Alarming News: Bank Losses Spreading!

MONEYANDMARKETS» Monday, March 30, 2009

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[«] Money and Markets 2009 Archive View This Issue On Our Website [»] Alarming News: Bank Losses Spreading! by Martin D. Weiss, Ph.D. For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates. In a moment, I'll explain what this means for your savings and your stocks. But first, here's the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1 And here's why the losses are so ominous: Until the third quarter of last year, the banks' losses in derivatives were almost entirely confined to credit default swaps — bets on failing companies and sinking investments. But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market. Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2 Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we've seen so far. Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9 billion in the fourth quarter. And remember: These represent the aggregate total for the entire banking industry, after netting out the results of banks with profitable trading. Why This Crisis Could Be Nearly as Bad as the Banking Crisis of 1929-31 Yes, I know the standard argument: In 1929, bank regulation and depositor protection was primarily run by state governments. Now, with the FDIC, the OCC, and more direct Federal Reserve intervention, it's far more centralized. But offsetting that strength are serious weaknesses in the banking system that did not exist in the 1930s: • In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation's high-roller megabanks dominate the market. • In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it's precisely in this dangerous sector that the megabanks dominate the most. External Sponsorship How to Profit from the "Obama Boom Sectors" In the past 6 months alone the Dow has dropped -29%. Meanwhile, 12 out of the 14 ETFs that Nathan Slaughter flagged for his ETF Authority readers back in September have seen gains of up to +402%. What's next? Get ready ... Nathan's just uncovered four "Obama boom sectors" that are about to receive a tsunamic injection of government cash. The $3.6 trillion-plus stimulus plan should send his top ETFs soaring. Here's how to profit today. Click here now for more information ... According to the OCC's Q4 2008 report, America's top five commercial banks control 96 percent of the industry's total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 ... while the rest of the nation's 7,000-plus banking institutions control a meager 22 cents!3 This is a massively dangerous concentration of risk. The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they'll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it's the primary reason they lost a record $3.4 billion in the last three months of 2008. The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead. Worst of all, the five biggest banks are exposed to breathtaking default risk — the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers. Here's our chart on these risks, updated to reflect the new data just released on Friday: Specifically, at year-end 2008, Bank of America's total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank's was 278 percent; JPMorgan Chase's, 382 percent; and HSBC America's, 550 percent.4 What's excessive? The banking regulators won't tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view. And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs. According to the OCC, Goldman Sachs' total credit exposure at year-end was 1,056 percent, or over ten times more than its capital. The folks at Goldman think they're smart, and they are. They say they can handle large risks, and usually they can. But not in a sinking global economy! And not when the exposure reaches such stratospheric extremes! Major Impact on the Stock Market In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century. The same is happening today. Whether the nation's big banks are bailed out by the federal government or not, the fact remains that they're jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations. And regardless of how much lawmakers try to arm-twist banks to lend more, it's rarely happening. With scant exceptions, bank capital has been reduced, sometimes decimated. The risk of lending has gone through the roof. And many of the more prudent borrowers don't even want bank loans to begin with. Those credit shortages, both acute and chronic, have a big impact on the economy and the stock market. Moreover, unlike the 1930s, banks themselves are publicly traded companies whose shares make up a substantial portion of the S&P 500. The big lesson to be learned: Don't pooh-pooh comparisons between today's bear market and the deep bear market of 1929-32. From its peak in 1929, the Dow Jones Industrials Average fell 89 percent. Compared to the Dow's peak in 2007, that would be tantamount to a plunge of more than 12,600 points — to a low of approximately 1500, or an additional 81 percent decline from the Friday's 7776. Even a decline of half that magnitude would still leave the Dow well below the 5000 level, which remains our current target. Does this preclude sharp rallies? Absolutely not! From its recent March 6 bottom to last week's peak, the Dow has already jumped a resounding 