The Tasgall Group

As the Fed and Treasury announce yet another solution to all our problems, this graphic is making the rounds…

My opinions are many and varied… banning short selling is a witch hunt, the likes of which remind me of the scene in Monty Python… only instead of being a comedy, it’s the politically charged sound bite of the day.

As a heads up, and as if we needed more reasons to be bearish… the Baltic Dry Index (BDI) is breaking down to new lows for the year…

The BDI is a good indicator to follow as a barometer of economic health, so seeing it drop is generally not a good sign. If you like Mish’s blog, you can read more about it with his analysis of the situation.

This has been available for a while, but I hadn’t noticed it until now… but Google’s online spreadsheet program supports having live stock prices put directly into the spreadsheets for you… Great for a quick analysis or for some easy sharing…

Google’s Docs are not as powerful as Excel, but you could always export to Excel for heavier number crunching if you need to…

Two news articles worth mention broke so far over the weekend…

Paulson Plans to Bring Fannie, Freddie Under Government Control (Bloomberg):

Treasury Secretary Henry Paulson is preparing to announce plans to bring Fannie Mae and Freddie Mac under government control, seeking to halt the crisis of confidence in the companies that make up almost half the U.S. mortgage market.

Paulson met with Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron yesterday to tell them of the decision to put the companies into a conservatorship, where they would be removed from their jobs, according to a person briefed on the discussions. A public announcement is expected this weekend, the person said.

My take on the news? They need to get rid of more than just the CEOs if our tax money is going to be used to restructure the companies.

And another medium-sized bank has been closed by the FDIC (Bloomberg):

Silver State Bank of Henderson, Nevada was closed by U.S. regulators, the 11th bank to collapse this year amid a surge in soured real-estate loans stemming from the worst housing slump since the Depression.

Silver State, with $2 billion in assets and $1.7 billion in deposits, was shut by the Nevada Financial Institutions Division and the Federal Deposit Insurance Corp., the FDIC said yesterday in a statement.

The FDIC has continued it’s game of closing banks on Friday after the banks are closed. With $2b in assets, Silver State is certainly not small.

Fascinating chart from Casey Research… the Dow Industrials have their first ever negative quarterly earnings…

There are some other interesting details on the writeup.

I thought this chart is worth sharing…

After dwindling to almost zero, the personal savings rate spiked up in the last measured period…

On the demand front, both Silver and Zinc will likely get a boost in the future as new battery technology taps both for the next generation of laptop batteries. ZPower is promising higher energy density (to the tune of 40%), more environmental safety (yay recycling), and more chemical stability (a.k.a., fewer exploding laptop batteries).

No need to dive into silver or zinc futures to catch this trend though, the new batteries won’t be out until 2009, and existing laptops won’t be able to take advantage of the tech (new laptops that are designed to work with the new batteries only). That should stall things for a while, but if the 40% bump in energy payoff is real, I can’t imagine laptop makers not wanting a piece of this new tech.

Still, with Zinc in a downtrend since December 2006, this could eventually cause enough demand for a turn of the tide…

Silver is a different beast and tends to go along with Gold’s direction… and silver also provides the majority of the cost for said silver-zinc batteries.

Here’s a bold prediction for you.. RealtyTrac will release their foreclosure report on Thursday, and I’m going to predict that the number of foreclosures will decline.

Alas, the prediction is not that bold… and the lower foreclosures is not a bullish phenomenon, but rather a result of the changing rules. California, as well as two other states are changing the minimum amount of time required before foreclosure hearings can begin. Lenders now have to wait a full 90 days from the first missed payment before they can begin foreclosure (it used to be 60 days).

Banking, and the banks’ potential losses from mortgages are still very far from transparent right now. The only way things look like they’re improving is if the numbers don’t reflect reality. We can expect more than a few people will point to the lower foreclosures as a reason “the bottom is in”, but I, for one, won’t be listening.

Edit 8/14 @ 10:00 AM: Oops, guess I was too optimistic.? “U.S. foreclosure activity in July increased 8 percent from the previous month and 55 percent from July 2007, according to the RealtyTrac Foreclosure Market Report released today.”? Even with the rule change, things sucked.

They do have pretty graphics though…

Via The Big Picture’s guest post by Pleur de Plessis:

Richard Russell (Dow Theory Letters): Message to foreign creditors

?We owe our foreign creditors billions of dollars. Furthermore, our foreign creditors already own hundreds of billions of dollars. And our foreign creditors? big worry, among other worries is ? what happens if the dollar really tanks? Foreign holders of US dollars have already lost billions due to the slumping dollar. Yet, above all, the US needs our creditors holding on to their dollars and buying ever-more US bonds. What to do?

