Most/perhaps all are Shadow Banks

Consequences of Financial Meltdown

The Major Players

  • The Fed – Our unaudited Central Bank, established in 1913. It supervises monetary policy in USA, maintains stability in financial system, prevents runs on banking system, & has ability to print and dump money. Greenspan & Bernanke last two chairmen.
  • The Treasury - Established 1789 and basically runs monetary policy for US government and enforces financial laws. Works closely with the Fed.  Paulson & Geithner last two heads.
  • Shadow Financials – These are the financials that got over leveraged. The government eliminated regulations banks used to have about leveraging starting in 1998. Later, they were also allowed by congress to drop regular accounting. So their books are essentially unaudited. Besides the big shadow banks there are well over 100 medium and smaller shadow financials. Also add companies like like AIG, GE’s financing division (conglomerate), GMAC (car company), Fannie Mae, Freddie Mac and more

The Problem/The Sky is Falling/The bailout

In 2008 it became apparent to many that shadow financial institutions had become over leveraged by placing bets on mortgages (credit default swaps).

  • Our unaudited Fed engineers a deal to save mortgage giant Bear Sterns and it merges with JP Morgan. No one knows what $ the Fed promised to make this happen. JPM later gets big chunk of TARP funds. Other smaller mergers happen.
  • Lehman Brothers goes Bankrupt in Sept. 2008. Lehman claims lots of assets, but by the time they fell apart they had $613 billion in Debt and could only raise $1 billion in cash.
  • Lehman debt spreads throughout the world, people realize how over leveraged all the other shadow financials must be, housing prices plummet, and stocks begin to fall. SPX goes from 1500 to 666.
  • Treasury proposes TARP. Treasury/US government (the only entity in the world with power to stop fall) proposes to buy up bad debt and sell it later.. Paulson/Treasury later changes this to loaning shadow financials money $700 billion. ($50 billion or less has not yet been repaid)
  • Stocks keep falling and QE1 introduced. Fed prints and dumps a trillion plus more dollars into economy. Finally stocks stabilize and start to move up There’s more but lets take a look at what happens if these actions do not take place

What If Absolutely Nothing Was Done?


You lived through the panic after the Lehman collapse. Now add this – What if the second largest mortgage company Bear Sterns collapsed on top of that? Add perhaps 3 time larger insurance giant AIG collapsing. It’s debt all owned to other shadow financials who themselves were up to their eyeballs in over leveraged debt. They too collapse like Lehman.

  • The weekend before TARP, a run on AIG had started across the world. AIG who insured the shadow banks goes down then one bank collapsing after another because their collateral is no longer solvent. People panic and media adds to the frenzy. Everyone realizes. Lehman was just the tip of a giant iceberg of debt.
  • Belly up goes AIG, BAC, Citi, Major European banks, GE, Fannie and  hundreds/thousands other major/minor financial institutions. No one knows which bank has how much debt, so people take their $ out of all banks. Fear grows hyped by the media.
  • Stock market goes far lower than SPX 666
  • Bonds of these banks collapse. Even with just Lehman’s collapse BAC bonds went from 100 to 82 before recovering. (An institution I am treasurer for owned these bonds)
  • Financials, Fannie & Freddie bonds were the backbone of many money market funds (Think Fidelity, Vanguard etc) They or their insurance agent go belly up as the bonds become more worthless. You may have received a negative return on your money market fund depending on how are the panic had spread.
  • Home prices plummet way way way way down.
  • Not knowing which banks are shadow banks panicked investors pull their money from all banks. You know how suseptable your fellow Americans are to fear and fear mongering. Worldwide run on banking results. – a financial armageddon.

So a worldwide financial meltdown was averted.

That’s the good news now for the bad.

  • How deep is the shadow financial hole? Fed engineered Mergers, TARP, QE1 now QE2, POMC and an UNAUDITED Fed who can had loans money at their discount window and/or use some other opaque means to fill the over leveraged gap of the opaque shadow financials.
  • All of this cash used to fix the problem creates imbalances in the economic system that magnify the trillions gone into filing the shadow bank hole. Beyond my understanding, but nobel prize economists like Joe Stiglets and others get it.
  • By 2008 we had already created a huge debt by going to war, cutting taxes, pork spending etc. So this new debt was built on more debt.

The UGLY

  • There is no regulated financial derivatives exchange.
  • We did not return to the old laws that prevented over leveraging in the past or end too big to fail. Congress passed are weaker measures.
  • Dopamine When you get high the dopamine centers of your brain are activated. You get addicted to this pleasurable feeling. Sometimes like running its a heathy addiction. But with drugs or greed you keep needing bigger doses to obtain the same high. Physiologically those that run the shadow banks are not going to change their ways unless there is enforcement.

