The Worlds' Largest Hedge Fund (yes, that one, the one owned by you and I, the U.S. taxpayer) may now be adding additional securities to its portfolio. According to a recent Bloomberg article, the Fed is considering expanding the Term Asset-Backed Securities Loan Facility (TALF) to include loans for the purchase of Commercial Mortgage Backed Securities (CMBS). As you may recall, the TALF was developed to provide low-cost Federal Reverse loans that would be used to buy securities backed by consumer debt - essentially using taxpayer money to provide debt to help other taxpayers purchase the debt of still other taxpayers that took out too much debt [Yes, I know, using debt to solve a problem caused by too much debt does not really make sense, but I digress]. Anyway, since the TALF has previously been used to purchase securities tied to automotive debt and credit cards by offering three-year loans, why not try it now using five-year loans for commercial real estate? After all, it has been so successful for the auto and credit card industries (GM, Chrysler, and a White House Presidential scolding of credit card executives, notwithstanding - tongue in cheek, of course).

All kidding aside, it is hoped that such loans will create buying pressure for CBMS, thereby decreasing yields - many of which are near junk levels, making it unprofitable for banks to make new loans at such high yields. The down fall, of course, is that with such loans having a five instead of three year maturity, it will be even harder for the Fed to timely withdraw money from the system in later years, just when inflation is likely to creep back with a vengeance as the economy begins to hopefully recover. While maybe too late, at some point we are going to have to ask, are we preventing collapse and saving entire industries, or are we simply, and needlessly, juicing the system in order to save a few select companies, all the while unnaturally speeding-up the recovery? If the later, we may want to start planning for the hangover now.

Bank stress tests are now being delayed until the end of next week, not Monday, May 4th, as originally planned (see Bloomberg article).

Source: CFA Smart Brief

The delay is apparently being made as bank executives debate the findings of the tests with examiners. Initial talk was for banks to have tangible common equity equal of about 4 percent of a bank’s assets, with Tier 1 capital coming in about 6 percent. The goal of some regulators is to have common equity to be the dominant element in the bank's primary capital. Regulators are now worried that disclosure of poor results could cause the stocks of the weaker institutions to fall. Really? Is this a surprise? To add insult to injury, banks with low equity will be pressured to add capital, either by raising funds from private investors or taxpayers, or by converting government-held or privately-held preferred shares to common equity. Such a move will dilute existing shares and is sure to produce an undesirable downward spiral, one of which could further weaken banks which have scored low on the stress tests - which will no doubt result in some other type of assistance. Apparently, the government now needs a little more time to untangle the web they have weaved.

Third Quarter of Record Deficits

Posted by Bull Bear Trader | 4/28/2009 10:33:00 AM | , , , , | 0 comments »

The Treasury Department will need to borrow $361 billion in Q2, a record for the April-June quarter (see Investment News article), making for three straight quarters of record borrowing. The Treasury is also estimating it will need another $515 billion in Q3. The projected federal deficit for the year ending Sept. 30 will come to $1.75 trillion, another record, and quadruple the previous $454.8 billion deficit set last year - which was also a record. The national debt is currently at $11.1 trillion, but new limits will be raised to $12.1 trillion to account for the increased spending and borrowing.

The numbers are simply staggering, and make the recent proposal by the President to reduce the budget by $100 million seem to be just a drop in the bucket (see Washington Post article). In fact, regardless of your views on the $100 million, and spending cuts in general, a recent Youtube video gives you an idea of the size of the current budget, borrowing, and deficits, and shows you just how much (or little) $100 million amounts to (see YouTube video). Staggering indeed.

In the video below, Jim Cramer makes the case that hedge funds, and others for that matter, should consider going long select names given the recent positive (or less negative) macroeconomic data.