?Do you remember Treasury Secretary Paulson rushing all over the world ? Beijing, Moscow, Berlin, Tokyo ? you name it. What was he doing? I think he was beseeching our creditors, ?Look, you?ve got to help us and at the same time help yourself. Hold on to your US bonds, hold on to your Fannie and Freddie paper, keep buying our paper and our bonds. If you don?t, we?re all facing a catastrophe.

??The dollar on a purchasing power parity is ridiculously cheap now. And as soon as possible, we?ll raise rates and that will strengthen the dollar. In the mean time, we?ll talk the strong dollar. And we promise that we will not let the dollar hit the skids. A stronger dollar will help us and help you. Just hold our bonds, hold our paper, and keep buying our bonds. Furthermore, we?ll allow your Sovereign Wealth Funds to buy our assets. Buy all of the US you want. But rest assured, WE WILL DEFEND THE DOLLAR.?

?In my opinion, that was the deal. That was the reason why Paulson was running all over the world with his secret message.?

Source: Richard Russell, Dow Theory Letters, July 30, 2008.

This would argue for a sideways market in the USD, and an end to the continually falling dollar.

In my opinion, it may be a year or two, but the next big trend for the USD will likely be up. Will it be up because of US economic strength? Not really… but rather as the least bad of the global currencies. Europe is more messed up that most people realize (demographically), and they will have trouble maintaining the appearance of unity as the next few years unfold.

Here’s a side-note… take a look at the following chart of the USD index:

You might notice that the dollar has been rising and falling a lot over the last few months… as if constantly oscillating between extremes. This appearance is a side-effect of the way that charting software works… over the last day or two, the days from February have dropped off the left side of the chart, and the price range expanded to fit the entire graph…

To contrast, here is a 1 year chart where the price range shows a bit more vertical height.

The lesson? Be mindful of your chart axis.

I found Kevin Depew’s 5 Things article from Monday (at Minyanville) to have an excellent summation of what a credit crunch is, and why it is important. Here are several excerpts that can act as a primer to anyone wondering what is going on…

1. What is a “Credit Crunch”?

The simple answer is that a “credit crunch” is a general decline in the the supply of, and demand for, credit.

[A] “credit crunch” occurs when banks become more risk averse – less willing to lend – even though interest rates may remain the same, and in extreme cases, even though interest rates may go lower.

2. Why does credit growth matter in the first place?

Because in our [economic] system, economic growth is dependent upon credit expansion.

As long as credit expansion and demand for credit continues at an accelerating pace, the appearance of prosperity continues as asset prices increase. The “accelerating pace” aspect is critical. It is the key to maintaining the boom.

As Michael Darda, chief economist for MKM Partners told the Times today, ?Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.?

3. What do we mean by “credit expansion,” anyway?

[For almost 20 years, banks lent money] at artificially low interest rates and, later, to borrowers with increasingly low credit quality. By offering willing borrowers money at artificially low rates, this encouraged [taking on more risk and] risk tolerances were widened.

This is how debt was pyramided to such an extent that one small setback, in subprime borrowing for example, resulted in such a widespread problem, problems which quickly spread to other, supposedly safe credit risks.

By offering willing borrowers money at artificially low rates, this encouraged increased time preferences among economic actors, which is to say that investment horizons were lengthened and risk tolerances were widened. This money was then overinvested and misallocated by investors in dot.com ventures and houses.

4. How, then, did we transition from credit expansion to a “Credit Crunch”?

This loss of capital creates risk aversion; lenders suddenly find they are not being repaid, say, by subprime borrowers who are defaulting on their mortgages. These lenders in turn – remember this is a fractional banking system – find that because they used the repayment of these loans as collateral for loans they took out to “malinvest,” suddenly discover they are unable to repay some of their debts. The lender’s lender is in the same boat, as is the lender’s lender’s lender.

So, what do these lenders do? They “de-lever.” In other words, they sell whatever they can – whatever is still liquid (say, U.S. stocks, for example) in order to raise capital to repay loans.

Lenders in many cases cannot, or are no longer willing to, extend credit … for they fear not being repaid.

I have heavily excerpted/edited the original article for content and clarity… see the original if you want it all in the author’s original context.

Additionally, I left off #5, which attempts to answer the question of “What Next?” Depew has a very interesting answer that is very optimistic in its pessimism… Quite entertaining.