I left out stuff and will be back to Obama’s negatives next week


KISS & Stocks (Keep It Simple Stupid)

If you don’t understand a term look in up at Investopedia.com dictionary

AS ALWAYS, DO YOUR OWN RESEARCH BEFORE INVESTING!

DOUBLE CHECK ALL DATA, I MAKE MORE THAN GRAMMAR MISTAKES

Index Percentage Volume
Dow -0.11% down
NASDQ +0.16% flat
S&P +0.11% down
Russell 2000 -0.45% -

Technicals, Fundamentals & Analysis

Investors411 record – 5 years of beating benchmark S&P 500

US Stock Markets -

Stocks were flat – Dollar moved way down to about the middle of its consolidation range. Next Wednesday the Fed meets and tells us more about their QE2 (Quantitative easing part 2 or print and dump money into economy)

What Will the Fed do? What Will the Fed do? What Will the Fed do?.

The US is manipulating its dollar lower by printing and dumping money, This devalues our dollar and makes US goods cost less abroad. We sell more and lift ourselves out of recession/economic slump faster. Its a dollar war because other countries also see manipulating their dollar lower as a way out of recession/downturn.

Looks like the moves of the dollar are not relevant as long as it stays in narrow consolidation range.

Tech giant MSFT beat earnings & is up in pre market trading.

The person who is trying to protect YOU from the shadows and obstructionism, Elizabeth Warren, speaks out

Significant Indexes

  • The Dollar (USD) [Anything daily price move over +/- 0.50 is significant. Dollar usually moves inversely to stocks] The dollar fell a significant -1.07 yesterday. Dollar currently moving sideways within a range (see below). Back near middle of consolidation range Trend for stocks = Neutral
  • The Baltic Dry Index (BDI) [measures cost of world trade. Also proxy for China, emerging markets, exporting countries] Fell a significant -2.77% yesterday. BDI now consolidating after bull run that began in June. The BDI has been overshadowed by the dollar moves, but it if we get a few more downside moves like yesterday, outlook will change to neural then bearish Longer term Pattern=Bullish/Neutral
  • McClellan Index – (MO) [The rough guideline is over +60 = overbought market = sell positions or short stocks, & -60 = oversold market = buy stocks.] Basically flat closed at -24.01% yesterday. Six week tend (see chart) is looking bearish but location still = NEUTRAL

Reading Tea Leaves.

Mantra -“Any move in UUP (tracking ETF for dollar) above 22.7 resistance is trouble for stocks. Any move below 22.18 support level is good for stocks. A breakout of either the support or resistance level will tell you who wins the dollar war.UUP closed at 22.41

Helicopter Ben Bernanke printing and dumping

Wednesday is the day the Fed will announce more about QE2. QE1 was a trillion plus dollars printed and dumped into the economy. Anything over that would say we are still in major shadow financial over leveraged crisis. So best read of tea leaves is between $300 & 700 billion. Do NOT know what Wall Street expects. But any over/under the expectation number will drive the dollar.

All of this is part of the shadow financials bail out program that started when the Fed first helped JPM merge with Bear Sterns. It includes TARP parts 1&2, QE1, POMC (see updates of last few weeks Fed dumps about 5 billion on certain days into economy through this)The Discount Window and whatever the UNAUDITED Federal Bank gives to basically UNAUDITED Shadow financials. Only God and the Fed knows how many trillions have been printed and dumped.

The end purpose is to make shadow financials solvent. The world realized how catastrophically over leveraged these shadow institutions were but has no idea of the exact amount. The fact that its hidden makes you think the debt is HUGE

Bottom Line = All eyes on Fed and how big QE2 is going to be. What the Fed says and does about QE 2 will probably set the course for stocks and settle the dollar war.

Positions

The  Positions Section link to latest & former buys and sells  - These are positions I actually own

(I do manage 6 accounts that have other positions)

  • EWS (Singapore)
  • SSO (2x what S&P does).

Mantra - “Not making any specific move until dollar breaks out of its range. I would look at a breakout higher for the dollar, and a corresponding fall in stocks and the MO to oversold as a buying opportunity for long term investors.” Looks like next Wednesday Fed meeting is the big event.

Look for Paul R’s always enlightening remarks on stocks and sectors in the comments section of the blog. See POSITION section of blog for lists of potential stocks & ETF’s including ”YOUR Stock List.”

Longer Term Outlook - CAUTIOUSLY BULLISH

AS ALWAYS, DO YOUR OWN RESEARCH BEFORE INVESTING!

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