Tuesday, April 15, 2014 - Yellen in the Lions' Den

Financial Review with Sinclair Noe

DOW + 89 = 16,262
SPX + 12 = 1842
NAS + 11 = 4034
10 YR YLD - .01 = 2.62%
OIL - .22 = 103.83
GOLD – 24.20 = 1303.40
SILV - .41 = 19.66

Stocks were all over the place today. We started with triple digit gains for the Dow Industrials, dipped to triple digit losses, then back into positive territory for the close with the major indices closing just below their morning highs. This kind of volatility does not engender confidence; it does warrant caution.

The utilities sector gained 1.3% and finished ahead of the other groups, extending its YTD gain to 11.8%; the biotech ETF added 1%, while the broader healthcare sector advanced 1.1%.Tech stocks have been beaten up quite a bit over the past couple of weeks. The Nasdaq 100 Tech Index (NDXT) is down 7% since April 1st. The Nasdaq Composite has exhibited weakness, but not to the point of meeting the definition of a correction; it would take a slide to 3,922 to mark a 10% fall from the March 5 closing high at 4,357; a 10% pullback from the March 6 intraday high of 4,371 would be achieved at 3,934.

The Labor Department’s Consumer Price Index, or CPI, increased 0.2% in March after posting a 0.1% increase in February. Excluding volatile food and energy prices, core prices ticked up 0.2%.Prices rose 1.5% for the 12 months ending in March. That is up from February’s year-over-year reading of 1.1%. Core prices moved up 1.7% over the 12 months, up from 1.6% in February.

A major factor in both headline and core CPI in March was a 0.3% increase in shelter costs. On an annual basis, housing costs were up 2.7%, the fastest pace in six years. The indexes for medical care, used cars and airline fares also increased in March. Apparel prices rose for the first time this year. Household furnishings and recreation prices dipped in the month. Real or inflation-adjusted hourly wages, meanwhile, fell 0.3% in March to $10.31. Real wages have risen 0.5% over the past 12 months. So, we’re not seeing wage-push inflation.

The big difference has been housing; shelter costs account for a full third of the basket of goods and services tracked in the consumer price index. In the past year, consumer prices excluding shelter have risen just 1%, an indication that inflation pressures are subdued outside of housing.

The old rule of thumb was that rents and utilities combined should not take up more than 30% of household income. A new study by Zillow finds 90 cities where the median rent, not including utilities, was more than 30 percent of the median gross income. A study by Harvard finds that nationally, half of all renters are now spending more than 30% of their income on housing, up from 38% of renters in 2000. Part of the reason for the squeeze on renters is simple demand; between 2007 and 2013 the United States added, on net, about 6.2 million tenants, compared with 208,000 homeowners.

For many middle and lower income people, high rents choke spending on other goods and services, impeding the economic recovery. Low-income families that spend more than half their income on housing spend about a third less on food, 50% less on clothing, and 80% less on medical care compared with low-income families with affordable rents.

Federal Reserve Chairwoman Janet Yellen is scheduled to go to the lion’s den tomorrow, making a speech before the Economic Club in New York. Today, Yellen took the show on the road, speaking to a banking conference in Atlanta, she said current rules on how much capital banks must hold to protect against losses don't address all threats. She said the Fed's staff is considering what further measures might be needed, and such measures would likely apply to only the largest and most complex banks. Yellen said the Fed would review the likely effects of imposing stricter rules on banks. That probably plays better in Atlanta than Manhattan.

At some point Yellen must press the case of the Fed as regulator and in control of the banks rather than vice versa. Now, any threat or hint of threat at tighter control is only likely to result in the big banks moving risky behavior into less regulated areas of the financial system. These areas are often called the shadow banking system.

One area of concern for Yellen and her Fed colleagues is the short-term debt markets. So, Yellen would like to see the banks hold more capital; the idea being that it would make them less susceptible to a run. Now, when you hear that the Fed Chair is concerned about a bank run, this is not the old fashioned bank run, with customers lined up at the door of Bedford Savings and Loan and Jimmy Stewart trying to persuade his neighbors that their long-term loans will provide sufficient liquidity to short-term needs.

The problem goes to an area of regulation overlooked, or perhaps neglected by Congress and the various regulators; specifically derivatives; and after the collapse in 2008 what the regulators did was to concentrate the risk of the derivatives among four major Wall Street banks; the big banks just got bigger.

