood, Illinois. Republic Bank of Chicago, Oak Brook, Illinois will assume all the deposits.
As of May 26, 2009, Bank of Lincolnwood had total assets of approximately $214 million and total deposits of $202 million. Republic Bank of Chicago agreed to purchase approximately $162 million in assets. The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost to the Deposit Insurance Fund will be $83 million. Republic Bank of Chicago's acquisition of all the deposits was the "least costly" resolution for the DIF compared to alternatives. Bank of Lincolnwood is the 37th FDIC-insured institution to fail in the nation this year and the sixth in Illinois. The last bank to fail in the state was Citizens National Bank, Macomb, on May 22, 2009.
Does anyone even care about this data anymore? There obviously isnt one bank in the US which, on a long enough timeline, won't fail. Sphere: Related Content

FDIC Sold $295 Million Commercial Loans In April At 60 Cents On The Dollar

Looks like even the FDIC is flexing its perfectly inelastic supply curve in Commercial Real Estate Loans. After selling a whopping 1,328 performing and non-performing loans in March for $218 million (a 54% discount), the FDIC sold just 315 loans in April for $177 million, a 40% discount. Presumably the investors who have purchased these loans are ineligible for PPIP or else they would know they could have purchased everything at par and paid less than half in equity, resulting in much better IRRs (to themselves, not taxpayers). A novel development for this month, is that in addition to long-time fan of the FDIC loan auction process Beal Bank (LNV), now Colony Capital has also joined in the bidding fray (under Matrix Advisors LLC in the list below). It is notable that all of Colony's loan auctions were won at exactly the same bid: 67.1% of par. Something is definitely quite odd about this result. Reader feedback is welcome.

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Indiana Pension Funds Lose Appeal

Developing story: Indiana Pension Funds lose second circuit appeal challenge (from Bberg).

Supreme Court appeal pending: SCOTUS has until Monday to decide if it wants to deal with this ungodly mess.
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Payroll Data In Perspective

Compliments of a much happier and much less Merrill "Is that the most bullish piece you can come up with" Lynch-supervised David Rosenberg.
We have to put the data into perspective. Before the Lehman collapse, when equities were in a moderate bear market and bonds in a moderate bull market, the worst nonfarm payroll result we saw was -175,000. We don’t seem to recall too many pundits rejoicing over employment declines at that time, which were basically half of what was just posted in May. Moreover, the worst nonfarm payroll number in the 2001 recession — right after 9-11 — was -325,000; and before that, at the depths of the 1990-91 recession, the worst report showed a -306,000 print. So basically, what we saw today was a number consistent with a deep recession — just not quite as deep as the near-6% at an annual rate contraction we saw in the first quarter. It is difficult to rejoice over an employment data that is consistent with real GDP still declining anywhere from a 2% to 4% at an annual rate. Now here we are, close to nine months after the Lehman collapse, and we are still printing employment numbers that are double what they were before pre-Lehman. That is the bigger picture.

Moreover, the internals of today’s report, in a word, were awful. Not only are businesses still cutting jobs but they are also reducing the hours that their employees are working; the private workweek hit a new record low of 33.1 hours (from 33.2 hours in April). So, total labour input was much weaker than the headline payroll suggests and this is vividly illustrated in the aggregate-hours worked index, which fell 0.7% MoM and something ‘green shoot’ advocates will not like discuss since this was actually worse than the 0.3% MoM drop in April; this takes the three-month trend to a -8.6% annual rate. Think about that for a moment because what goes into GDP is total hours worked and productivity — so the latter better continue to hang in there or else we are going to be seeing some nasty output data going forward that may well take Mr. Market by surprise. Put another way, if companies had held hours worked constant in May instead of cutting them, to achieve the total labour input they achieved last month would have required — get this — a 927,000 payroll cut. ‘Green shoot’ indeed.
Source: Gluskin Sheff Sphere: Related Content

Consumer Credit Plunges v2

And I thought last month was bad. Total consumer credit in April dropped by almost $15 billion to just above $2.5 trillion, on expectations of -$6 billion, a 7.4% annual rate reduction. As for the March revision, it just does not compute how manipulated higher that number initially was.

Someone tell that house of dimon SPY permabid that consumer credit down -> savings up -> economy bad.

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Proudly Gunning Every Market Upswing Since TARP

Update: Just as the SPY is about to drop, guess who start gobbling up 5-10k blocks of SPY. $10 in TARP money to the first who guesses.

JPM making sure that no Dow dip goes unpunished.

Update 2: And just in case there is ANY CONFUSION AT ALL LEFT, here is who gunned the last ramp up.
Here is a good SAT-type mnemonic:
Akeem is to garbage, as [ blank ] is to gunning the market.
R Kelly is to underage girls, as [ blank ] is to SPY.
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Liesman Tries To Be Convincing, Another Epic Fail Ensues

Also, when it seems like Steve is about to crack in "explaining how we live and how the system is set up", Melissa storms to the front, providing that critical second wind of intellectual superstardom. Michael Pento must still be shell-shocked from that episode.

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So How About That Fed Funds Rate Increase?

