The Next Shoe To Drop?

by Larry Levin


Are you wondering if there is another surprise around the corner? Many so-called experts said the initial 10% correction was a place to buy - the drop was over. The same so-called experts claimed the Bear Sterns bailout was THE bottom - no doubt about it. When the resulting S&P500 rally grew long in the tooth after a 12% run, every drop was called a bottom, until it wasn't a bottom. Is July 15th the bottom for real this time? Now that FNM and FRE have been essentially nationalized, the very same so-called experts that have been so wrong are saying YES, this time you must trust them - the bottom is in. Of course, it is possible, but I'm not so sure. I guess what I am concerned about is - what is the next shoe to drop?

Perhaps the next shoe to drop will be commercial loans? Auto loans and credit card debt are troublesome, but commercial loans are far worse.

Bloomberg headline: Bank of America Says Losses Shift to Commercial Loans (Update1) -- Bank of America Corp., the biggest U.S. consumer bank, said credit weakness is spreading to commercial borrowers from residential customers and loan losses probably will deepen in the third quarter. Home builders unable to repay their loans are contributing to deterioration among commercial borrowers, said Brian Moynihan, head of the global corporate and investment banking unit, at a New York conference today. More than half the Charlotte, North Carolina-based bank's $13.4 billion in loans to builders are considered troubled, 19 percent are not paying interest and losses are likely to mount, Moynihan said.

Bank of America 's commercial loans were $335 billion as of June 30, and a home-builder portfolio that accounts for less than 4 percent - won't create major pain for us, but it's going up. It's not pretty - he said.

Between rotten home loans and the now sinking commercial loan portfolios, Warren Buffett has had enough.

Although Warren Buffett usually plays the role of Pollyanna, waxing enthusiastic about the prospects for the American economy, his latest business decision doesn't match his public rhetoric. From today's Journal: Warren Buffett's Berkshire Hathaway Inc. has told one of its subsidiaries-(Kansas Bankers Surety)-to stop insuring bank deposits above the amount guaranteed by the federal government, dealing a fresh blow to the financial-services industry as it tries to assuage anxious customers.

Commercial banks seeking to attract large deposits over federally-insured limits would purchase their own insurance protection to give wealthy customers peace of mind: don't worry about the $100,000 deposit insurance limit per account. We have additional coverage via our own insurer - might be said to a customer.

But the banking system is on the brink, saddled with hundreds of billions of toxic loan assets sitting on its collective balance sheet. Buffett appears to think it's no longer a good idea to be insuring 'em. The uncertain position of commercial banking also puts the FDIC at risk. As I wrote in the past, with $45 billion in its insurance fund and the prospect that WaMu, with $140 billion of insured deposits could fail, it seems inevitable that FDIC will run out of money.

Taxpayers take on trillions in risk - says the headline in Monday's USA Today. You can call it a bailout, you can call it a safety net or you can call it a rescue package, the paper quoted a research director at Argus Research, but the bottom line is the American taxpayer is left footing the bill.

You'd think you'd hear people squawking or marching on DC, with that kind of burden hoisted on their backs. Apparently, nobody really thinks he is going to pay for the housing bailout. Instead, the costs are expected to disappear, like a Vegas vanishing elephant trick. The problem is the elephant never really disappears; it's slight of hand - an illusion. Like the elephant, the debt will remain.

There's no outrage for this, but if a spotted owl is in danger - LOOK OUT! The US is the land of the free and home of the brave? It will be again - someday - but now it is the land of the compliant, and the home of the conformist.

Real Time Trading Signals*for

Trade Date: 9/10/08

E-Mini S&P Trades*
(before fees and commissions):

1) VA buy @ 10:10am at 1225.00 = b/e (1 lot)

2) PP sell @ 1:15pm at 1240.50 = b/e (1 lot)

3) FT buy @ 2:35pm at 1236.25 = -2.00 (1 lot)

4) Algorithm positions (1)...combined total...-3.25

ZB (30 Year Bond) Trades*
(before fees and commissions):

1) No trades today.


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