If you’ve ever stood in a teller’s line at the bank, you may have noticed the FDIC sticker, which reads, “Backed by the full faith and credit of the United States Government.” Effectively, that means, if the assessments the FDIC charges the banks to meet the needs of the Deposit Insurance Fund run short, the taxpayer must prop up the fund to make insured depositors whole. On top of that promise, the National Depositor Preference statute came into being in the US in 1993, making all deposit liabilities at insured depository banks preferred over the claims of other creditors.

The serious wrinkle in the plan is that if one of the four largest banks in terms of derivative exposure was put into receivership by the FDIC, its derivative counterparties have the legal right to assert a super-priority claim on the liquid assets of the bank, jumping in front of depositors. Typically, the counterparties start grabbing their collateral before the public is even aware of the problem.

The Deposit Insurance Fund probably has about $40 billion in assets. With the Dodd-Frank prohibition against further taxpayer bailouts of banks, where would the FDIC turn to stem a run on one of the largest banks?

Under the Federal Deposit Insurance Act, the FDIC, acting as a conservator or receiver for an insured depository institution, has the right to “disaffirm or repudiate any contract or lease.” But here again, Wall Street has the FDIC between a rock and a hard place. Let’s say there was a reenactment of 2008 and Citigroup was sliding toward insolvency. If the FDIC repudiated Citigroup’s derivative contracts, it would set off a panic and contagion at the other three largest banks holding trillions in derivatives, creating an even larger financial tab for the Deposit Insurance Fund to meet. Banks taking deposits of public funds are required to pledge collateral against any funds exceeding the deposit insurance limit of $250,000. But derivative claims are also secured with collateral, and they have super-priority over all other claimants, including other secured creditors. The money is gone before you get to the teller’s window.

But before you lose any sleep over the prospects of another, potentially far worse global financial meltdown, take solace that the economy is recovering. There are a few more jobs, and consumers are spending, and the housing market is improving, and the Fed has been pumping money into the economy to foster this growth of credit. Right?

Well, one of the lessons we’ve learned in the recovery is that there is a difference between credit growth and economic growth. And absent real and sustainable economic growth a gap eventually forms as credit growth expands. The more one spends on a place of shelter the less one has to spend on other things, and overall demand is reduced. Bank lending finances the purchase of existing assets, particularly with reference to real estate. Such existing asset finance does not directly stimulate investment or consumption, but it drives up asset prices, and that leads lenders and borrowers to believe that even more credit is both safe and desirable. The expansion is like a rubber band that can only stretch so far.

So, it seems the greatest danger to the current economy are the very mechanisms that are still used to “fix” the last financial crisis: money-printing and asset-purchases by major central banks around the world that unleashed a global flood of liquidity for over five years. Most of this massively huge pile of cash has landed in the laps of banks, institutional investors, hedge funds, private equity firms, and other speculators has not been used to boost lending to the private, and thus has not contributed to the recovery of the real economy. Instead, it has been poured into financial assets and has artificially goosed their valuations.

This money sloshing through the system and the persistence of zero-interest-rate policies have driven desperate investors ever further out into “all risky asset classes,” including emerging assets, junk-rated corporate credit, Eurozone peripheral debt, and equities. That buying pressure has inflated their valuations even further. And in the emerging markets, it led to an appreciation of exchange rates.

And when the rubber band breaks, there will be a derivatives bet on it. When the derivatives default, the counterparties, operating in an unregulated shadow banking world of their own design, do not have sufficient capital to pay off the derivatives bet, and so the first thing they’ll do is raid the bank vaults, and when that dries up, the short-term credit markets freeze, because none of the counterparties have faith that the other party has any more in capital reserves than they have.

What Do We Do Now?

Cyprus.com Editors

By Cyprus.com. Cross posted with permission

Yesterday, we discussed why we thought the combination of an across-the-board bank levy (regardless of institution health), in absence of restructuring the capital structure of banks was a bad idea and bad precedent.

Today, we will lay out what we think should happen. We recognize that we are working with more limited information than the teams actually negotiating the bailout, but we will give it our best shot.

Our parameters for a proper solution are the following:

1. Respect the €100K deposit insurance limit

2. Preserve moral hazard / fairness to bank creditors. In other words, hit the creditors of the bad banks more aggressively than the creditors of the good banks.

3. Have a solution that is sustainable for Cyprus over the medium-term.

This is actually a more more complicated question than it seems and at the crux of our analysis and our concerns about the initially proposed plan.

(a) For better or worse, financial services (broadly defined to also capture accountants, lawyers and other corporate services firms involved in managing the financial services clients) accounts for 45% of Cyprus GDP. A large % of this comes from serving Russian clients and is the most important industry in Cyprus.

