Page 4 of 4 CREDIT BUBBLE BULLETIN Q3 2008 'Flow of Funds'
Commentary and weekly watch by Doug Noland
valued. An examination of AIG's credit-default swaps guaranteeing more than
$300 billion of corporate loans, mortgages and other assets not covered by a
$152.5 billion federal rescue shows the ... insurer may value some of its
positions at levels that don't reflect distress in the markets, according to
... Gradient Analytics Inc. and a tax consultant who teaches at Columbia
University ... 'Every time I look at their statements I find something new,'
said Donn Vickrey, executive vice president of Gradient Analytics ... He
estimated that AIG may need to take at least $28 billion in additional
writedowns on swaps covering European corporate
loans and prime residential mortgages, as well as collateralized loan and debt
obligations."
December 18 - Bloomberg (Jody Shenn): "Americans seeking mortgages aren't
getting the full benefit of record low yields on Treasuries and
government-supported mortgage bonds ... While the average rate on a fixed
30-year mortgage fell to 5.18% last week from 6.47% in October ... the
historical relationship between home loans and mortgage bonds shows rates
should be at least half a percentage point lower."
Real Estate Bust Watch
December 15 - UPI: "The value of US homes is on target to fall by $2 trillion
in 2008, a private research group said. The most recent Zillow Real Estate
Market Report said home values fell 8.4% from a year ago by the end of the
third quarter. At the end of the quarter, US homes had already lost $1.9
trillion in value, the report said. At that point, one in seven homeowners were
'underwater,' with a total of 11.7 million owing more on their mortgages than
their homes were worth ... "
December 19 - SF Chronicle: "San Francisco office rents dropped 22% during the
fourth quarter from the previous year, the largest decline in seven years, as
the shrinking financial services industry flooded downtown with empty space."
December 19 - SF Chronicle: "Bay Area home values plummeted to an eight-year
low in November... The median for existing single-family homes in the
nine-county region fell to $350,000, a 47.8% drop from a year ago ... according
to ... DataQuick. Nearly 50% of the houses that sold during the month had been
repossessed in the last year. 'Bargains and foreclosures are still king,' said
Andrew LePage, analyst with the ... firm."
Speculator Watch
December 18 - Bloomberg (Saijel Kishan): "Hedge-fund liquidations rose to a
record in the third quarter ... , according to Hedge Fund Research Inc. About
344 funds closed in the three months ended Sept. 30, the most since the ...
firm started tracking this data in 1996. Closures in the first nine months of
2008 rose 70% from the same period last year to 693 ... The $1.5 trillion
hedge-fund industry is heading for its worst year, with the average fund losing
18% through November. Investor withdrawals could reach $400 billion in 2008,
according to an estimate by Morgan Stanley. For the full year, 920 funds might
shut down, topping the 563 closings in 2007 and the previous annual high of
848, set in 2005, HFR said."
December 15 - Bloomberg (Tom Cahill): "Almost a third of hedge funds will shut
or merge after the $1.5 trillion industry posted its worst ever performance
this year, according to IGS Group, which advises hedge funds on raising money.
'The failure rate is going to go up, the closure rate is going up, and the
merger rate is going up,' IGS Chief Executive Officer John Godden said ...
'It's going to be a 30% wipe out.' The number of hedge funds more than tripled
in the last decade to a record 10,233 at the end of June, according to ...
Hedge Fund Research Inc."
December 18 - Dow Jones (Dan Molinski): "The number of hedge funds closing shop
hit a record high...'We're at historical extremes with regards to risk
tolerance, or the lack thereof, and investors are liquidating whatever assets
they have ... selling indiscriminately,' Heinz said. Hedge funds have become a
virtual ATM machine in recent months for investors looking to get their hands
on cash amid a financial crisis that has tightened lending conditions around
the world and caused liquidity to dry up. Several hedge funds have been forced
to put up so-called 'gates' to slow or halt redemptions."
December 16 - Bloomberg (Saijel Kishan): "R3 Capital Management LLC's $1.5
billion hedge fund lost 31% in the first six months after it was founded by
Rick Rieder mainly because its assets were frozen by the bankruptcy of his
former employer, Lehman Brothers ... "
December 18 - Bloomberg (John Rega): "The European Union stepped up scrutiny of
hedge funds' investment practices and risk taking, opening a policy review that
may lead to more disclosure and rules on capital and short-selling for the
private investment pools."