Since Ben and his CNBC cronies have been ahhing and ooohing about hyperinflation, and the hyperdeflation of debt, both expected to start any minute now, we thought it's time to check out expectations for the fed fund target rate. Turns out the market is really buying into this inflation story. Of course, a mere four months ago the Taylor rule said we need -6% rates to stabilize the economy, but it is amazing what a little propaganda and a little (well, maybe not so little) excess cash printing will do to expectations.

The table below indicates that 10% of "professionals" expect a raise in the Fed Funds rate to 0.25% by June, 22.3% think we will be at 0.50% by August, and 7.4% think we will be at 0.75% by September. Mmmk, we are curious how the fact that over the past week mortgages have increased by 1% erasing hundreds of billions in consumer net worth jives with this inflationary expectation, but that's fine. After all, there is no indication that we are even close to escaping the gravity pull of bizarro world.

Also for those curious enough, I present the intraday Fed Funds 30 futures rate.

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UK Government Crisis Reaches Critical Point

Developing story: As Gordon Brown is currently speaking, more and more labour party members are dropping like flies. Just resigned, British Ministed of State for Europe, Caroline Flint. Sphere: Related Content

The Mortgage Refi Trade Is Over

If, like Bob Pisani, you refied a week ago at 4.7%, congrats. If not, tough luck. Vigilantes check to you Mr. Bernanke.

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IMF: "Where Does The Public Sector End And The Private Sector Begin?"

In keeping up with our socialist times, another relevant white paper out of the IMF.

Hat tip Alex Sphere: Related Content

Federal Reserve Balance Sheet Update: Week Of June 3

Total Federal Reserve balance sheet assets for the week of June 3 of $2,065 billion consisting of:
  • Securities held outright: $1,114 billion (an increase of $6.2 billion, resulting from $8.6 billion in new Treasury purchases and a $3 billion decrease in Fed Agency Debt - this is the first agency decrease since the fed started buying this security class)
  • Net borrowings: $498 billion (no change from the updated prior week, and a $57 billion reduction from the week of May 20)
  • Float, liquidity swaps, Maiden Lane and other assets: $453 billion (decrease of $16 billion due to a continued reduction in Central Bank Liquidity Swaps ($8 billion) and $9 billion in CPFF outstandings )
Foreign holdings of USTs and Agencies increased by $7.4 billion to $2,732 billion from $2,724 billion in the prior week.

Another representation of the balance sheet can also be seen here at this St. Louis fed site.

Source: Federal Reserve's H.3 and H.4 reports Sphere: Related Content

Zero Hedge On Fox Business

We are not holding our breath until CNBC quotes us.

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Moody's Complaining About Rating Shopping

In a sign of the upcoming TALF-subsidized apocalypse, none other than Moody's is now complaining that issuers are shopping for ratings, or seeking ratings only from those agencies they know apriori will provide the highest rating (AAA) needed for TALF inclusion. Yes, Virginia, we have gone full circle to 2005, and now the government itself is promoting the same vicious rating loop that got us into this credit mess in the first place. Zero Hedge wrote about this more than a month ago - we are happy that Moody's has finally taken the time to confirm our observations.

Luckily, consumer confidence is so high and bank stocks haven't plunged in over 2 months, so TALF will not be needed. Really? I guess Sheila Bair forgot that this really has to revert at some point, and when it does, have fun gluing the pieces back together without the mad dash Frankenstein creation that was the PPIP.

According to Bloomberg:
The need to have a AAA rating to be eligible “for government programs raises the specter of rating shopping,” Andrew Kimball, head of the global structured finance business at Moody’s Investors Service, said during the company’s investor day today. “Those programs don’t differentiate on the quality of the rating. Rating shopping becomes a problem.”

As a result, New York-based Moody’s hasn’t been included in some recent transactions, Kimball said on a conference call broadcast from the event. Under TALF, the Fed provides low-cost loans to investors to buy AAA rated securities backed by auto, credit card, equipment, education and other kinds of loans. Companies sold about $15 billion of eligible asset-backed debt ahead of the fourth deadline for the Fed’s TALF on June 2, up from about $13.5 billion in May, according to Bloomberg data.


The Obama administration and Bernanke are counting on the TALF as a cornerstone of plans to revive credit and end the recession. While the program is on pace to fall short of its $1 trillion official ceiling, Bernanke said in a letter to a lawmaker last month that the TALF has helped create “improved conditions” in the asset-backed securities market.

Cabela’s Inc., a Sidney, Nebraska-based chain that specializes in hunting and fishing gear, sold about $425 million in bonds backed by payments on its store card for TALF in April. The securities had AAA ratings from S&P, Fitch, and Toronto- based Dominion Bond Rating Service Ltd. Moody’s doesn’t grade the debt.

“The most conservative rating agency usually has the lowest market share, and in the case of TALF-eligible ABS, that would be Fitch,” said Kevin Duignan, spokesman for Fitch in New York.