With a British Law and British accounting heritage, independent courts and a highly educated population, it is the most natural industry for us, regardless of if Germany is confused about why Cyprus is in this sector. It is something that Cyprus has spent decades nurturing and protecting (often at significant cost to it).

(b) If either the deposit levy is seen as too unfair (and investors leave) or if Russia revokes the double-taxation treaty as punishment for the levy (as threatened today by Medvedev), this sector of the economy would take a huge blow.

We are going to use a completely made up estimate that, over a two year period, Russian departure would cost Cyprus a 15% drop in GDP (reduction of the financial sector by 1/3) with another 5% in knock-on effects for a total loss of 20% of GDP. The total could actually be higher, but we can use this as a planning assumption because whether it is 15% or 25%, it does not change the outcome of this exercise.

(c) This means any scenarios below that involve throwing away the Russian business need to be scored with a GDP 20% lower than our current GDP

We also have a few more variables to throw in the mix that have been discussed publicly since yesterday:

1. Nationalization of Cyprus pension funds and forcing them to lend to the government. This apparently can capture up to 4B.

2. Doing special bond issues to the local population against future oil and gas revenue.

3. The vastly land rich Church of Cyprus has offered to mortgage its land on behalf of the government, though we are not exactly sure how the mechanics of that would work, nor does anyone have any real estimate of the value of said land.

4. On the Russian front, nothing substantive has emerged. There are constant leaks and denials that one or more private Russian actors would purchase Laiki before and/or after a full and/or partial recapitalization.

Analysis

Given the above, here is our analysis of several possible Scenarios

Scenario A: Government / Troika Track: The Existing Solution +/- some modifications

This seems the most likely approach at this time and what the Cyprus government is discussing with the troika.

1. The troika will lend 10B as in the original plan.

2. Cyprus will then make up the remaining 5.8B through a combination of:

a. Nationalization of pension funds and forcing them to loan money to the government.

b. possibly loans against future oil and gas revenues from the Church of Cyprus and the local population

c. a reduced deposit levy in the 3%-5% range (possibly exempting small accounts).

Initial reports were that the troika rejected this plan because they were afraid that 2(a) and 2(b) would lead to unsustainable debt for Cyprus but surely that is a failure of imagination. These instruments could easily be made subordinate to official lenders or otherwise termed out into the long future at which point they are acting as pseudo-equity for the government.

So we will assume that they can work out the subordination of the local loans.

Our concern about this plan is the following:

(a) Even though the levy is lower than the initial levy, the damage might still be irreversible to Cyprus as a banking center if we apply an across the board levy (or the damage might have already been done from the events of this week).

(b) In which case, the drop in GDP will be coming anyway through the loss of its financial services sector, but Cyprus is still levered up to 120% of its original GDP (as if it had not fallen).

(c) Which means that, within a year or two, Cyprus will be looking at a debt-to-GDP in the 150-160% range which is clearly unsustainable and will either lead to Greek-style austerity or another depositor tax (if there are any left at that point).

We believe the initial Troika plan suffers from this risk as well and is the key risk that needs to be taken very seriously by Cyprus, namely that we lever up to protect the financial services sector, but then lose it anyway.

For us to be supportive of any measure that limits the hit on large foreign depositors, we need to see real evidence that the offshore sector is not fatally wounded, as per our Scenario B below.

Alternative Scenarios

We now present three alternative Scenarios B-D for consideration.

Scenario B: Return to Rule of Law / Protect Russia

The basis of this scenario is to preserve the principles of our legal system and to maintain our financial sector.

(1) As it relates to banks:

(a) Shareholders in any of the banks to be bailed out need to be completely wiped out. It is small fries at this stage, but it should happen as a matter of principle

(b) Bondholders should be wiped

(c) Senior management should be replaced and salaries cut bank-wide.

(d) Insured depositors are protected

(e) Uninsured depositors *in the failing institutions* make up the difference. That means that in practice, large account holders in Laiki have the largest haircut, followed by Bank of Cyprus and then Hellenic and the Coops. Other banks that are healthy do not have cuts.

(f) Place a Good Bank-Bad Bank structure in place for Laiki and possibly BoC with a Resolution Corp in charge of unwinding the bad assets

(g) Merge the Good parts of Laiki with BoC - there should be significant operation savings in branches, etc.

(2) The messaging to the offshore sector, despite the chaos of this week, would be the following:

(a) "We voted in, the face of the annihilation from Europe, to protect your deposits. Where else do you have that security in the EU?

