Credit Crunch Special

Welcome to this special issue of the Market Oracle Financial Markets Forecasting and Analysis Newsletter.

Last week saw extreme volatility on the markets as the central banks fought to stave off a collapse in the financial markets in response to the ongoing credit crunch.

On Friday the battle was temporarily won by the Central Banks with the US Feds decision to effectively cut interest rates by 0.5% on the discount rate, which included the unprecedented step of changing the financing terms from overnight to 30 days.

However two key elements remain -

1. That the amount of bad debts is unknown due to the fact that many of the deals were off the exchanges. Derivatives trades on parcels of debt on margin between banks and hedge funds. This means that even though US Sub primes may only be valued at $100 billion, the actual amount of bonds and derivatives contracts affected by sub primes are in excess of $1 trillion, and may even be as high as $3 trillion, hence the panic.

2. That there will be more bad news on the US housing sub prime front as Adjustable Rate Mortgages (ARMs) reset at higher rates at ever higher numbers during the next 9 months. This is termed as Arm-ageddon!. The only savior for the impact of further credit crunches is deep interest rate cuts.

Therefore despite Fridays rally, and undoubtedly many stocks look cheap after recent plunges. The market is unable to price the risk of all these bond packages as the instruments have become illiquid, stock valuations therefore in the financial sector at least are expected to change drastically from cheap to expensive 'if' the worst case scenario is observed. Though companies in sectors such as Oil, Gas and Mining look appealing for long-term investments, so there are bargains out there.

Additionally, volatility is not going to go away and we can expect many more days of the indices moving by more than 3% in either direction.

Regards,

Nadeem Walayat,

Editor of The Market Oracle

The following are a representation of best of recent articles that explain the ongoing credit crunch.

1. The Financial Markets Panic of 2007
2. Financial crisis! What to do ...
3. Short Selling The Road To Redemptions
4. Fingers of Global Financial Markets Instability Returns!
5. Stock Market Brushfire; Will there be a run on the Banks?
6. Global Financial System in Jeopardy!
7. Back to the 1998 Crisis, Subprime's to Impact for a Longtime
8. Mortgage Backed Securties Are America's Shoddiest Exports
9. “ARM”ageddon As Subprime Financial Dominos Fall
10. Hedge Fund Subprime Credit Crunch to Impact Interest Rates
    

By: John_Mauldin

In this issue:
Muddle Through or End of the World?
An Alphabet Soup of Credit
Turning Nuclear Waste Into Gold (and Back Again!)
Mrs. Watanabe and the Hedge Fund Connection
The Rating Agency Blame Game
Where Do We Go From Here?
Hedge Funds to the Rescue!
Warren Buffett Needs to Take Over Moody's
Will a Fed Rate Cut Make a Difference?
Vacation, Europe, and Reading

End of the World or Muddle Through? This week I try to explain in simple terms the very complicated story of how we went from some bad mortgage loan practices in the US to the point of world credit markets freezing up. There is a connection between the retirement plans of Mr. and Mrs. Watanabe in Japan and the subprime problems of Mr. and Mrs. Smith in California. We find the relationship between European banks and problematic hedge funds. And finally, we try and see how we get out of this mess. Oddly, I think it is hedge funds (and maybe Warren Buffett) to the rescue, but not in the way you would think. It is a lot to cover, so let's jump right in. (And there are a lot of charts, so while this will print out long, it is only a little longer than the usual in word length.)

Read Article

By: Mike Larson

We are in the midst of a financial crisis . Not a downturn. Not a slump. Not a blip. This is a full-blown meltdown. The causes?

Too much housing speculation: The Federal Reserve pumped the economy full of easy money after the tech bubble burst. That money found its way into the housing market, fueling a speculative bubble like no other in modern U.S. history. Now that bubble is popping, too … and the fallout is spreading throughout the financial markets.

Read Article

By: Brady_Willett

With the financial markets doing their best impression of a tinderbox waiting for a spark, it is not easy to use the word ‘oversold' without cracking a smile. After all, if the S&P 500 - which closed less than 1-point below its 200 DMA yesterday - was really ‘oversold' it would not normally be trading only 6.4% off of its recent highs (market corrections are generally -10% and bear markets are -20%).

Needless to say, this is not a normal stock market, and these are hardly normal times. Rather, the largely secretive dealings of hedge funds control the tape, and unpredictable capital flows from central bankers and foreign investors can swing asset prices wildly about. Talk all you want about corporate America's attractive balance sheet, or those beautiful trailing P/Es, this market is controlled by unknown and volatile forces.