‘Fact of Life’

“It is the internal mandate to maintain market share that leads an analyst to compromise credit quality,” said Jack Toliver, managing director of global commercial mortgage-backed securities at Dominion.
As I observed a few weeks back, in an effort to facilitate just this kind of rating shopping phenomenon, the Fed, for the first time, allowed DBRS and Realpoint to participate in the list of TALF rating-eligible rating agencies. Of course, this is meant only to provide a larger universe from which to pick for those 2 (or however many) raters that will provide the increasingly elusive AAA rating.

As long as the circle jerk of ratees paying the raters for the highest endorsement continues (with Bernanke's full blessings), there is not a snowball's chance in hell that we will ever get to a point where taxpayer money is funding good assets. This is precisely the crusade of Connecticut AG Richard Blumenthal. The only way to avoid the catch 22 of "paying for the AAA" is for all rating agencies to move to a subscriber paid model, incorporated currently by TALF ineligible rating provider Egan Jones. The fact that investors themselves are willing to sponsor that kind of business model means that a company like Egan Jones has the highest credibility among all raters and should be the focal point in Blumenthal's push for eliminating rating conflicts of interest within the investing community. This observation was also the reason for Greenlight's David Einhorn unabashed trashing of Moody's as a failed business model.

Zero Hedge's modest proposal to all who read us in D.C. and beyond is to implement just such a model - yes, it will means huge margin hits to the bottom lines of S&P and Moody's, Warren Buffett may end up with a loss (which should be more than made up by his gains from his Goldman Sachs investment) but it will be the first real step back toward regaining investor confidence in a rating model that has lost even the remotest trace of impartiality and objectivity. Sphere: Related Content

Market Reactions To Pre-GM/Chrysler Unemployment Number

Total unemployment

2s10s schizophrenia

2 year skyrocketing

10s30s curve pancacking

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Daily Highlights: 6.5.09

  • Initial Unemployment claims in US decrease, signal worst of slump ending.
  • Oil climbs higher in Asia, nearing $70 a barrel ahead of US jobs report.
  • ABM Industries beats by $0.05; posts Q2 EPS of $0.32. Revs fell 5.6% to $855.7M.
  • AIG may raise $988M selling portion of Transatlantic Holdings stake.
  • Abercrombie & Fitch's May same-store sales drops 28%.
  • American Apparel's May same store sales at -10% vs. cons est. of -4.0%.
  • Axsys Technologies to be acquired by General Dynamics for $54/sh ($643M).
  • Bank of America ousts head of risk oversight.
  • BHP to pay Rio Tinto $5.8B under iron ore production joint venture.
  • Cooper Cos's Q2 net rises 119% to $24.6M; revs up 0.5% at $260.6M.
  • GM has inks a preliminary deal to sell its Saturn division to mega auto dealer Roger Penske.
  • GM agreed to finance a PE firm's buyout of bankrupt Delphi.
  • Intel to acquire Wind River Systems for $11.50/sh cash ($884M).
  • Krispy Kreme Doughnuts' Q1 net skidded 53%; revs down 9.9% to $93.4M.
  • Macy's May same-store sales fell 9.1%, while JC Penney reported an 8.2% decline. Saks Inc. posted a 27% plunge.
  • Qwest's long-distance business has received preliminary bids well below the $2-3B it was seeking.
  • Rio Tinto cancels the $19.5B deal with Chinalco; announces $12.5B rights issue.
  • Textron to reduce its workforce at its Cessna unit, cites weakness in aviation market.
  • Vail Resorts beats by $0.12, posts Q3 EPS of $1.68. Revs fell 21.3% to $333.5M.
  • Economic Calendar: Data on Average Workweek, Nonfarm Payrolls, Unemployment Rate,Consumer Credit to be released today.
Earnings Calendar: AGYS, AMWD, CHP, CPW, ODC, TOPS, XIDE.

Economic Calendar: Data on Initial Claims, Productivity-Rev. to be released today.

Companies to watch: Abercrombie & Fitch, Agilysys, C&D Technologies, Exide, Intel, Macy's, Rio Tinto, Textron Inc.

Recent Egan Jones Rating Actions:


Data provided by: Egan Jones Research and Analytics Sphere: Related Content

Frontrunning: June 5

  • 9.4% unemployment, U-6 hits 16.4%, layoffs slow... Just wait for the GM/Chrysler fallout (AP)
  • FDIC pushes for removal of top Citi executives (Marketwatch)
  • Silverton bank shut down after private equity buyers have no desire to buy, even with FDIC backing (WSJ)
  • Opel-Magna deal facing collapse, Fiat hopes to get second look at US Taxpayer generosity (Reuters)
  • Let's keep many eyes on the banks (WSJ)
  • GM to sell Saturn brand to Roger Penske (AP)
  • The market's rally: a square-foot rally (Barron's)
  • Legacy of debt gives fiscal stimulus bad name (Bloomberg)
  • 7 factors that led to crisis (Big Picture)
  • Should we fear rising bond yields (Everyday Economist)
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Thursday, June 4, 2009

In Preparation For The Chrysler Appelate Hearing

The three briefs filed with the Second Circuit are provided below. Reminder: the appeals hearing will be tomorrow at 2:00pm at the Appelate court at 500 Pearl Street. If the hearing does not result in an outright rejection of the appeal, this could have historic precedent as it unlocks a chain of events which would i) delay the Chrysler bankruptcy indefinitely, ii) give Fiat a free "out", and as has been rumored, without getting Opel, the motivation for the Italians to consummate the deal is materially lower, iii) have a material adverse impact on the outcome of the accelerated GM case. Even if the 2nd Circuit sides with the Debtor/USA, it is still feasible that White & Case will seek overtures to the Supreme Court. In other words, all unemployed and bored readers would be well advised to check out the action at the Second Circuit (no entrance fee).