Malta, Luxembourg, Latvia all have similar EU pressure and risks. Malta has 7x bank assets:GDP and Luxembourg 21x bank assets:GDP and are in the Euro so they are one accident away from also being at the mercy of Germany. Latvia is within the EU, has applied for the Euro and, furthermore, its bank sector controlled by German banks. Ireland is under a package of its own. So, the usual suspects (for an EU entity) face similar risks as Cyprus.

Furthermore, you do not know how they will respond under external pressure. Whereas, we are proven - we took on the ECB, the IMF and the EC to deliver for you."

(b) We protected your deposits (the ones in your own, Russian or English, highly-rated institutions). If any serious investor was still in Laiki as of March 2013 given years of downgrades into junk status by the major agencies, then, honestly, he or she has only himself to blame.

(c) These are the same rules of the road you will find in any serious jurisdiction -- aka there is predictability in creditor precedence and predictability in which banks are risky or not and innocent bystanders are not hurt.

(3) As it relates to the government:

Immediate cuts in spending. We need to do this anyway. It is no 'victory' to preserve salaries and deficits when the deficit funding is coming at such high cost in sovereign autonomy. For the same reasons, the SGOs should be privatized.

(4) To the degree that any additional funding is needed, use the additional sources from Scenario A (pensions, etc)

This is the theoretically best plan in our mind but for us to to support this plan, we would like to see some sense of real official support from Russia that shows they consider it acceptable and will support Cyprus's continued role in financial intermediation. This could include:

(a) Even a nominally small loan of 500M-1B euros on the same terms as the Troiaka (just to show commitment to the plan, in exchange for their depositors not being burned)

(b) Re-affirmation of the tax treaty

(c) Positive statements about deepening ties

If this is not achieveable, proceed to Scenario C

Scenario C: Burn the Russians

This would be our modification of Scenario A.

If one comes to the conclusion that the offshore business is gone in any case (see recently articles in WSJ, Medvedev's statements about cancelling the tax treaty, etc), then you might as well burn them hard and reduce your debt burden to a level sustainable by an 20% smaller economy.

By our rough calculation, we think that is an additional 4-5B euros minimum haircut from the non-EU depositors. They might yell and scream, but, hey, they are gone anyway...

In any case, this Scenario C is much better leverage in bringing the Russians along on Scenario B than offering to sell them Laiki.

In this scenario, you still resolve the banks, cut government spending, privatize the SGOs and so on.

Solution D: Self-Bailout (Burn everyone)

This it the model for the 'patriots' to follow, if they have the stomach for it.

Their patriotic, reflexive approach to date is 'leave the Euro' which is moronic and will leave Cyprus with an immediate drop of national wealth in the range of 50-60% as the NCYP (New Cyprus Pound) would have a hard devaluation immediately and no access to the ECB.

If one is willing to take that type of pain in order to achieve independence from foreigners, there are better solutions within the Eurozone as follows:

1. Cram down the sovereign bond-holders. If they don't accept, hard default on the June refinancing. Even though they are English Law bonds, Cyprus has almost no assets outside Cyprus that we can think of that they can freeze. So let them go to court and play for time. In the meantime, don't pay them (since, anyway, you don't have the money to pay them)

2. Cut government spending dramatically in order to run a surplus (Cyprus won't be borrowing on the international markets any time soon in this model), privatize SGOs, etc.

3. Resolve the insolvent banks as per Scenario B AND burn the offshore depositors as in Scenario C

4. Supplement with nationalization of pensions and Church of Cyprus support as needed.

5. At this point, you have no official creditors, can control your own policy and you hold out until the oil/gas comes online

6. As it relates to the ECB, request ongoing support with the solvent banks, including the Good Bank, as per ECB rules.

We don't recommend this path. But if things start going astray and the alternative is Euro exit, in our opinion, this is better. And theoretically the Northern countries should be pleased that we are not asking for any of their money and glad that we are not setting a 'leave the Euro' precedent.

It is disappointing that these are the options on the table as none of them are ideal. In our opinion, Scenario B was workable and should have been worked out behind closed doors. It would have been a very reasonable and fair solution and would have not damaged Cyprus's reputation the way that this week's events have. If the Troika wasn't so intent on intimidating Cyprus into a solution and (for reasons not known to us) insulting Russia, it could have been done this way.

At this point, it is mostly a judgement call of 'is the offshore business beyond recovery under any model?'

If not, then we should do Scenario B to save it. If it is, we should be hard-minded and do Scenario C and at least leave Cyprus in a fiscally survivable position.

The Editors, Cyprus.com

New Year, New Bank Failures

In 2010, we witnessed 157 banks closed by the FDIC. They were either taken over by stronger hands or liquidated and depositors were given back their deposits. 