21 percent in just 20 short days. And the rally may still not be over. But this is nothing unusual. In the 1929-32 period, the Dow enjoyed even sharper rallies, and those rallies did nothing to end the great bear market. My father, who made a fortune shorting stocks in that period, explains it this way: "In the 1930s, at each step down the slippery slope of the market's decline, Washington would periodically announce some new initiative to turn things around. "President Hoover would give a new pep talk promising ‘prosperity around the corner.' And often, the Dow staged dramatic rallies — up 30 percent on the first round, 48 percent on the second, 23 percent on the third, and more. "Each time, I sought to use the rallies as selling opportunities. I persuaded more of my clients to get rid of their stocks and pile up cash. I even told them to take their money out of shaky banks." Your approach today should be similar. Specifically, Step 1. Keep as much as 90 percent of your money SAFE, as follows: For your banking needs, seek to use only institutions with a Financial Strength Rating of B+ or better. For a list, click here. Then, in the index, scroll down to item 13, "Strongest Banks and Thrifts in the U.S." Make sure your deposits remain comfortably under the old FDIC insurance coverage limits of $100,000. The new $250,000 per account limit is temporary and, in my view, not something to rely on long term. Move the bulk of your money to Treasury bills or equivalent. You can buy them (a) directly from the U.S. Treasury Department by opening an account at TreasuryDirect, (b) through your broker, or (c) via a Treasury-only money market fund. For further instructions, click here and review sections 1 through 3 — "How to Buy Treasury Bills or Equivalent," "How to Use Your Treasury-Only Money Fund as a Bank," and "How to Set Up a Single, Safe Account for Nearly All Your Savings and Checking." Important: You may have seen some commentary from experts that "Treasuries are not safe." But when you review their comments more carefully, you'll probably see they're not referring to Treasury bills, which have virtually zero price risk. They're talking strictly about Treasury notes or bonds, which can — and probably will — suffer serious declines in their market value. Step 2. If you missed the opportunity to greatly reduce your exposure to the stock market in 2007 or 2008, you now have another chance. And the more the market rises from here, the more you should sell. Step 3. If you are still exposed to stock market declines, seriously consider inverse ETFs, ideal for helping you hedge against that risk. (For more background information, see my 2007 report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.) Step 4. If you have funds you can afford to risk, seriously consider two major profit opportunities in the months ahead: To profit handsomely from the market's next decline. The best time to start: When Wall Street pundits begin declaring "the bear is dead." They'll be wrong. But their enthusiasm can be one of the telltale signs that the latest rally is probably ending. To profit even more when the market hits rock bottom and you can buy some of the nation's best companies for pennies on the dollar. The ideal time to buy: When Wall Street is convinced the world is virtually "coming to an end." They will be wrong, again. But that kind of extreme pessimism could be one of your signals that a real recovery is about to begin. Good luck and God bless! Martin 1 For the banks' $3.42 billion loss in interest rate derivatives, see OCC's Quarterly Report on Bank Trading and Derivatives Activities Fourth Quarter 2008, table at the bottom of pdf page 17, "Cash & Derivative Revenue," line 1. As you can see, that was 7.2 times larger than the previous record — the fourth quarter of 2004, when the nation's banks lost $472 million in interest rate derivatives. 2 See OCC table at the bottom of pdf page 11, "Derivative Contracts by Type." In it, the OCC reports total U.S. bank-held derivatives of $200,382 billion at year-end 2008. Among these, the single largest category is interest rate derivatives, representing $164,404 billion, or 82 percent of the total. In contrast, credit derivatives are only $15,897 billion, or 7.93 percent of the total. Within the credit derivative category, the OCC reports (page 1, fourth bullet) that nearly all — 98 percent — are credit default swaps, which have proven to be the most toxic and damaging category of derivatives so far. But they represent only 7.77 percent of all derivatives (7.93 percent x 98 percent). 3 OCC. In Table 1, pdf page 22, "Notional Amount of Derivatives Contracts." 4 OCC, table at bottom of pdf page 13. About Money and Markets For more information and archived issues, visit http://www.moneyandmarkets.com Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig. Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph: This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com. http://natural-dog-food-review.com/boston-terrier-secrets.htm http://natural-dog-food-review.com/Don't-Let-Your-Dog-Die-Young.htm http://natural-dog-food-review.com/index.htm http://natural-dog-food-review.com/my-favorites.htm

Looming Collapse of Russia, China and more

Looming Collapse of Russia, China and more ... by Martin D. Weiss, Ph.D.