Also, a cursory look at the filings indicates that the Indiana Pensioners will likely have an uphill climb as their two main points are demonstrably subjective i) whether the 363 sale was sub rosa plan, and ii) whether the US is allowed to use TARP funding for auto bailouts. Granted, some degrees of freedom in both, but what likely could have produced more bankable results would have been a valuation fight, where Lauria could have brought in an expert to opine as to the value of a liquidated Chrysler, and state (objectively) that this value is significantly higher than that presented by Capstone's highly discredited banker Robert Manzo. Arguing against the good faith preparation of his report, together with a justified higher valuation liquidation analysis would have potentially given the Judge much less subjective leeway.

But who knows, stranger things have happened.

The main briefs presented:



United States:

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Live Transcripts Of Chrysler Terminated Dealers Hearing

The files below are the court recordings from today's terminated dealers objection hearing. We have not had a chance to go through them yet. We would advise readers to focus on the testimony of Ethel Cook from Arkansas, whose sworn declaration previously, brought up some very interesting observations.

Part 1

Part 2

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Taxpayers Finance Platinum Equity's Purchase Of Delphi

The WSJ reports that US Taxpayers, giddy with joy at purchasing GM, are soon to become proud owners of the debt of another bankrupt auto company - this time GM critical supplier Delphi, which has been in bankruptcy for well over 3 years. The WSJ quotes a person familiar with the deal, according to whom the U.S. government has decided to backstop the $2.5 billion needed in financing (of the $3.6 total purchase price), in order to make billionaire Tom Gores yet another recipient of the great Obama dilemma: heads I win, tails taxpayers lose.

Someone please get Jon Stewart on the line.

The Daily Show With Jon StewartM - Th 11p / 10c
BiG Mess
Daily Show
Full Episodes
Political HumorEconomic Crisis
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Jim Lockhart Has No Idea Why Fannie Went Bankrupt, Kanjorski's "Bank Run" Sequel

Alan Grayson, the not-so-caped crusader who has a penchant for irreverently exposing weapons grade stupidity especially when it is manifested by such systemic cogs as FHFA's Jim Lockhart, who is "supposed" to know what it was that caused the implosion of the GSEs he currently presides over, continues his rampage, and this time takes on Fannie Mae. An interesting Q&A follows, in which Lockhart displays his complete lack of understanding of what the principal causes for FNM's downfall were, why the company had $1.2 trillion in CDS months before its implosion, and how its minuscule loss reserve could end up becoming a $100 billion + (and rising) taxpayer loss. Unfortunately, the "pristine" condition that FNM was in, at least as disclosed by its 10-Q the quarter before its was placed into conservatorship, is likely exactly the same condition that Citi, BofA, Wells and all other system banks are in right now. In order to prevent a repeat of the GSE fiasco, Grasyon should be asking Messrs Pandit, Lewis and Stumpf the questions (prospectively), that Lockhart has no answers to (retrospectively).

Anyway, enjoy the video.

Now as a total tangent, as regular readers will recall, in early February, Zero Hedge presented a C-Span interview with Paul Kanjorski in which he disclosed that in September, in the days after the Lehman blow up, Paulson and Bernanke did everything they could to prevent a global run on the bank, with some interesting details. The outcry that ensued was amusing, with respectable journalists such as Felix Salmon announcing that this was likely blown out of proportion, and some people essentially calling Kanjorski a senile old fart. Having personally followed up with the Pennsylvania Democrat, I can attest that senile he is not. Curiously, Paul repeats exactly the same thing he said before C-Span at the end of yesterday's FNM/FRE hearing. Readers who wish to be reminded of how close we came (especially now that Kanjorski has been given ample opportunity to recall the events from that day verbatim), and what were the justifications given for Wall Street's bailout by Paulson and Bernanke in those bleak fall days, please fast forward to the 5 hour 18 minute 20 second mark in the following clip. Sphere: Related Content

The State Vs. Federal Schism

By now if you don't know the trajectory that the federal government has set on with monetizing virtually anything and everything, you must be living somewhere deep in the green shoot forest with only enough WiFi/cable coverage to get CNBC. But while the government and its "reserve" are set on a specific course, the fate of individual states in the US is far less certain (for example, if Arnie could print Spearmint Rhino funny money and buy the miles and miles of unwanted inventory in Long Beach harbor, he would; unlucky for the strippers, and lucky for everyone else, he can't. Although at this rate the next iteration of the hundred dollar bill will likely have Ben Franklin sliding on Made In China stripper pole).