On this first Friday of the New Year, only two banks were shut down. According to the BlogSpot the Bank Blog: 

  “The "honor" of the first bank to fail in 2011 belongs to First Commercial Bank of Florida based in Orlando. …It had approximately $598.5 million in total assets and $529.6 million in total deposits was closed. First Southern Bank of Boca Raton, FL has agreed to assume all deposits and acquired most of the assets. In addition, they have entered into a loss sharing agreement with the FDIC.

The second bank to fail this week is Legacy Bank of Scottsdale, AZ. … Legacy Bank had approximately $150.6 million in total assets and $125.9 million in total deposits was closed. It was acquired by Enterprise Bank & Trust of St. Louis, MO raising their asset level to over $2.5 billion, a roughly 6% increase.” 

Below are several links to different interactive maps of bank closures: an WSJ interactive map of the banking crisis since 2008, a version by Bankrate.com, then, my personal favorite, Portal Seven, and finally Bank info Security’s Failed Banks and Credit Union (24 CU’s shuffled off this mortal coil in 2010) interactive maps. 

WSJ

http://graphicsweb.wsj.com/documents/Failed-US-Banks.html

Bankrate

http://www.bankrate.com/finance/savings/map-of-failed-banks.aspx

Portal Seven

http://portalseven.com/banks/Failed_Banks_Map_2011.jsp

Bank info Security

http://www.bankinfosecurity.com/articles.php?art_id=2092 

Why the redundancy? It’s called research and it protects analysts and analysis from becoming lazy and eaten alive by “Black Swans”. Besides, variety is the spice of life. 

The foremost question for 2011 is which group will hit the 100 institution finish line first; the number of FDIC bank closures or the number of municipalities to default on bond payments or file for reorganization under Chapter 9? 

For those of you unfamiliar with Chapter 9, Title 11, of the United States Code, the following is a short description taken from Wikipedia: 

“Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities and assists them in the restructuring of debts. Most famously, Chapter 9 was used by Orange County, California in 1994 to adjust its debts. 

Previous to the creation of Chapter 9 bankruptcy, the only remedy when a municipality was unable to pay its creditors was for the creditors to pursue an action of mandamus, and compel the municipality to raise taxes. During the Great Depression, this approach proved impossible, so in 1934, the Bankruptcy Act was amended to extend to municipalities.^[1][2] 

The 1934 Amendment was declared unconstitutional in Ashton v. Cameron County Water District,;^[3] however, a similar act was passed again by Congress in 1937 and codified as Chapter X of the Bankruptcy Act (later redesignated as Chapter IX).^[4] Chapter IX was largely unchanged until it was amended in 1976 in response to New York City's financial crisis.^[5] The changes made in 1976 were adopted nearly identically in the modern 1978 Bankruptcy Code as Chapter 9.” 

Therefore, if the 112^th Congress refuses to assist states this year, their “tough love” approach may include modifying Chapter 9, to allow states to reorganize, too. 

Katy-bar-the-door, if foreign creditors of the U.S. ever decide to perform a “tough love” credit analysis of America’s annual deficit spending over the last 10 years by both political parties. 

The U.S. profile worsens with ongoing maintenance costs of rising poverty rates and persistently high unemployment, mutating employment characteristics and opportunities, an aging population, exploding medical costs and 50 million uninsured citizens (while dead birds fall from the sky and dead fish wash ashore, mystifying officials); and a slowly crumpling, complex, and very expensive infrastructure. 

As disturbing as our internal footprint is, our annual trillion dollar expenditure for homeland security and open-ended global military commitments, housing over 800 active operating bases, rests precariously upon on stagnant personal incomes and falling tax receipts. The Fed Chairman, Ben Bernanke, instructs America to be patient; jobs will return in four or five years. 

Educational test scores, a mighty predictive tool forecasting future individual or collective wealth, explicitly from the quickest growing population segment, are out of synch with societal needs. 

Our soured social and political discourse and extreme political recklessness is everywhere in the air and on display before our allies, trading partners, and foreign lenders of last resort to see. 

Let’s hope the benefactors of our cash flows prefers their biggest borrower and financial liability becoming this new, edgy, erratic, 21^stcentury emerging America economy versus the former, stable, predictable, 20^th century American middle class.

The Lost Decade: Widespread and Furious

Last Friday morning before the US stocks markets opened, the American financial system was staring into the abyss – again. Complete liquidation had occurred throughout the night in Asia and Europe, and now it was our turn. The US was given a death row reprieve, at least for now.