I hope you've had a great start to your New Year!
At the same time, however, I trust you are not counting on the latest holiday rally in the stock market — or the most recent incarnation of the Obama rescue package — to transform 2009 into a positive year for the economy.
The reasons: In addition to the massive wealth destruction I told you about two weeks ago and the continuing debt collapse I've been warning you about for many months now, the overseas engines of global growth are also collapsing.
This does not negate my long-term view that certain overseas economies offer great future opportunities. But it does represent a major short-term threat to U.S. investors, U.S. companies and the U.S. economy as a whole.
The undeniable reality: The debt crisis that first appeared in the U.S. subprime mortgage market ... then precipitated a Wall Street meltdown ... and has now driven the American economy into its sharpest decline since the Great Depression ... has now spread to the entire world.
It is driving the economies of Western Europe and Japan into an unprecedented tailspin. It threatens the economic — and potentially political — stability of Russia, China and several emerging market nations. And it's setting the stage for a global depression of epic dimensions.
Here are some of the most vulnerable major economies ...
Russia Smashed by Oil Price Collapse
Never in modern history has the success or failure of a major emerging economy been so dependent on one single commodity! And never before has that commodity fallen so far and so fast as Russian crude oil!
Russia does have other resource and revenue sources. But in just the past six months, Urals crude, Russia's primary export blend, has plunged from a high of nearly $141 per barrel to a low of a meager $32.34 — a 77% crash that's pounded Russian stocks like a sledgehammer and sliced through the Russian economy like a serrated sickle.
The big dilemma: To balance its federal budget, Russia must get a minimum of $70 per barrel for its crude oil. But at $32 and change, it's getting less than HALF that amount. The entire country is losing money hand over fist.
No wonder Russia's stock market has plunged 72%, forcing 25 separate stock exchange shutdowns!
Transneft, the Russian oil transporter, is down from $2,025 in January 2008 to a recent low of $270. Gazprom, the natural gas monopoly, has lost more than two-thirds of its market capitalization since May. Meanwhile, Lukoil fell from a May peak of $113 to a recent low of $32.
Russia's oil-driven real estate bubble is also collapsing. That's why Russian construction and real estate giant Sistema-Hals lost more than 94% of its value last year alone ... why PIK Group, another major construction giant, collapsed by 96% ... and why the entire RCP Shares Index of Russian developers has sunk 92% since its record high in June 2007.
Ford, Renault and Volkswagen are halting production at Russian assembly lines. Unemployment is likely to surge to 10% and beyond. Massive amounts of foreign capital are fleeing the country.
In a desperate attempt to stem the tide, the Russian government has devalued the ruble 11 times since November, and thrown a quarter of its foreign currency reserves at the raging debt crisis. But it's still not enough. Russia's primary source of revenues — energy exports — is in shambles; and unless crude oil prices could somehow DOUBLE in a big hurry, Russia's economic and financial decline cannot end.
Standard & Poor's has cut Russia's long-term debt rating for the first time in nine years, citing dangerous outflows and a "rapid depletion" of currency reserves. And more downgrades are in the offing. Even a major debt default is not unthinkable.
The biggest danger: Political upheaval and social unrest.
Even before this crisis, Russia's middle class earned less than $500 per month. Now, with the devastating plunge in oil revenues already in place, those numbers are falling to even lower levels. For a nation with a cost of living that rivals that of the U.S., Western Europe and Japan, the last thing the Russian people needed was a depression. Yet that's exactly what they're getting.
I visited Russia last year before the collapse in oil prices. I spoke to a variety of professionals and people on the street. And I stayed with friends who work in government jobs.
