Sunday, March 04, 2007

We're all gonna DIE!!!

Next week doesn't look great, folks.

I'm just sorta digging out from under last week's workload, and I noticed that a couple of more banks are now warning that, "hey, maybe loaning all that money to people who couldn't pay it back DOES have a negative consequence."

Subprime lending, the little engine that could and fueler of housing fraud, scams, overvaluations, and outright lending lunacy is imploding.

Our friends over at have been kind enough to summarize the carnage for us for the top 25 sub-prime lenders in the country. Here is a snippet of the top five.

1.) Wells Fargo
2.) HSBC Household Finance
3.) New Century
4.) Countrywide
5.) Fremont General

Since the big Tuesday drawdown and several after the end of trading Friday these little nasties came to light:

"New Century Financial Corp. said late Friday that it's facing a federal criminal probe and will likely breach a major lending covenant with its financial backers, bringing into question the survival of the second-largest U.S. subprime-mortgage lender. "

"Countrywide Financial Corp., Calabasas, Calif., reported Thursday that $22 billion, or 19%, of its subprime receivables are in some form of delinquency. "

"Troubled subprime lender Fremont General (NYSE:FMT) said late Friday it will exit subprime residential lending, citing mounting pressure from loan repurchases and likely regulatory action. The company had first hinted at problems on February 28, when it said it would delay its fourth quarter and full year earnings."

I heard some rumblings online about an afterhours announcement by HSBC, putting a more fine point on an earlier "prewarning" about subprime loan losses, but have been unable to locate it. In addition, Wells Fargo owns over 4% of Fremont. It will be very interesting to see how Wells weathers the storm when California starts *really* rolling over.

So is this the end for the bubblicious US markets? No, but it is the beginning of the end, imo. Liquidity will continue to dictate everything. If (when!) liquidity dries up, the prices will revert to and past "fair value". Will gold be the place to hide, or just deflate with everything else? This really depends on the actions of the powers that be. Will they use this as the excuse to increase liquidity at the cost of the dollar? If so, expect continued strength (relative to the dollar) in the precious metals.

If you believe this is the case, check technical levels for support in the POG (probably around 620 and again at 600 -- without checking the charts).

ciao for now,


kirk wynn said...

It's difficult to figure out what all this economic stuff is doing on a site I discovered while researching Uruguay. Maybe you should forget about sub-prime loan defaults in the US and explore possibilities in the Uruguayan stock market. They do have one don't they?

FuBarrio said...

hahahaha -- the UY stock market it's such a big deal i've never heard of it. :)

if they do, it's TINY.

the point is, ALL the world markets are being driven much less by valuations, and much more by liquidity.

to the extent that subprime blowups make people reevaluate risk, and RISK PREMIUMS, that could dramatically change the game.

very few are sitting around figuring out that company X can only possibly grow earnings by X% annually, and thus should only be worth 15 times earnings, etc.

it got so bad that even residential property speculators completely threw out age old metrics for valuing residential properties...and made a mountain of money doing it.

right now prices in nearly every market (even the private equity market) is being driven by availability of liquidity.... excess liquidity in my opinion....and that is being driven by the Fed Reserve, Bank of Japan, Bank of England, EU and the Chinese.

even an expert stock picker is going to have a challenge on their hands if they ignore the liquidity tides.


Anonymous said...

In Jan. you said you would post interest rates being paid at UY banks in Feb.Its now March would you post please.That is something an EXPAT would be interested in.
Thanks Boot

FuBarrio said...

Salty (Devil) Dog,

Good point. What can I say? You're right.

I also said that I'd post how people can leverage into gold before the Chinese new year move.

I've been extremely negligent with posting for BOTH of my loyal readers.

My research has been hampered a bit because of:

1.) no internet for a month, and
2.) holiday season here meant my banking contacts that could give me the ins and outs were in brazil and "rocha" (a beach in UY) for well over a month
3.) i started working

I'm back on the job now that they are back in town and will post poste haste.

I would caution you though before you get too carried away ignoring the interest rate environ in the states...*they are ALL connected*. In other words, in the competition for global capital what the bank of japan and the fed pay has a LOT to do with what Banco Republica Oriental de Uruguay will pay you.

I will check on savings bank rates, CD rates, and govt backed notes and report back in a couple of days.

Semper Fi (gungy),