Virtually every measurement for wealth, even if casually examined since the year 2000, shows a decline in value or no change. The S & P 500, the DJIA, and NASDAQ, closed on December 29, 2000, at the levels of 1,320.28, at 10,786.85, and 2,341.70, respectively. Friday, October 24th, their respective levels were 876.77, 8,378.95, and 1,202.27.

Also on December 29, 2000, the Wilshire 5000 Composite Index closed at 12,175.88 versus 8,806.20, October 24th; the 10-year Treasury note at 5.12 per cent versus 3.69 per cent, October 24th; and Value Line – Geometric closed at 393.47 versus 226.82 last Friday.

REITs, open and closed end mutual funds, individual stocks, and all classes of equity assets have been savagely beaten up by the Great Bear market of 2008, with the same ferocity as it counterpart, the Great Bull Market of 1982-2005, rose. Leverage and deregulation ushered in 30 years of miraculous wealth and prosperity. Now, the tide has reversed. Asset values, first real estate, ultimately all assets, in the short term, have nowhere to go but down.

The federal government is using all of its power to soften the landing, but historically, expansionary monetary policy will only debase our currency and opens the door for massive inflation once we exit the impending recession.

This summer I wrote about the inevitable pain deleveraging would inflict on the economy and why it had to occur. I think we are far from the end of this cycle. Municipal Market Advisors reported municipal bonds staged one of their biggest one day rallies in history on October 22 and the 30-year Treasury bond traded at an unbelievable 3.96 yield Friday. The cash price for gold is currently being pushed lower through forced liquidation.

Baby Boomers, still traumatized by their 3rd quarter retirement account and September brokerage account statements, are having a collective epiphany about their upcoming retirement years. Their careful planning and hard work to secure a comfortable 'golden years' lifestyle has been robbed.

What's next for the economy? Just as all other assets are unwinding, in time, so will the bond markets and the US dollar. By then, TIPS, gold, and non-credit dependent stocks should be your first line of investing defense.

Market Depending on the Kindness of Strangers

To paraphrase Blanche DuBois from “A Streetcar Named Desire”, the Tennessee Williams 1948 Pulitzer Prize winner for Drama for a play, which later became a 1951 movie nominated for 11 Academy Awards, winning four Oscars, the stock market this past week, as well as for the month of July, was beholding to the kindness of strangers. And the primary stranger for the stock market was the gyrating price of oil. Other commodity prices continued to recede from their late June/early July highs, too. The secondary stranger was a dastardly set of economic data that perturb the market in an unkindly manner.

Break out the Dramamine and the Bourbon because after a roller coaster ride like this, six flags has been scratched off my things to do list for the remainder of the summer of 2008. Much of it had to do with short covering, end-of-the-quarter window dressing, and good old fashion profit taking.

The last week in July displayed an intense market; a triple digit decline for the DJIA Monday of 239.61, followed by Tuesday and Wednesday gains of 266.48 and 186.13, respectively, and a triple digit decline Thursday of 205.67. Finally, dry heaves Friday ended the day down 51.70. For the full week, the Dow lost just 44 points stopping at 11,226.32. The S & P 500 closed at 1,260.31 and NASDAQ finished the week at 2.310.96. Both were down for the week as well.

The auto industry had to come clean last week. General Motors (GM) led the way by reporting a $15.5 billion loss or $27.33 per share for the second quarter on revenues of $28.2 billion. GM also mismanaged to lose $39 billion in the third quarter of 2007.

The entire auto industry recorded dismal sales in July; Toyota (TM) was down 18.7 percent, Ford (F) was down 21.5 percent, General Motors was down 32.4 percent, Chrysler was down 34.2 percent, and Honda (HMC), winning the brass ring, was down 9.2percent. Total car sales in July were tracking at 12.55 million annual units, a million units below June. Truly ugly numbers for an economy not headed into recession.

Not to beat a dead horse, the S & P/Case Shiller Index for May reported a 15.8 percent YOY drop in housing prices. This was more than the 15.2 percent drop reported for April. Bank regulators shut down First Priority Bank of Florida on Friday. SunTrust Banks Inc. (STI) agreed to take over the insured deposits and to reopen the six branches on Monday. The deleveraging of America continues unabated.

Speaking of non-surprises, Exxon Mobil (XOM) only managed to save a lousy $11.6 billion on gross sales of $138 billion. Royal Dutch Shell PLC (RDS.A) pocketed $11.56 billion in profits from $131.42 billion, when they reported their second quarter earnings. This works out to almost $1 Billion in net profit each week or every 7 days. Wow. If only the U.S. government owned oil.