The truth is that while the Fed may have postponed the day of reckoning for another half-administration, the situation at the state level is starting to become untenable.

A report released by the National Association of State Budget Officers confirms all fears about just how gruesome the fiscal catastrophe is at the state level...I dare anyone to tell any state comptroller the joke about the green shoot and the economic rebound: in light of the utter collapse in state budgets, I don't think they will appreciate it too much.

Some of the report's observations:
The number of states experiencing revenue shortfalls increased in fiscal 2009. Revenues from all sources which include sales, personal income, corporate income and all other taxes and fees exceed expectations in two states, are on target in ten states, and are below expectations in thirty eight states. This is in contrast to fiscal 2008 when twenty-five states reported that revenue collections exceeded estimates.

Fiscal 2009 estimated tax collections of sales, personal income, and corporate income are 6.1 percent lower than actual fiscal 2008 collections. Specifically, sales tax collections are 3.2 percent lower and personal income tax collections are 6.6 percent lower.

Thirty-five states assume negative budget growth for fiscal 2010 governors’ recommended general fund budgets, while 30 states are estimating negative growth budgets for fiscal 2009.

Corporate income tax collections are 15.2 percent lower for current fiscal 2009 estimates relative to actual fiscal 2008 collections.

Compared to fiscal 2009 collections, recommended fiscal 2010 budgets reflect a 3.0 percent increase in sales tax revenue, 1.3 percent increase in personal income tax revenue, and a 1.7 percent decrease in corporate income tax revenue.

Many states have since reported that April tax collections were well below estimates.

Because states recognize that an economic downturn may last for more than one year they are reluctant to deplete balances. This is in part due to concerns that the poor fiscal situation may continue through fiscal 2011.
Someone may want to FedEx that last statement over to Tim Geithner: it seems even the Chinese students who were cackling dispassionately at TurboTaxTim's cluelessness, are aware of the simple fact that "the poor fiscal situation may continue through fiscal 2011."

Hat tip Richard Sphere: Related Content

Daily Credit Market Summary: June 4 - Divergence Deja Vu

Spreads were mixed in the US today as HY underperformed IG as credit rallied intraday but ended pretty much unch on the day. Indices generally outperformed intrinsics (single-names were generally wider) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.

The names having the largest impact on IG are Simon Property Group, L.P. (-15bps) pushing IG 0.12bps tighter, and International Lease Finance Corp. (+240.9bps) adding 1.51bps to IG. HVOL is more sensitive with Simon Property Group, L.P. pushing it 0.52bps tighter, and International Lease Finance Corp. contributing 6.7bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Barrick Gold Corp. (-7bps) pushing the index 0.07bps tighter, and Valero Energy Corp. (+17bps) adding 0.17bps to ExHVOL.

The price of investment grade credit rose 0.01% to around 99.02% of par, while the price of high yield credits fell 0.38% to around 83.5% of par. ABX market prices are lower by 0.22% of par or in absolute terms, 0.09%. Broadly speaking, CMBX market prices are lower by 1.08% of par or in absolute terms, 0.37%. Volatility (VIX) is down -0.84pts to 30.18%, with 10Y TSY selling off (yield rising) 17bps to 3.71% and the 2s10s curve steepened by 12.2bps, as the cost of protection on US Treasuries rose 0bps to 40bps. 2Y swap spreads widened 6.1bps to 47.25bps, as the TED Spread tightened by 2.3bps to 0.49% and Libor-OIS improved 1.6bps to 41bps.

The Dollar weakened with DXY falling 0.15% to 79.378, Oil rising $2.74 to $68.86 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.28% today (a 3.99% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $17.58 to $980.65 as the S&P rallies (940.8 0.98%) outperforming IG credits (123bps 0.01%) while IG, which opened wider at 123.5bps, outperforms HY credits. IG11 and XOver11 are -2.75bps and +1.75bps respectively while ITRX11 is -1.88bps to 107bps.

The majority of credit curves flattened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).

Dispersion rose +19.6bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 38% of IG credits are shifting by more than 3bps and 46% of the CDX universe are also shifting significantly (less than the 5 day average of 62%). The number of names wider than the index stayed at 46 as the day's range fell to 6bps (one-week average 7.13bps), between low bid at 121 and high offer at 127 and higher beta credits (2.62%) underperformed lower beta credits (0.93%).

In IG, wideners outpaced tighteners by around 2-to-1, with 62 credits wider. By sector, CONS saw 22% names wider, ENRGs 63% names wider, FINLs 76% names wider, INDUs 46% names wider, and TMTs 65% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 106.94bps and the latter at 106.48bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 305.95bps from 294.35bps, but remains below the short-term average of 311.41bps, with the HY/XOver ratio rising to 1.45x, above its 5-day mean of 1.45x. The IG-Main spread decompressed to 16bps from 14.37bps, but remains below the short-term average of 16.34bps, with the IG/Main ratio rising to 1.15x, above its 5-day mean of 1.14x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 0.9bps to 106.5bps, with 37 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 3.89bps to 148.24bps, with Finance names (worst) wider by 44.85bps to 688.24bps, Banks (best) wider by 3.09bps to 191.15bps, and Brokers wider by 3.75bps to 179.58bps. Monolines are trading wider on average by 31.66bps (0.81%) to 2380.48bps.