Read Article

By: Ty_Andros

Fingers of Instability – Series Introduction - FIRE!
This marks the return of the “Fingers of Instability” series begun in February of this year, as we look to see these emerging regularly over the coming weeks until they are priced into the market. First let's look at the “shortened” description of what they are from that issue of Tedbits:

This is a metaphor for the present structure of the Global financial systems as practiced by the G7 Central banks and Government Financial officials around the world. I read a missive from a prominent newsletter writer sometime in the last 6 to 12 months and he described a computer study of Sand piles. In this study they piled on grains of sand on a pile one by one. It went on to describe how the mound could grow one grain at a time, and was stable and that as it grew areas of instability emerged and that once it got to critical mass as little as 1 grain of sand could spark a complete collapse of either the whole pile, a major portion of the sandpile, or just a small part of the pile.

Read Article

By: Mike_Whitney

On Friday, the Dow Jone's clawed its way back from a 200 point deficit to a mere 31 point loss after the Federal Reserve injected $38 billion into the banking system. The Fed had already pumped $24 billion into the system a day earlier after the Dow plummeted 387 points. That brings the Fed's total commitment to a whopping $62 billion.

By some estimates, $326.3 billion has now been added to the G-7 Nations' intra-banking system to prevent a breakdown. That amount will rise considerably in the weeks ahead as the situation continues to deteriorate. Some readers may remember that on Tuesday, August 7, the Fed announced that it was NOT planning to bail out the market.

My, how quickly things change.

Read Aricle

By: Money_and_Markets

For the first time since 9-11, central banks around the world are pouring massive amounts of fresh new cash into their markets.

On Thursday alone, Japan pumped in $8.4 billion … Australia injected $4.2 billion … the U.S. pumped in $24 billion … and the European Central Bank flooded its banking system with an unprecedented $130 billion! And on Friday, they did it again , opening the money floodgates in similar quantities.

Why?

Is the global economy suddenly contracting? No.

Are the world's largest banks suddenly going broke? No.

So what has prompted these governments to pour out so much money so soon?

The answer:

Read Article

By: John_Mauldin

In this issue:
China - Upping the Rhetorical Ante
Back to 1998
The End of the Quantitative World
Subprime for a Long Time
The Fugu Ultimatum
90 Years and Still Going Strong

In the early fall of 1998, I remember being on a flight to Bermuda from New York. I was upgraded and sat next to a very distinguished looking gentleman. He was going to a conference about re-insurance and I was going to speak at a large hedge fund conference. We hit it off, and began a very interesting conversation, one that still burns in my mind today. It turns out that he was vice-chairman of one of the largest insurance firms in the world, and was a real financial insider, seemingly knowing every big name on Wall Street personally. After he had a few drinks (he was clearly somewhat stressed), he began to talk about the Long Term Capital Management fund and the problems in the markets. He had had a ring side seat at the Fed-sponsored bailout proceedings.

Read Article

By: Peter_Schiff

For years, Americans have been able to pay for enormous trade deficits by exchanging IOU's for imported consumer goods. Unfortunately for foreign creditors, a substantial percentage of those IOU's have recently taken the form of mortgaged backed securities.

Sporting higher yields than Treasury bonds, investment grade ratings from reputable agencies, and juicy commissions for the investment banks that packaged them, these structured mortgage bonds have quickly become America 's greatest export. Ironically, amid cll the recent hoopla about defective Chinese exports, America has proved that when it comes to flooding the world with shoddy merchandise, nobody beats the good old USA .

Read Article

By: Ty_Andros

The dominos have begun to fall, look for it to cascade into the fall as markets reprice the normalization of credit conditions, and CURTAIL the most risky and foolish lending practices. Cov lite, LBO's, private equity and CDO/CMO paper is dead until the deals are priced in a manner that secures lenders interests in a RATIONAL manner, as they should be as they are just SUBPRIME on a gargantuan scale. I love it as volatility is opportunity for the prepared investor. Volatility rose from 1997 till the high in 2000 and the markets did fine. After several weeks of market turmoil it's time to look at the factors that are the catalyst to this market sell off. It's not over by a long shot but some curious things are happening and I want to inform you of them.

Read Article

By: Nadeem_Walayat

The ongoing crisis triggered by the subprime mortgage defaults continues to spiral into new directions, making it difficult for even experienced market watchers to comprehend the complete picture and its implication for the financial markets. Therefore this article attempts to explain the crisis and what it implies for future interest rate trends.

What are Subprime Mortgages?

These are Mortgages made available to those of subprime credit risk (poor credit histories), hence called sub prime mortgages.

Why would financial institutions lend to people with poor credit histories ?

Read Article

For many more, hundreds more articles on the credit crunch, make sure to visit the Market Oracle today and protect yourself as the credit crunch continues to unfold.

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