Posted at 7:31 PM (CST) by & filed under Jim's Mailbox.

Existing U.S. Home Sales Fall for Third Month

Existing sales fell but other headlines reassure us that all is well as long as expectations are exceeded – Stocks climb after home sales top expectations. Headline spin can be a very tough nut to crack for the average investor.

Sales of existing U.S. homes fell in February for a third month, indicating a lack of jobs is hindering government efforts to revive demand.

The extension and expansion of a federal tax credit that helped stabilize housing in 2009 has yet to spark sales this year as hiring hasn’t materialized. Home Depot Inc. is among companies cutting prices to stimulate demand as the world’s largest economy recovers from the worst recession since the 1930s.

Extent and pretend is the foundation of stimulus. Extend the housing credits and pretend the benefits outweigh the costs. The reason why pretend and extend didn’t work in the 30′s and doesn’t work today is that worst recession since 1930 is not a recession. Today’s recession is part of a series of recession and liquidity induced recoveries, jobless recoveries, that the media either cannot, through ignorance, or more likely will not, as part of pretend and extend, recognize this fact until will after the fact.

It’s up to you. People tend to see what they believe, but money demands objectivity.

Purchases dropped 0.6 percent to a 5.02 million annual rate, the lowest level in eight months and in line with the median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. The median price decreased 1.8 percent from February 2009.

Falling sales and lower prices generates a falling real trend.




Stocks climb after home sales top expectations

Stocks punched higher Tuesday to extend their streak of gains after sales of existing homes fell less than expected.

The stock rally rolls on, but do not be deceived by the reasons why. Housing starts, while bouncing from depressed levels in 2009, are beginning to roll over. Also, the months supply of new one-family houses for sale, or the ratio of houses for sale to houses sold is rising again. Headlines suggesting unexpected strength mean little in the face of these trends. In other words, something other than better than expected home sales is pushing the market higher. The rally in equities was setup long ago by leverage money.

Housing Starts And Change YOY:

Months Supply And Change YOY:



Greek Crisis May Provoke Fed-ECB Split as Euro Slides

European Central Bank President Jean-Claude Trichet’s campaign for governments to learn the lessons of the Greek fiscal crisis may provoke a transatlantic policy split that forces the euro back toward its lows of 2006.

As investors push Greece, Spain, Portugal and Ireland to deliver on plans to cut budget deficits, the withdrawal of stimulus raises the risk of double-dip recession and even deflation in all or parts of the 16-nation euro area. The possibility of slower expansion is prompting economists from Deutsche Bank AG to HSBC Holdings Plc to predict Trichet’s ECB will be slower than they previously anticipated in raising its key interest rate from a record low of 1 percent.

Of course, well all know that Europe is the epicenter of the world’s economic stresses.

AP analysis: Average county was stressed in Jan.

Worsening economic conditions caused the nation to reach a bleak milestone in January: For the first time since The Associated Press began analyzing conditions in more than 3,100 U.S. counties nearly a year ago, the average county was found to be economically stressed.

Driving the pain was a deterioration in states that earlier had weathered the Great Recession better than the nation as a whole. These states endured the sharpest gains in unemployment for the past three months due to job losses in such industries as energy and construction. The states include West Virginia, Idaho, Mississippi, Montana and Wisconsin.

Yet, it’s all about Europe. Nothing to see here in the U.S. Looks like someone talking their short Euro book. Short Euro pushes up the U.S. Dollar Index which is 57% the Euro. This opens the dollar to COMEX gang.



Posted at 2:12 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

A good commentary on the true state of the US economy is found in a quote by an executive of Home Depot. From Bloomberg:

“We are looking to continue to drive our traffic in the stores,” Craig Menear, executive vice president of merchandising, said in a telephone interview last week from Atlanta, where Home Depot is based. “Things are still difficult out there for customers.”