From everything I had read, I had anticipated signs of greater prosperity. Instead, I was surprised to see how little average citizens had benefited from the recent years of rapid economic growth.
Yes, they have more access to a wider variety of goods that were scarce during the Soviet era. But most professionals — such as teachers, doctors, nurses and government employees — are still living on the edge of poverty.
Equally surprising is the popular disgust and disdain for the government. Public opinion surveys and press reports may indicate broad support for the Kremlin's foreign policy, and they seem to be accurate. But support for domestic policies is another matter entirely.
My view: Any major disappointment with respect to pocketbook issues could lead to major political changes, the outcome of which is largely unpredictable.
China Far More Vulnerable Than Expected
China's extraordinary expansion of the past decade fueled booms in global trade, commodities and emerging markets. It was a major growth engine that turbo-charged Australia, Brazil, Southeast Asia and even Japan.
Now, however, that engine is grinding to a screeching halt. Indeed, when historians look back to major pivot points of this global economic crisis, they will undoubtedly point to the abrupt end of China's boom.
Many of us assumed that because China's economy was growing so quickly — at a breakneck pace of 10% or more per year — it could easily afford to slow down by a few percentage points and still be in far better shape than most other economies.
But now I seriously question that theory. Indeed, more often than not, companies, industries and entire nations that enjoy the biggest booms are also vulnerable to some of the biggest busts. Instead of a mere slowdown, as many still seem to expect, China's economy could suffer a wholesale collapse.
Exports, which still represent two-fifths of the Chinese economy, are already sinking fast. And the domestic economy, much of which depends directly or indirectly on the revenues flowing from exports, is also beginning to sink.
Warning signs are everywhere: Stocks, down 60% just in the last 12 months; imports, down 17.9% in November alone; foreign investments to China, off 36.5% last year.
In response, the government has slashed interest rates and pledged a $582 billion stimulus package. But that's mere pocket change compared to China's trillions in vulnerable exports. Moreover, it has done little to help millions of small- and medium-sized businesses which are already shutting down and laying off millions.
A big problem: 45% of the Chinese government bailout is earmarked for the cement and housing industry. Meanwhile, cash-flow problems are sweeping through the entire economy, downing airlines, manufacturers and property companies.
Airlines like China Southern and China Eastern, for example, have been losing money hand over fist. China's auto sales are plunging. Its shipbuilding industry is in a tailspin. And its real estate market is collapsing.
Next, expect surging unemployment ... mass reverse migrations from urban centers to the countryside ... spreading popular unrest ... and a major challenge to authority. Chinese leaders have already admitted that an economic downturn would test their ability to govern. Now, that downturn is here — and the ultimate test, on the near horizon.
Meanwhile ...
India, also heavily dependent on foreign demand for its goods, is suffering its worst export slump in recent memory. Overseas shipments plunged 12.1% in October and another 9.9% in November, forcing companies like Tata Motors, India's biggest truck maker, and Hyundai Motor to cut output, fire workers and shut down factories.
Brazil, which was growing at a record pace until the third quarter, has suddenly frozen in its tracks. Much of the foreign money it counted on has vanished, leaving acute capital shortages in its wake. Auto sales have gone dead, leaving biggest-ever inventories of unsold cars. Credit, abundantly available just a few months ago, is now gone.
Japan has been slammed by its worst recession since World War II ... with stock prices plunging to new 18-year lows ... industrial output suffering the largest monthly drop since records were kept ... Toyota reporting its first loss in 70 years ... layoff victims filling tent parks ... and worse.
Everywhere from Argentina and Mexico to Australia, New Zealand and even the once-rich Middle East, the worldwide debt crisis, the bust in commodities and the sharp slowdown in global trade are transforming massive booms into instant recessions.
It's happening fast and it's accelerating. Government rescue programs aren't nearly enough to turn the tide. And it's another key reason you must approach 2009 with great caution.
Stick with safety. Don't veer from the course I have laid out for avoiding the dangers. Wait for the truly big price declines ahead before reinvesting!
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.