Fiscal Watch
December 18 - Bloomberg (Ryan J. Donmoyer): "Individual investors who lost
money in Bernard Madoff's alleged $50 billion fraud may be able to recover some
of their money by seeking tax refunds. 'The Madoff debacle will result in what
amounts to another federal government bailout,' said Warren Kessler, an
attorney at ... Kessler & Kessler. "It is likely that the Treasury will
wind up refunding taxes,' at least on the loss of money individuals invested
with Madoff, he said. Capital-gains taxes paid by investors may be refundable
for 2005 through 2007, lawyers said. In addition, they said investors probably
can convince the Internal Revenue Service they are victims of theft, which
would let them deduct losses from their income taxes dating back to 2006. Any
unused theft losses could be used to reduce tax liabilities for the next 20
years."
Muni Watch
December 15 - Bloomberg (Darrell Preston): "US states are running out of cash
to pay unemployment benefits to the rising number of workers losing their jobs,
forcing officials to borrow from the federal government, cut benefits or raise
payroll taxes. Nineteen states have less than the recommended year of reserves
to pay benefits and four states - Indiana, New York, South Carolina and Ohio -
are down to one to three months, according to US Department Labor data."
December 15 - Bloomberg (William Selway): "US state governments are reducing
spending for the first time since 1983 as the recession erodes the tax
collections that pay for schools, health clinics and other local programs, a
national survey found. The budgets passed by states cut spending from their
general funds, the pools of money not earmarked for specific purposes, by $380
million to $689 billion in the current budget year, which began in July for all
but four states, according to a survey by the National Association of State
Budget Officers ... "
California Watch
December 17 - Bloomberg (Michael B. Marois and William Selway): "'California's
fiscal house is burning down,' Treasurer Bill Lockyer said ... 'The people
still wait for their elected leaders to pull them out of the fire, stop the
blaze and rebuild the house on a solid, lasting foundation. Until that happens,
the infrastructure work so vital to getting our economy back on track will lie
crippled.'"
December 18 - Wall Street Journal (Jesse McKinley): "In another sign of
California's fiscal morass, a state board charged with backing infrastructure
projects voted ... to halt some $3.8 billion in financing until a yawning
budget gap is addressed ... Bill Lockyer, the state treasurer, said the board's
vote to suspend infrastructure financing was necessary to safeguard the
dwindling government coffers, which he said could run dry as soon as February.
'We had to say we can't spend money we don't have,' Mr. Lockyer said. Nearly
2,000 projects could be delayed or halted, from multimillion dollar highway
improvements to a $5,300 allocation for a Fresno school district. The list of
projects that could be affected runs some 75 pages and includes veterans homes,
prisons, roads, fire stations and environmental and housing projects."
December 18 - Wall Street Journal (Bobby White): "California may soon have more
bankrupt towns on its hands. The city of Vallejo, Calif., gained national
attention earlier this year by filing for Chapter 9 bankruptcy protection. Now,
two neighbors are fighting to avoid the same fate, as the state's economic
crisis spreads. Isleton and Rio Vista, small towns roughly 50 miles northeast
of San Francisco, say they have begun consulting with bankruptcy lawyers as
they draw up plans to deal with their mounting budget crises ... California's
troubled towns can't expect much help from the state. A state board voted
Wednesday to shut off $3.8 billion in financing to hundreds of infrastructure
projects to preserve cash ... 'California's fiscal house is burning down,'
State Treasurer Bill Lockyer said ... "
December 18 - Bloomberg (Michael B. Marois and William Selway): "California
lawmakers vote today on a plan to raise $9.3 billion in taxes to help ease the
state's record budget deficit ... The proposal would tax oil drillers, slap a
2.5% surcharge on income taxes and replace gasoline taxes with a flat
39-cents-a-gallon fee."
New York Watch
December 15 - Bloomberg (Michael Quint): "New York Governor David Paterson says
his plan for closing next year's record budget deficit of at least $13.3
billion to be presented tomorrow won't include higher income taxes. To help
close the gap, Paterson will propose raising $4 billion with a variety of
measures including a new tax on sugar-based soft drinks such as Coca-Cola,
higher tuition at public universities, and ending the sales tax exemption for
clothing costing less than $115 ... "
December 17 - Bloomberg (Chris Dolmetsch): "Fares and tolls for most of New
York City's bridges, buses, trains and tunnels will increase by an average of
23% next year under the budget approved today by the transit authority."
December 18 - Bloomberg (Adam L. Cataldo and Henry Goldman): "The New York City
Council reached an agreement with Mayor Michael Bloomberg today to send $400
rebates to owners of apartments and homes and raise property taxes 7% beginning
next month."
Crude Liquidity Watch
December 16 - Bloomberg (Anthony DiPaola and Camilla Hall): "Saudi Arabia cut
its benchmark interest rate for the fourth time in less than three months ...
The Saudi Arabian Monetary Agency reduced its main repurchase rate to 2.5% from
3% ... "
Doug Noland is a market strategist for the Prudent Bear Funds.
(Republished with permission from PrudentBear.com.
Copyright 2005-2008 David W Tice & Associates. All rights reserved.)
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