Wouldn’t know it listening to all the talk of “recovery” floating around out there. I still maintain that this so-called “jobless recovery” (by now I am nauseated every time I hear this oxymoronic term) is nothing more than an “L” shaped phenomenon, an economy that has reached a bottom but is crawling along sideways maintaining itself only by the continued infusion of massive amounts of liquidity. There is no sign of any serious job creation and as a result, retailers continue to slash prices in the hopes that they can attract the all-important but cash-strapped consumer into their stores.

I might add here that the continued growth in the size of Leviathan will suck in more and more capital that would otherwise be used for constructive purposes, furthering hampering growth in the private sector. This metastasizing tumor in Washington DC will be a drag on the economy for years unless the citizenry says, “Enough” and throws out those whose votes are feeding it.

As was the case yesterday, the Euro continues to hover precipitously above major chart support below the 13500 level. It has been holding with the result that the Dollar cannot muster enough upside strength to take out 81.50 on the USDX. This range bound activity in the Forex markets has been affecting gold which while higher today, is still effectively contained in a range as well.

It is a bit eerie seeing this sort of thing continuing day after day when the potential for a huge move in any of these markets exists at nearly any moment due to the tenuous condition of so many economies of the West. I am not sure what the catalyst might be but it is certain that there certainly is not lacking an abundance of possible events that could trigger a wave of buying or an avalanche of selling in the Forex arena that would impact the gold market. They have been relatively quiet as uncertainty and a lack of strong conviction hold sway but once a consensus is arrived at by the trading community, the next sharp trend will commence. For now, we wait and watch.

Euro gold remains very firm holding above the €800 level coming in at €814.177 for the afternoon Fix. Gold priced in British Pound terms is also strong holding above the €700 level coming in at £731.359 at the PM fix.

Copper cannot yet make it above $3.50 but does not want to stay down below $3.30 for any length of time either.

Crude oil is stuck between $83 on the upside and $79 on the downside.

These last two markets in particular should tell us quite a bit about where the consensus is shifting in regards to the overall economy. Lumber is also a key tell-tale market, but it too is in a range trade so it is not telling us anything either.

The HUI, while higher today, is still stuck in its range as well.

Even the Continuous Commodity Index, CCI, is mired in a trading range.

I am sure you are as tired of reading the word “range” as I am of writing it. What does all this mean – simple – uncertainty rules.

The only thing that does not seem to be in a range is the S&P 500. It is a mere 2 points from putting in another yearly high. Happy Days are apparently just around the corner for us all. With all the profits that the stock market has priced in for these companies, federal tax revenues should soon be soaring obliterating the deficit in record time. Before long the spending drunk politicians will be searching high and low for more ways to waste the new-found surplus.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini


Posted at 9:11 PM (CST) by & filed under Trader Dan Norcini.

Dear Friends,

I am sending this short series of charts to detail in picture form a picture of the US Federal Government total indebtedness in comparison to nominal GDP (Gross Domestic Product). The last chart is a ratio of the two overlaying total GDP against total government debt.

I think it is interesting to note the decline in the ratio which is occurring even as the government goes madly and hopelessly into further debt. Keynesians should take note.

Click charts to enlarge in PDF formatGDP and Debt charts 3-2010 (2)_Page_3GDP and Debt charts 3-2010 (2)_Page_1GDP and Debt charts 3-2010 (2)_Page_2

Posted at 9:01 PM (CST) by & filed under In The News.

Dear CIGAs,

I am preparing to leave for Tanzania today. Please consider these thoughts as I will be in the air for nearly 19 hours.

There is NO way the debt disaster is going away. There is no way that the US dollar is a store house of value.

The US and Great Britain have the most serious debt problems and it is still growing. Gold will trade at $1650 and above. According to Martin the action of the gold price is a perfect setup cycle wise for a major April – October rally.

Seasonality does not now exist in gold, but it does exist in gold trader’s minds.

Lipsky Says Debt Challenges Face Advanced Economies (Update1)
By Joyce Koh

March 21 (Bloomberg) — Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.