Second quarter Gross Domestic Product [GDP] advance report came out at 1.9% which proved that the economy is still expanding although the fourth quarter 2007 was revised down to a negative .2 percent from a positive .6 percent. It was a magnificent work of fiction. That second quarter GDP figure includes the $160 billion stimulus package rebate that was spread throughout the country beginning April 17th. The price of oil closed on June 30th at $140 a barrel which means the pain felt in the economy from the zenith in crude prices was fractionally captured in the 1.9 percent data. Do we need an asterisk next to this GDP figure like Barry Bonds homerun record? Juicing is juicing. The unemployment rate rose to 5.7 percent while an additional 51,000 jobs were lost; the seventh consecutive month for fewer jobs in the economy.

There was improvement in Treasury prices last week, the Two Year Note yield moved down 20 basis points to 2.51 percent and the benchmark Ten Year Note ended the week at 3.94 percent, down 16 basis points. The Ten Year Note auction will be held Wednesday August 6th and the Thirty Year Bond auction is scheduled for Thursday August 7th. The Federal Open Market Committee meets Tuesday, August 5th to review monetary policy. Rates are expected to remain at 2 percent.

August 4th, June Personal Income, June Personal Spending, and June Factory Orders will be announced. August 5th, the July Institute for Supply Management [ISM] Non-Manufacturing Composite Index comes out. August 6th, MBA Mortgage Application Survey Refinancing Index is due. August 7th, Initial Jobless Claims, June Pending home Sales and June Consumer Credit is revealed. August 8th, 2Q preliminary Nonfarm Productivity and Unit Labor Costs are reported.

Batman has now earned $400 million in domestic ticket sales in just 17 days. The caped crusader has still sold fewer tickets than the all time box office champ, the 1996 released “Titanic” that grossed $600 million, domestically. Batman ticket prices are also 50 percent higher than they were for the champ. That’s called inflation.

Weekly Review and Outlook: Deleveraging's Not Just for I-Banks

Like a wild jungle creature forced into a confrontation, but unsuccessful, this past week's stock market limped into the weekend, stunned, pensive, and little changed with Dow Jones Industrial Average [DJIA] closing at 11370.69, the Standard & Poor's 500 ending at 1256.76, and NASDAQ finishing its week at 2310.53. The Dow lost 125.88 for the week. Likewise, the S&P 500 dropped 2.92 and NASDAQ subtracted 27.75, respectively.

The CNBC midday rowdies strained themselves lifting a Hubble sized telescope looking for positive data points in the housing numbers. Existing home sales came out Thursday; they were down 2.4 percent in June, at a seasonally adjusted annual rate of 4.86 million units. New home sales for June, appearing Friday, was lower by .06 percent, on a seasonally adjusted annual rate of 530,000, from a revised upward May figure of 533,000.

I can imagine the rowdies on an express elevator to hell remarking that our destination has dry heat, that it's a gated community, and that it's a Christian neighborhood with few trespassers.

In the second quarter, 739,714 foreclosure filings were recorded. Also, 220,000 homes were lost to bank repossession, according to RealtyTrac. That is up 14 percent from the first quarter and up 121 percent from the same quarter in 2007.

A report published on Friday, by an International Monetary Fund economist, concluded U.S. housing prices were still overvalued, in the first quarter this year, perhaps, 14 percent, within a range of 8 percent to 20 percent. According to Reuters, IMF economist Vladimir Klyuev's report "What goes up must come down? House price dynamics in the United States", examined the inventory-to-sales ratio, foreclosure rates, market inertia, and other data points, formulating this opinion. That would mean at least an additional $1 trillion in lost asset value. The government debt market is still comatose.

The 2 year and 10 year US Treasury Notes, as well as the 30 year US Treasury Bond ended the week with higher yields, paying 2.71%, 4.10%, and 4.68%, versus 2.64%, 4.85%, and 4.65, respectively. August is a major refunding month with auctions scheduled for the Two, Five, Ten, and Thirty Year Treasury obligations, in addition to the weekly T-Bill The brightest spot in the market was the Nymex Light Sweet Crude Oil September contract; it closed Friday at $123.26 per barrel, extending its reprieve to cash strapped motorists from its recent high of $147.20.

Online retail analysts are reporting double digit growth in sales among several retailers because of consumers passively boycotting higher gasoline prices. Who would have thought that one day we would be happy seeing oil prices heading towards $100 a barrel?

