Is there an Asian contagion coming our way?

by Anthony Cherniawski, The Practical Investor, LLC | August 21, 2009

China plans to tighten capital requirements for banks, threatening to curb the record lending that’s fueled a 60 percent rally in the nation’s stock market, three people familiar with the matter said.

The China Banking Regulatory Commission sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt sold by other lenders from supplementary capital, said the people, who have seen the document. Banks have until Aug. 25 to give feedback, said the people, declining to be named as the matter is private.

Freddie Mac rumored to issue $25 billion of Cow Pies?

Freddie Mac wants to retire as much of the old Preferred Shares as possible. The Preferred shareholders got the shaft when Freddie went into receivership last year. The Junior Subordinated debt was bought in recently at par+. The sub debt is ‘money good’ while the Preferred shares are worthless. No bankruptcy court would have allowed that treatment. The concern was that someday someone would sue in Federal Court and the precedents of Equity Subordination would prevail.

So they propose to kill two birds with the same stone. Even better for Freddie, the new POOP was going on the books as 'equity' at the full $25 face value. If the deal were fully subscribed it would have resulted in an increase in the equity line of $50 billion! It may also put off the day of reckoning with Congress. There might be something to this rumor…

A final run for the top?

--Federal Reserve Chairman Ben S. Bernanke said the global economy is “beginning to emerge” from a recession after “aggressive” action by central banks and governments. “After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.” In other words, he’s saying the economy is “less bad.” How bad might it be?
The Fed may pull the plug on stimulus.
-- Federal Reserve policy makers are concerned about making “a colossal policy error” leading to higher inflation if they don’t withdraw extraordinary monetary stimulus soon enough, said Laurence Meyer, a former Fed governor. “When you talk to committee members you see a little bit more angst than you’d expect,” Meyer said in an interview yesterday. “In public they say they’re confident they’ll get it right. They’re confident they have the tools to get it right. But when you talk to them in private there’s some concern there.” I’d be concerned, too.
Gold is consolidating for a big move.
--Gold rose the most this month in New York and London as the dollar fell to a two-week low, increasing the metal’s appeal as a hedge against further declines in the U.S. currency. Short-term, however, there are indications that it may decline below its support at 930. This could bring some pain to gold investors for a time.

Cash for Clunkers dings the Nikkei.
-- Japanese stocks fell, capping their first weekly drop in more than a month, as U.S. plans to close a car-financing program dragged down automakers. Honda Motor Co., a carmaker that derives almost half its sales from North America, sank 4.1 percent after the U.S. said it will close the “cash for clunkers” program on Aug. 24. And I thought cash for clunkers was supposed to help the U.S. automakers.
The Shanghai Index is looking bearish as regulators tighten lending.
Shanghai Index.png -- China’s stocks rose 49.19, or 1.7 percent, to 2,960.77 at the close after changing direction seven times. The gauge has rebounded after dipping more than 20 percent below its Aug. 4 high, the threshold for a bear market. On Aug. 19, the regulator sent banks a plan to tighten capital requirements, threatening to curb record lending, three people familiar with the matter said. Is this contagious?

US Dollar.png The dollar may be (finally) finding a bottom.
-- The dollar declined against most major currencies after Federal Reserve Chairman Ben. S. Bernanake said the global economy is emerging from recession and U.S. existing home sales rose, reducing demand for safety. Even Nobel Prize winning economists are bearish on the dollar. “The dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk.” Could it be a good time to buy?

The Housing Index is disconnected with reality.
Housing Index.png --Widespread joblessness is causing more Americans to fall behind on their house payments, triggering a new round of foreclosures that some analysts fear could delay the nation's economic recovery.
A mortgage trade group reported Thursday that more than 13% of the nation's mortgage holders were delinquent on their mortgages or in the process of having their homes repossessed during the second quarter of this year. That's the highest figure since tracking began in 1972. California's rate, 15.2%, was among the highest of all states.
Gasoline prices easing?
The Energy Information Administration Weekly Report suggests that, “Following three consecutive increases, the U.S. average price for regular gasoline slipped a penny to settle at $2.64 per gallon this week. The national average was $1.10 below the year-ago price. Regionally, prices dropped in the Midwest and on the Gulf Coast but increased elsewhere. On the East Coast, the average price moved up a cent to $2.62 per gallon. The price in the Midwest dropped the most of any region, falling nearly five cents to $2.55 per gallon.”
Natural Gas.png Natural gas prices still modest.
The Energy Information Agency’s Natural Gas Weekly Update reports, “Significant price declines at all markets in the lower 48 States occurred during the report week, as supplies continued to appear more than adequate in the near-term and the likelihood of a hurricane-related disruption in production appeared limited. Many spot prices are trading at near 7-year lows, with no daily market prices exceeding $4 per MMBtu and many below $3 per MMBtu..”

The Winds Of Frugality Blow In Bernanke's Face

Mish explains deflation to “GR.” Bernanke is no wizard.
Talking about the auto industry and Wal-Mart, "GR" says "They will not sell below cost even if the demand graph drops to zero. They will somehow find a way to get government subsidy, or else they will find a consumer gimmick to increase the price."

Well GM sold cars at a loss for 5 years and that is why they eventually went bankrupt. If GM sold no cars insisting they break even they would have gone bankrupt sooner.

Currently, commercial real estate bankruptcies are growing at a massive rate. So too are bank failures, foreclosures, and credit card defaults. And bankruptcies, foreclosures, and credit card defaults result in the destruction of credit, the very essence of deflation.

Somehow "GR", like many others, has intense faith in the Fed to get prices up and consumers spending. This is in spite of the fact that prices are falling and demand is sinking in the face of the biggest stimulus package the world has ever seen!

contact information

Anthony Cherniawski | President and CIO, The Practical Investor, LLC.
State Registered Investment Advisor | Mason, MI USA | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.