All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech today at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging market nations had also reached a “worrisome level.”

“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.

Rising public debt could lead governments to seek to eliminate it through inflation or even default if they fail to carry out fiscal measures in time, Mohamed A. El-Erian, co-chief investment officer at Pacific Investment Management Co. warned earlier this month. Nassim Nicholas Taleb, author of “The Black Swan,” a book arguing that unforeseen events can roil markets, said March 12 he is concerned about hyperinflation as governments around the world take on more debt and print money.



Trader Dan’s Commentary

It is not a good idea to go out of your way to insult your banker.

China warns US against sanctions over currency
China warns US against sanctions over currency dispute, says may report trade deficit in March 22, 2010
Gillian Wong, Associated Press Writer, On Sunday March 21, 2010, 6:08 am EDT

BEIJING (AP) — China’s commerce minister warned the United States on Sunday against imposing trade sanctions over Beijing’s currency controls, and said his country was likely to report a trade deficit in March.

Washington and other trading partners are pressing China to ease controls that have kept its yuan currency steady against the dollar for 18 months to help its companies compete amid weak global demand. Some U.S. lawmakers have demanded to have China declared a currency manipulator in a U.S. Treasury Department report due out next month, which could precede possible trade sanctions.

Asked what measures China would adopt if the Treasury Department declared it a currency manipulator, Chinese Commerce Minister Chen Deming said China would not sit idly by and reiterated Premier Wen Jiabao’s statement a week ago denying that the yuan was undervalued.

"If (the Treasury Department’s) reply is accompanied by trade sanctions and trade measures, we will not ignore it," Chen said. "If it is followed by any international legal lawsuit against China, we will take them on."

Business groups say China’s currency controls keep the yuan undervalued by up to 40 percent, giving its exporters an unfair price advantage and swelling its multibillion-dollar trade surplus.



Jim Sinclair’s Commentary

Over the past three years a Russian economist has predicted what is occurring below, taking it to an extreme by suggesting the unthinkable, a breakdown of the union into economic alliances.

One thing is for sure – hopeless change.

States rebel against Washington
The pushback against federal power began under Bush, but may now be accelerating.



There’s an old joke in South Carolina: Confederate President Jefferson Davis may have surrendered at the Burt-Stark mansion in Abbeville, S.C., in 1865, but the people of state Rep. Michael Pitts’s district never did. With revolutionary die-hards behind him, Mr. Pitts has fired a warning shot across the bow of the Washington establishment. As the writer of one of 28 state "sovereignty bills" – one even calls for outright dissolution of the Union if Washington doesn’t rein itself in – Pitts is at the forefront of a states’ rights revival, reasserting their say on everything from stem cell research to the Second Amendment.

Washington can be a bully, but there’s evidence right now that there are people willing to resist our bully," said Pitts, by phone from the state capitol of Columbia.

Just as California under President Bush asserted itself on issues ranging from gun control to medical marijuana, a motley cohort of states – from South Carolina to New Hampshire, from Washington State to Oklahoma – are presenting a foil for President Obama’s national ambitions. And they’re laying the groundwork for a political standoff over the 10th Amendment, which cedes all power not granted to Washington to the people.


Jim Sinclair’s Commentary

Failed banks will be pasted up as long as possible to keep the number down.

The Federal Deposit Insurance Corp. reported the failure of 7 more banks this week, bringing this year’s total to 37, representing a pace that will easily surpass last year’s total of 140 bank collapses.

Through the end of March last year, 21 banks had failed.

Crippling loan losses propelled by a still peaking commercial real estate crisis prompted the FDIC to act against banks in Alabama, Georgia, Minnesota, Ohio and Utah.

“We have the capacity and tools necessary to effectively and efficiently handle the expected 2010 level of insured depository institution failures,” said Mitchell L. Glassman, director, Division of Resolutions and Receiverships for the FDIC, in testimony before a House subcommittee in January.