In IG, FINLs underperformed non-FINLs (7.96% wider to 0.85% wider respectively), with the former (IG FINLs) wider by 22.6bps to 306.6bps, with 3 of the 21 names tighter. The IG CDS market (as per CDX) is 19.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.15bps), with the bond ETFs outperforming the IG CDS market by around 7.68bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 2.57bps to 106.94bps (with ITRX FINLs -trending tighter- weaker by 0.87 to 107.25bps) and is currently trading tight to its week's range at 6.79%, between 124.92 to 105.63bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0%, between 86.91 to 71bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.42bps from -0.83bps, but remains above the short-term average of -1.65bps. The Main exFINLS to IG ExHVOL differential compressed to 33.52bps from 37.34bps, and remains below the short-term average of 36.44bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -0.54bps to 157.35 (24 wider - 19 tighter <> 29 steeper - 16 flatter).

CDX12 IG 0bps to 123.25 ($0 to $99.01) (FV +4.12bps to 138.25) (61 wider - 37 tighter <> 50 steeper - 55 flatter) - Trend Tighter.

CDX12 HVOL -5bps to 280 (FV +15.62bps to 341.42) (18 wider - 8 tighter <> 11 steeper - 17 flatter) - Trend Tighter.

CDX12 ExHVOL +1.58bps to 73.75 (FV +0.77bps to 79.19) (43 wider - 52 tighter <> 56 steeper - 39 flatter).

CDX11 XO 0bps to 322.5 (FV +1.67bps to 391.91) (18 wider - 6 tighter <> 12 steeper - 14 flatter) - Trend Wider.

CDX12 HY (30% recovery) Px $-0.38 to $83.5 / +13.4bps to 993.2 (FV -2.24bps to 914.52) (42 wider - 38 tighter <> 39 steeper - 42 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.13 to $83.75 / -6.39bps to 803.71 - Trend Tighter.

MCDX12 +9bps to 180bps. - No Trend.

CDR Counterparty Risk Index rose 3.47bps (2.4%) to 147.82bps (15 wider - 0 tighter).

CDR Government Risk Index rose 2.57bps (4.39%) to 61.11bps..

DXY weakened 0.15% to 79.38.

Oil rose $2.74 to $68.86.

Gold rose $17.58 to $980.65.

VIX fell 0.84pts to 30.18%.

10Y US Treasury yields rose 17bps to 3.71%.

S&P500 Futures gained 0.98% to 940.8. Sphere: Related Content

Goldman Sachs Principal Transactions Update: 741 Million Shares

Latest NYSE Program Trading data out. Program trading last week ramped up by 27% from 26.5% the week before, to 33.7% of all NYSE buy+sell volume, and much higher than the 52 week average of 25.3%. The 15 most active member firms traded 1.9 billion shares for principal accounts, compared to 1.6 in the prior week. The top principal trader is and has always been (at least for the past 9 months) Goldman Sachs, with 741.7 million principal trades, virtually nothing in facilitation and 115 million in agency, keeping the principal to non-principal ratio at just under 7x.

And if the Goldman Supplemental Liquidity Provider team is patting itself on the back for its tremendous contribution of being the major (and likely only) liquidity provider, maybe they can explain the insane bid/offer spreads on the SPY at close today (and everyday): one could drive a Tengzhong Sichuan-made Hummer/forklift through that spread blindfolded (no, JPM, nobody is interested in your constant SPY machinegunning with 5k SPY blocks on every single goddamn market dip).

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Treasury Curve Hits Record Steepness Again

The treasury curve just hit a new all time record wide of 278.7 bps.

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Volume Explosion Seen In Goldman Sachs Commodity Index

And now for some midday Schrodinger wave function collapse:

"If a volume explosion hits the GSCI index, does it exist if nobody witnesses it?"

It is quite obvious that nobody at all was aware of any impact pieces out of Goldman that would herald summer of 2008 crude price targets... The chart below shows the insignificant volume pop in the GSCI.

A brief recap on GSCI from Seeking Alpha.
The GCSI is an index of 24 commodities weighted by world production. Goldman Sachs believes each commodity should be weighted in proportion to the amount of that commodity flowing through the economy.

Because commodities can be held in many different ways, it is impossible to directly measure the amount of capital dedicated to holding that asset. For a stock you can measure its market capitalization which represents the total amount of capital dedicated to holding that stock. But for commodities, you can't do that. The way to measure economic significance of commodity is to measure its production, which in turn is related to how much capital is dedicated to that commodity.

At this point, theoretical elegance clashes with investment prudence. The world's most widely produced and traded commodity is oil and related products. Reflecting that, the GSCI has a 73.5% weighting in energy commodities. Of the total index, 45% is weighted to Crude Oil. Of the remaining 27% of the index, 10% is allocated to each of agricultural commodities and industrial metals. The final 7% is split between precious metals and livestock. The GSCI is designed to reflect reality without concern for investability.

hat tip Frank Sphere: Related Content

Mortgages Blowing Wider Again

Mortgage vigilantes out in full force today, calling Bernanke's bluff. Spread to 10 Years galloping fast as well.