Late Friday afternoon, the Office of the Comptroller of the Currency closed First National Bank and the FDIC was named receiver of another two banks, one California-based and the other Nevada based, First National Bank of Nevada with $3.4 billion in assets, and First Heritage with $254 million in assets. Both were owned by undercapitalized First National Bank Holding Co., of Scottsdale, Arizona. First National lost $140 million in the first quarter. They reported $4.6 billion in assets and $4.3 billion in liabilities. Nine point four percent of it $3.7 billion in loans were non-current, ending March 31. Mutual of Omaha Bank acquired the deposits of the two banks from the FDIC for a 4.41 percent premium. The new Mutual of Omaha Bank branches will open Monday morning.

There are currently 8,494 institutions holding $13.4 trillion assets insured by the FDIC. The FDIC said the failures would cost its deposit insurance fund roughly $862 million. This brings the total number of bank failures in 2008 to seven. You can learn more about the status of a particular bank here

Game Changer : The really, really, big news this week came from Chrysler LLC. It announced Friday afternoon that its financing arm would discontinue offering leasing deals to its U.S. customers beginning August 1; the same date when their $30 billion credit facility is up for renewal. The rising cost of capital is making leasing terms less attractive to consumers. This is another aftershock resulting from stifling energy prices and an economy that's deleveraging.

Declining SUV and lease values forced Ford to take a $2.1 billion charge at its finance division last week. Although, third party banks and credit unions will step in to fill the void, expect some slippage in the approval rates for leasing transactions. The same market pressures compelling Ford (F) to exit this market will certainly continue to present as a business factor for any entity looking to make a profit leasing vehicles. The cost of capital is important, however, the residual value of the underlying asset is monumental. The percentage of Chrysler sales attributed to leasing is greater than 20 percent.

It will be very interesting to see if this extemporaneous admission becomes evolutionary inside America's automobile industry. Americans divine right to drive automobiles has been an unconditional assumption since the end of WWII. In 2008, it's a fair question to ask given this extraordinary economic environment of failing banks, growing home foreclosures, stagnant incomes, evaporating jobs, personal and business credit contraction, a runaway federal budget, an aging infrastructure, an expensive endless foreign war, a fractured financial system, rising worldwide demand for limited resources, and a demonstrable shifting of global wealth. Plus, the third generation of Americans, exposed growing up around an enlightenment concerning the ecology and global environmental issues, is being handed the task of running our economy. They will shape and modify our society's habits in the future.

The U.S. Senate actually gaveled a rare Saturday session passing landmark legislation to triage a metastasizing bankrupted residential real estate market. Highlights of the bill include; a new regulator for Fannie Mae (FNM) and Freddie Mac (FRE) and up to $300 billion to insure refinanced mortgages for the next 18 months; $4 billion to states to buy and rehabilitate foreclosed properties, a 10 percent tax credit up to $7,500 dollars for first time home buyers purchasing a home between April of this year and June of next year; increase the federal debt limit to $10.6 trillion, and more.

We now have a de facto nationalized residential real estate market. The reversal by the White House to withdraw a veto threat and sign a passed bill into law would create tears of joy on the face of Scottish economist John Law and Louis the XIV of France. Welcome to the new depression. France has succumbed to capitalism. In between fist bumping with the Democratic presumptive nominee Barack Obama and checking out his Italian-born former model turned pop star wife's, Carla Bruni-Sarkozy's new music album, "Comme si de rien n'etait"(As if nothing had happened), President Nicolas Sarkozy of France bullied his National Assembly into radically reforming their 1958 Constitution. Passage of the reform package includes limiting Presidential terms, strengthening the power of the legislature, weakening the position of Prime Minister, and repealing the 35 hour per week cap for workers.

It is an indication that the global downturn will affect everyone. The French are now more aware than ever of prioritizing work and leisure to enhance income and productivity. Calling national strikes on idealistic principles was an industrial age luxury. Cash flow is paramount in the beginning of the 21st century. Welcome to the club.

The year 2008 will record the resignation of Fidel Castro of Cuba, as its President, and the abandonment of immense leisure time by the average French worker; two aging symbols of 20th Century socialism. I wonder if Hank Paulson and Ben Bernanke are erecting the first 21st century's symbol of socialism. Tonight, I shall pour a very, very, nice XO Cognac and contemplate the upcoming Consumer Confidence figure on the 29th; the Employment and Crude Inventories figures on the 30th; the GDP-Advanced, Initial Claims, and Chicago PMI, on the 31st; and August 1st, Auto and Truck Sales, Average Workweek, Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Construction Spending, and the ISM Index. Maybe two drinks, au revoir!