FDIC Chairman Sheila Bair has also said the regulator expects this year’s bank failures to exceed the 2009 tally, which was the highest in nearly two decades.

Advanta Bank Corp., of Draper, Utah, with about $1.6 billion in assets and $1.5 billion in deposits, was the largest failure. And the only bank that wasn’t assumed by another institution, forcing the FDIC to cover accounts up to $250,000. The regulator said checks for those insured deposits would be mailed to account holders on Monday



Jim Sinclair’s Commentary

What is the difference between the effects of a REPO 105 and what Greece did? In a practical sense, nothing whatsoever.

How many other US financial entities and maybe public bodies have used this hide a debt technical maneuver? Balance sheets everywhere are total cartoons.

Lehman vice-president lost job after raising Repo 105 ethical concerns
Christine Seib and Alexandra Frean
March 17, 2010 10:42AM

A KEY witness in the damning inquiry into the collapse of Lehman Brothers was laid off by the bank a month after he raised concerns about the way it had accounted for $US50 billion ($54.2bn) of risky loans.

Matthew Lee, a senior vice-president in Lehman’s accounting division, warned senior executives on May 16, 2008, that the bank was hiding huge risks from investors and regulators when it reported its quarterly figures.

By the end of June, Mr Lee had lost his job “as part of a wider restructuring”. He had worked for the bank for 14 years.

Erwin Shustak, Mr Lee’s lawyer, told The Wall Street Journal: “It was easier just to shut him up and let him go. Mr Lee provided key evidence to the investigation by Anton Valukas into what drove Lehman into Chapter 11 bankruptcy in September 2008.”

The 2200-page report by Mr Valukas, which was released last week, implicated British law and accountancy firms in Lehman’s controversial accounting method, called Repo 105.


Jim Sinclair’s Commentary

Junk is the kindest of descriptions. Most of these items are worthless and will never recover.

Lies are everywhere. Creative bookkeeping is everywhere.

Repos are sold for no business purpose other than hiding debts. This cannot win the day.

New York Fed Warehousing Junk Loans On Its Books: Examiner’s Report
03-22-10 01:12 PM

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a "warehouse" for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.

"The Fed legally is forbidden from taking such assets. There’s a legal requirement that the Fed’s assets be investment grade," Rep. Alan Grayson (D-Fla.) told HuffPost. Grayson, who is the cosponsor of the Grayson-Paul Audit the Fed measure that passed the House, said the Lehman scandal shows precisely why such an audit is needed.


Posted at 8:14 PM (CST) by & filed under Jim's Mailbox.

Jim Sinclair’s Commentary

What government does not manipulate their currency? What do you think the Exchange Stabilization Fund is all about?

This is madness when the target is your banker. It almost seems as if repeated crises are desirable.

China commerce minister tips trade deficit in March

Chen, speaking at forum Sunday, said China’s deteriorating trade picture with the rest of the world indicated China shouldn’t revalue its currency against the U.S. dollar, the state-run China Daily reported.

As the April 15th deadline to declare China a currency manipulator approaches, the rhetoric is running at full steam on both sides. Come on, other than Antarctica – and I’ll have to check on that one because the penguins with Internet access are becoming increasingly savy, which continent doesn’t manipulate its currency?



Obama Pays More Than Buffett as U.S. Risks AAA Rating

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

A rare and possibly and important event. It’s the market’s way of saying at least we know that Buffett doesn’t believe that money grows on trees.



North Korean finance chief executed for botched currency reform

North Korea has executed a senior official blamed for currency reforms that damaged the already ailing economy and potentially affected the succession, a news agency in South Korea reported today.

Had Mr Nam-gi done this in the US he would have been rewarded with taxpayer funded bonus and many offers for his book titled, "I’m Doing God’s Work".



Fed’s Plosser: Timely withdrawal of stimulus crucial

Remember these headlines?