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Terminated Chrysler Dealers Are Heard; The Clinton Scent Redux

Today, Chrysler's terminated dealers finally get a chance to be heard by Judge Speedy, although the mootness of the hearing can be smelt from miles away. Associated Press has some good color on the proceedings:

Just under 20 dealers were sworn in at the beginning of what was expected to be a lengthy day of testimony from both dealers and Chrysler LLC executives. Arguments on the motion are scheduled for Tuesday.

It's not clear when U.S. Judge Arthur Gonzalez will rule on Chrysler's motion, or how this will effect Chrysler's plans to terminate the dealer franchises effective Tuesday.

James Tarbox broke down while testifying about learning that the franchises for his pair of dealerships in Rhode Island and Massachusetts were included on Chrysler's list of the 789 it plans to terminate.

"I thought there must be a mistake," he said choking back tears.

Though acknowledging that he posted a loss for 2008, Tarbox said his dealerships have won awards for both sales and service in recent years.

While dealer closure is a natural and expected phenomenon, as both Chrysler and GM attempt to streamline into something resembling profitability, the question of terminated dealer selection is one that has bothered Zero Hedge, and specifically Marla, who put together some very interesting statistical analyses and models trying to extract any relevant patterns. As readers will recall, while the data preliminarily did not demonstrate a republican or democratic bias, there was some peculiar tendency in the data to favor Clinton donors. Yes, just statistics, and we all know those can be flawed. Plus the data set Marla worked with was not exhaustive. Hopefully, when GM discloses its full list of closures, the statistical exercise can be repeated with a much bigger sample population which should confirm or deny any relevant observations. Several GM dealers have already approached us unsolicited with information on their termination: we hope that if GM is tight lipped about its dealer list, that more voluntary information will come from the GM dealer community. But again, the best possible outcome is to get a more relevant statistical case.


Last night I decided to flip through some of the sworn declarations presented by the dealers at the bankruptcy court hearing today. The compiled presentation list is presented below for the benefit of readers. The dominant theme among all dealers is that virtually all acknowledge they were compliant with both Project Alpha and Project Genesis: the key cut off criteria that Chrysler stated it had used in determining who gets terminated and who stays. In fact, the bulk of the dealers had significantly above average statistics from a sale, MSRP, customer satisfaction and service point of view within the entire Chrysler dealer universe. So in the event that retained dealers were not Genesis compliant while cut ones were, this would demonstrate that there was, in fact, more here than meets the eye. We leave the exercise for a later day, but will get to it shortly.

One particular declaration caught my eye, that of Ethel L. Cook, a dealer based in downtown Little Rock, a town near and dear to the former resident. I believe readers can draw their own conclusions based on Mr. Cook's sworn testimony (highlights mine).
On May 13, 2009, I received a letter from Chrysler notifying the Dealership that Chrysler had elected to “reject” our Dealer Agreement. I am obviously very familiar with the Little Rock, Arkansas dealer network and was surprised because both Cook and Crain, the only Chrysler dealers in Little Rock, were both rejected. Therefore, Chrysler’s action would, on its face, result in a complete lack of representation in a major American city. Since that would be a ludicrous result, one can only infer that Chrysler has a more sinister motive.

Because it is inconceivable that Chrysler will not have a dealership in Little Rock going forward, the only conclusion that one could draw is that, after review, the evidence in other markets in the region, that Chrysler now intends to “give” the Little Rock market to a Landers-related dealer.

Having reviewed the pattern of assumption and rejection of dealers throughout their region, I have detected a pattern: In every market where there is a dealership connected with former Penske Automotive executive Steve Landers, or his new automotive partnership with “Mac” McLarty (former Chief of Staff for President Clinton) and Robert L. Johnson (majority owner of the Charlotte Bobcats), the competitors are rejected.

In the Little Rock, Landers Chrysler Dodge Jeep is located far out of town in Benton, Arkansas. Nevertheless, the two Little Rock dealers, Cook and Crain were rejected.

In the Fayetteville, Arkansas area, Landers-McLarty Dodge Chrysler Jeep is located far out of town in Bentonville, Arkansas. Competitors Springdale Dodge Chrysler, Steve Smith County Jeep and Jones Brothers were all rejected.

In the Shreveport, Louisiana market, Lee’s Summit Dodge Chrysler Jeep (a Landers McLarty dealership) is located in Bossier City, Louisiana. Both competitive dealers, Claude de Beaux in Vivian, Louisiana and Greater Birmingham Dodge Chrysler in Shreveport were rejected.

In the Springfield, Missouri market, Tri-Lakes Motors (a Landers-McLarty dealership) is located in Branson, Missouri. Competitors Heritage Chrysler Jeep in Ozark, Missouri and Ramsay Motor Company in Harrison, Arkansas were rejected. A pattern seems to be emerging. Everywhere there is a Landers-McLarty dealership, Chrysler has rejected the competition.