The Federal Reserve must be prepared to raise interest rates if necessary before the jobless rate has fallen to "acceptable levels", or risk losing its inflation-fighting credibility, a senior Fed official said on Tuesday.

I call it the battle of Fed Speak vs. Tobacco Smoke Enema.

Tobacco Smoke Enema:

Change in the quantity of the Monetary Base is one of many quantitative easing levers used by the Fed. As to the quantity of money out in the system, the Fed has direct control over the “monetary base” through open market operations. The rate at which the Fed pumps up the "monetary base" has up ticked again – so much for the monetary discipline. Why has the Fed once again pressed down on the accelerator? In other words, why and why now despite the active PR campaign promoting discipline?

Board of Governor Monetary Base, Adjusted for Changes in Reserve Requirement Year-over-Year Change Since 1959 (YOY):

Board of Governor Monetary Base, Adjusted for Changes in Reserve Requirement Year-over-Year Change Since 2007 (YOY)




House sends health care overhaul bill to Obama

"This is what change looks like," Obama said later in televised remarks that stirred memories of his 2008 campaign promise of "change we can believe in."

Certainly this statement will be debated for some time. Our job as investors and traders is to remain objective and act with discipline towards the trends in place.

The reality is that spending of all sorts (not including health care overhaul and the inevitable programs to come) has increased well beyond domestic income and saving pools. America, as a result, has turned increasing to foreign savings to fund our spending programs. Federal debt held by foreign and international investors has not only rapidly increased since 2006 but also soared to 25% of GDP as of the fourth quarter 2009. Another way of looking at the severity of the problem is to look at equilibrium price gold relative to net foreign obligations. This price has jumped from $3,753/oz in 2001 to $13,794/oz in 2009.

These trends have not gone unnoticed by those lending the money. The rising price of gold across the global suggests that the world believes that the above trends are becoming unstable.

Federal Debt Held by Foreign & International Investors As a % of GDP (FDHBFINGDPR) and the London P.M. Fixed Price of Gold (GOLD):

Federal Debt Held by Foreign & International Investors (FDHBFIN) and the Equilibrium Price (FDHBFIN/OZ)



Chicago Fed National Activity Index (CFNAI) vs Stocks

The Chicago Fed National Activity Index (CFNAI) is a diffusion indicator that reflects the current and future course of U.S. economic activity. Today’s down tick in the CFNAI has its smoothed average playing with the up trend established in 2009. Up trend breaks reflect economic deceleration and tend to coincide with stock market pauses or declines. The 2002 and 2009 up trends are highlighted by the yellow boxes for comparison.

Chicago Fed National Activity Index (CNFAI) and S&P 500 Average



Posted at 1:47 PM (CST) by & filed under Trader Dan Norcini.

Dear CIGAs,

There is a fascinating article on Bloomberg’s website that I highly recommend that details the goings on in the bond market.

Click here to view the article…

The gist of the piece is that the US under the spendaholic Obama is a higher risk than Berkshire Hathaway.

After last evening’s “tariff of abominations” was shoved down the throat of the American people, I am sure that the bond market situation is only going to get worse. Another new entitlement, more massive spending and more borrowing – it just keeps going and going and going.

Adam Smith once remarked to a friend that “there is a great deal of ruin in a nation”, by which he meant that government bureaucrats and inept, clumsy and ignorant politicians can dish out a great deal of harm to a nation by their foolish and stupid policies, but that in spite of that, the great nation has a vibrant economy that can absorb the blow and steady itself and then go on to recover in spite of the damage inflicted by their policies. That premise is going to be put to the test in the case of the US sooner rather than later with last evening’s monstrosity.