In the Huntsville, Alabama market, Landers McLarty Dodge Chrysler Jeep, is located in Huntsville. Competitor Cloverleaf Chrysler Dodge Jeep was rejected.

Favoritism and cronyism towards preferred dealer group is not a valid exercise of business judgment.
We could not agree with the last line more, Ethel. After reading this sworn declaration, Zero Hedge is eagerly awaiting the full results from Marla's exercise, especially once it gets the much needed GM dealer termination data.

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Melissa Francis Takes On Deutsche Bank Chief Economist, Epic Fail Ensues

In what is an interview for the ages, CNBC's Melissa Francis takes on DB's Chief Economist Joe LaVorgna, stupefies him (and whatever watchers the comedy channel might have left) with a definition of inflation taken straight out of Cosmopolitan, tells him he has lost all credibility (4:20 into the clip), rewriters the first chapter in Econ 101, and ploughs on even after permabull Kudlow tells her to shut up. Priceless (in both a deflationary and Cosmo's inflationary world).

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Retail Chain Store Sales Plummet

After a peculiar pick up in April, the chain store sales trendline has reverted to a complete collapse, dropping a whopping and record 4.6% in May. Look like tax refund stimulus benefits have done their temporary magic and now all trends are back on their usual course.

Below is the definition on Chain Store Sales for those unfamiliar:
The monthly chain store sales data are compiled in two basic forms: (1) based on comparable- store sales (the primary measure) and (2) based on total company stores. They are sales weighted indexes and currently cover a little more than 80 chains. The compilation of the data as an index allows for continuity over the long haul (much like a stock price index).
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REIT Support Group Therapy In Full Swing

The greatest commercial real estate Kool Aid convention is currently in progress at the Waldorf-Astoria where NAREIT is holding its annual circlejerk week (oddly Zero Hedge was not invited), during which REITs try to convince other REITs how great the market is, how the GGP bankruptcy was the greatest thing since sliced bread, and how rents will (all facts to the contrary) continue to rise to infinity + 1 in perpetuity, as cap rates eventually become negative. Of course, if they really want to continue living in their humongous bubble, it's their right.

Now every now and then, someone utters something so dialectically stupid, that my ears start bleeding - it was only fitting that this year's "Kool Aid statement of the year" came from NAREIT itself.

Brad Case, vice president for research at NAREIT (who apparently lives in a cave and is locked into a 20 year lease agreement with exponentially accelerating rent increases), had this priceless gem of a statement:
"Real estate investment trusts in the U.S. may raise about $582 billion by 2013 for acquisitions as competitors sell properties and values fall. Publicly traded REITs will probably accumulate about $728 billion, including debt, for purchases. REITs including Vornado Realty Trust and Simon Property Group Inc. raised $11.5 billion in offerings in April and May and that’s just the front edge of the iceberg. The process that’s taking place starting right now looks very much like the process that we saw starting in early 1991."
Where does one even begin? Of course, while serial upgrader and totally unconflicted equity underwriter and loan redeemer (and NAREIT conference sponsor, duh) Merrill/BofA would love nothing more than to see REITs raise 25x more than what they have issued in follow-ons already ($$$ signs dancing in the eyes of whoever is left in the REIT research department at Merrill), for that to be an even remote possibility, Commercial Real Estate funds (such as Cohen and Steers) would all need to get nationalized, and Barack would have to announce that it is every man, woman and child's sworn duty to buy each and every share ever to be issued in perpetuity by such pristine and massively leveraged companies as Kimco and Duke Realty. For god's sake - if investors don't even feel like purchasing AAA-rated TALF CRE/CMBS paper at 12x leverage, who in their right mind would keep buying infinitely diluted equity offering from trusts that dont even pay the mandatory cash distribution in cash anymore (why are REITs attractive again?). If investors are really so deluded and bullish, they should just go out and buy ghost mall X directly and skip the middleman completely. Oh yes, there are quite a few of these available compliments of the rising tide of upcoming bankruptcies in the space.

For those who want to "Just Say No" to the REIT Kool Aid, I continue presenting data exposing what a complete fraud any statement is that CRE is due for a rebound, let alone the garbage statement that REITs have yet to raise half a trillion in equity (i mean come on, there are only so many shorts ML can squeeze, right, right?). Today's installment comes courtesy of Massey Knackal, who has put together a great long-term analysis of Manhattan multifamily data. I would love to get Brad Case's insights on just what this chart implies for his venerable coverage universe. Some of the most relevant charts from the presentation (attached below)

So while the jokers at the Waldorf Astoria congratulate bet the farm that CRE savior TALF will bail them all out, things are getting uglier by the minute. We wish them all the best, especially in advance of the Fed adjusting the TALF inclusion criteria yet again. However, no matter how you spin it, unemployment, economic contraction and lower rents which are the new normal, will sooner or later catch up with them. There is only so much time that inflating your numbers will buy you. Sooner or later someone will have to pay their rent as well... Maybe that is the key issue that Case should have addressed instead of some waxing philosophical on some whimsical future page pulled out straight from the 2006 uber-leverage days.

Report from Massey Knackal

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