Health care stocks loved the news – why wouldn’t they? After all, they now have a guaranteed list of clients thanks to a federal mandate. Let’s call it a captive audience. Who said companies could not prosper under top-down socialism; it all depends on whether or not legislation is favorable to your business. Do you think we might be able to get these clowns in Washington to pass a “gold reform bill” that would mandate under the penalty of fine, that every citizen in the US be required to purchase a one ounce gold coin? That would do wonders for the mining sector and create lots of jobs. Why not – after all, we have now reached a new era in which the Feds can mandate that a private citizen purchase a private product (insurance) so what is to prevent us from lobbying for the passage of the “Gold Reform Bill”? Let’s wave the flag and pitch the bill as good for “life, liberty and pursuit of happiness” of all the citizenry, bring in some sob stories, concoct some “studies” that show how many mining sector jobs it will create and that should do the trick.

On to the markets however -

There were lingering concerns today in regards to Greece which brought more pressure on the Euro early in the session. It continues to hover very precipitously above 13445 – 13435 on the charts. Around mid morning however, it started moving up off its lows and that movement allowed Dollar bears to press the USDX below the 81.00 level again. For now the Dollar remains pinned under the 81.50 level on the USDX as the trading range dominates.

Gold was keying off this strength in the Dollar (or weakness in the Euro) and the raiders at the Comex were able to take it down below chart support at $1,100 as a result. With the recovery off its lows in the Euro, gold floated higher however and attempted to move back above the $1,100 level. Once the Euro moved into the plus column, gold recaptured $1,100 while the HUI simultaneously climbed well off its lowest levels. At least for today – gold and the Euro are moving almost tick for tick.

The short and sweet version is that many markets remain mired in range trades and gold is in that category.

Crude oil and copper were both weaker early in the session but with the Dollar moving into the negative column at midday, they also moved higher as once again the algos are controlling the price action.

The S&P 500 is 4 points from making another yearly high as I write this commentary.

Click chart to enlarge today’s hourly action in Gold in PDF format with commentary from Trader Dan Norcini


Posted at 7:35 PM (CST) by & filed under In The News.

Jim Sinclair’s Commentary

One way or another Greece and all the states of the USA will be bailed out.

In the final analysis all these potential bankrupts can say bailout or anarchy.

Markets spooked as Greek rescue plan crumbles
Europe’s rescue plan for Greece appears to be crumbling after the country threatened to call in the International Monetary Fund unless Brussels comes up with real money on acceptable terms within a week.
By Ambrose Evans-Pritchard
Published: 5:30AM GMT 19 Mar 2010

The inability of the eurozone to put together a viable package after a month of talks has dismayed markets, which thought the terms of a deal had already been agreed. Yields on 10-year Greek bonds spiked 17 basis points yesterday to 6.26pc. The euro fell two cents against the dollar to below $1.36. "The facade of unity among eurozone members hardly held for more than a day," said Beat Siegenthaler from UBS.

Greek Premier George Papandreou told the European Parliament that his country was running out of patience. It is in effect already subject to the full rigours of an IMF-style austerity plan but without enjoying any of the benefits. He said the savings from cost-cutting measures were vanishing into the pockets of bond-holders through higher interest rates.

"We have the worst of the IMF and none of the advantages. This is where Europe must come in and provide what the IMF can offer. Or Greece will have to go to the IMF. We hope that will not be necessary," he said.

"I prefer a European solution as part of the eurozone, to show the world that Europe can act together. This is not to ask for money but to have an instrument on the table to stop the speculation. We expect the EU to live up to the challenge facing it. We are a eurozone country," he said. Hungary was better off with a "free currency", able to work with the IMF outside the eurozone.

"Papandreou is playing poker," said Silvio Peruzzi from RBS. The defiant tone leaves no doubt that this escalating game of brinkmanship has turned deadly serious. If Mr Papandreou is bluffing, his bluff is likely to be called since a German-led bloc of states is also warming to the IMF as the best way after all to maintain EMU discipline.


Posted at 7:33 PM (CST) by & filed under Jim's Mailbox.

Dear CIGAs,

What is clear here is the egregious OVERVALUATION of the assets of financial entities thanks to the capitulation of the FASB that allows banks and other financial entities to pick the value of their assets. This is a public disgrace that the public has no idea about. In these cases the overstatement was between 37% and above 100%. This is outrageous beyond outrageous.

The FDIC has accepted loss guarantees up to 95% of assets going out as long as 10 years. The same people who brought this crisis to you are buying these banks with the long term FDIC guarantees.

Dear Jim,

Over the past two Fridays, 3/12 – 3/19/10, the FDIC announced the closings of 10 more banks, bringing this year’s total to 37. Collectively, the 10 banks had reported assets of about $4.4 billion and deposits of about $4.1 billion.

The closings will cost the FDIC an estimated $1.47 billion, approximately 36% of the value of the deposits. Based on the FDIC’s loss estimates, the actual market value of the 10 banks’ assets is only about $2.634 billion and had been over-stated by about 67%.

The closings of several of the largest banks stand out. Typically throughout this crisis, the largest banks have generated the largest losses proportionally.

Advanta Bank Corp. of Draper, Utah, had reported assets of $1.6 billion and deposits of $1.5 billion. The FDIC’s loss projection is $635.6 million, about 42% of deposits. Based on that estimate, the bank’s assets are really only worth about $864.4 million and had been over-stated by 85%.

Appalachian Community Bank of Ellijay, Georgia, had reported assets of $1.01 billion and deposits of $917.6 million. The FDIC’s loss projection is $419.3 million, about 46% of deposits. Based on that estimate, the bank’s assets are really only worth about $498.3 million and had been over-stated by 103%.

The third largest bank closed, Park Avenue Bank of New York, NY, provides a useful contrast in that its costs are in the range of what the FDIC would traditionally have considered a fairly successful bank closure. It had reported assets of $520.1 million and deposits of $494.5 million. The FDIC’s loss projection is $50.7 million, about 10% of deposits. By that estimate, the market value of its assets is $443.8 million, and had been over-stated by about 17%.

An over-valuation of 17% is a lot more defensible than one of 85% or 103%. It’s nice to see that some banks haven’t marked their assets up to pure fantasy valuations. However, failures as well contained as Park Avenue Bank have been few and far between.

In addition, it is important to note that the loss for Park Avenue Bank, and for eight of the other banks closed over the past two weeks, could likely end up being more than presently estimated because the FDIC entered into loss-share agreements with respect to at least two-thirds of the value of the assets taken over by the successor banks. In Park Avenue’s case, the FDIC had to enter into a loss-share transaction with respect to $379.8 million of those assets.

The FDIC provides a great deal of information regarding the specifics of these loss share agreements in a release entitled, “Loss-Share Questions and Answers” that can be found at:

Broadly speaking, the FDIC has agreed to reimburse between 80% and 95% of any losses the acquiring banks incur on the assets beyond specific estimates agreed to at the time of the takeover. For commercial assets, the agreements typically run for eight years and for single family mortgages, they run for 10 years.

That is a huge amount of risk to assume and a very long period over which to assume it. As I will discuss in a separate article to follow, the FDIC has in effect been forced to enter into these loss share agreements because without them, the acquiring banks were refusing to take over any substantial amount of the failed banks’ assets.

The FDIC includes an estimate of what it believes it will have to pay out under each loss share agreement when it makes its loss projection for the bank failure in question. Still, the manner in which these loss share agreements have been structured makes it clear that the parties believe the greater risk is that the assets will lose more value more than expected.

In total, the FDIC took on an additional $2.1 billion in assets under loss share agreements in connection with the bank closings over this past two weeks. Since the beginning of this crisis, it has entered into agreements with a total of about $136.5 billion in assets under loss share.

Respectfully yours,
CIGA Richard B.


Japanese Yen

Volume continues to shrink as the Yen marks time on support. This is quietly bullish. The Yen is building up "cause" for the third tap of overhead resistance. This is classical "three taps and out" action.

Japanese Yen ETF (FXY)