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EJ
04-25-07, 08:45 PM
http://www.itulip.com/images/wallstreetbear.jpgClimbing the Cliff of Doom-in dollars
April 25, 2007 (iTulip)

Forget "climbing a wall of worry." Today we are reminded to remind readers, Why are we Nervous? Because We Can't Do Without (http://itulip.com/forums/showthread.php?t=1058):

Without cheap imports, CPI inflation will go through the roof
Without continued loose and low rate lending, housing prices will continue to fall
Without continually increasing deficit spending to generate new government jobs
Without an ever increasing rate of new debt creation, key segments of the U.S. economy–especially consumption and finance–will contract.
Without ever more rapid public and private sector debt growth, current GDP growth cannot be maintained
o Without an ever more rapidly expanding money supply, the U.S. economy is ripe for a debt deflation, either via a near hyper-inflation or debt defaults
Without the continued political support of foreign governments expressed as lending, we can't run our government, pay our existing debts, or our pensions or mortgages, or make payments on the last few hundred billion of leveraged buyouts

It is from this final point that launch into today's AntiSpin, as it explains both the recent US market froth and the likely source of its demise.
Lenders–Buyout Busters? (subsciption) (http://online.wsj.com/article/SB117728819731778522.html?mod=googlenews_wsj)
April 23, 2007 (Edward Chancellor and Robert Cyran - Wall Street Journal)

LBO Binge Could Wane If Huge Borrowing Need Exceeds Market's Supply

Around $200 billion of leveraged buyouts were announced in the first quarter of this year, of which more than half occurred in the U.S., according to Dealogic. For the past couple of years, LBO activity has been doubling annually. Given the amount of money that has been raised by private-equity firms, this could continue for a while. Barclays Capital estimates that buyout shops have about $160 billion to spend in the U.S. alone. That could translate into $750 billion of deals this year.

In the first quarter, buyout firms called the shots when arranging loans for their acquisitions. They borrowed cheaply using aggressive structures, such as payment-in-kind notes, and offered lenders little protection. But that could change. Private-equity firms may need as much as $600 billion in debt this year. Barclays estimates that lenders in the high-yield bond and institutional-loan market aren't likely to come up with much more than half this sum.

Something like that happened toward the end of the technology-stock bubble in 2000, when the borrowing demands from big-spending telecom firms swamped the markets. There is another uncanny parallel with that period. After a brief period of thriftiness, corporations are once again bleeding cash. As in 2000, U.S. firms now run a financial deficit equivalent to more than 4% of gross domestic product. The earlier deficit was a prelude to the 2001 corporate-credit crunch.

So far, the loan market has expanded to meet private equity's demands. But the ultimate suppliers of these loans, including the booming hedge-fund industry, don't have bottomless pockets. The hypergrowth in the buyout world is set to test their resources.
The source of loans fueling the LBO bubble? According to Jim Finkel, CEO Dynamic Credit (iTulip Select Interview (http://itulip.com/forums/showthread.php?t=757)), between 45% and 60%–no one knows for sure–of the loans supporting LBOs is generated by the CDO market, the same securitization machine that generated enough loans to meet the demands of the housing bubble–until it didn't. Jim believes that the financial and economic risks posed by the LBO market are much higher than for the mortgage market. A crash of the LBO bubble will leave many very large companies unable to service debts without reducing costs. The largest expense of any corporation is payroll. Cost cutting will mean increased unemployment, which will feed into the declining housing market.

The Chancellor/Cyran Wall Street Journal article continues:
http://www.itulip.com/images/lbos042507.gifComing IPO Boom

Private equity isn't just testing the limits of the loan market. The stock market also is on a roll. Underwriters of U.S. stocks have just come off their two best quarters since the start of the decade. In the past six months, 161 companies raised close to $32 billion–about 60% more than was raised a year earlier. Like everything else on Wall Street, the leveraged-buyout business is driving this bonanza. LBO-backed stocks accounted for about a third of all initial public offerings in the past six months. Unfortunately for those concerned about innovation and the strength of the underlying economy, there has been a paucity of venture-capital-backed companies debuting on the public markets.

Indeed, a bit less than $4 billion, or 12% of the amount raised in the past two quarters, went to these up-and-comers. This isn't impressive. It is just half of what these companies raised 10 years ago, let alone the massive floats seen during the dot-com era. Rather, the latest IPO surge is due to companies returning to the public markets after going private. This may not make investors happy -- shares in these companies tend to be priced higher and haven't performed as well as typical IPOs.

But it will please bankers. Nine of the world's 10 largest LBOs occurred in the past 18 months. Already there is talk that some of these companies are winging their way back to the public markets, including high-end retailer Neiman Marcus. At some point nearly all of the record LBOs from today's astonishing buyout binge will try to return to the investors who sold them off in the first place. That will be the ultimate test of demand.
So, today's headline is...
Dow Closes Above 13,000 on Earnings Data (http://biz.yahoo.com/ap/070425/wall_street.html?.v=59)
April 25, 2007 (Madlen Read and Tim Paradis - AP)

Dow Ends Above 13,000 As Earnings Reports Push Stock Market to Historic Heights

It looks like cause for celebration: The Dow Jones industrial average surged from 12,000 to 13,000 in just six months. But appearances can be deceiving, and there may be more reason to worry than rejoice about Wall Street's latest accomplishment.
...and the news is, from the perspective of a DOW investor based, say, in Spain who owns the DOW in euros:


http://www.itulip.com/images/dowineuros.gif


That said, if you are in Spain–or the UK or Ireland–you are not fretting about your sideways crawling US stock market investments. You have other worries.
Euro helps topple Spanish property (http://www.telegraph.co.uk/money/main.jhtml;jsessionid=5FFPBWFS5T2UPQFIQMGSFF4AVCBQ WIV0?xml=/money/2007/04/25/cnspain25.xml)
April 25, 2007 (Ambrose Evans-Pritchard - Telegraph)

Fears of a property crash swept the Spanish stock market yesterday, sending shares of construction companies into free-fall, and hitting banks exposed to the mortgage market. Spain's biggest property group, Sacyr, fell 8.15pc, while developers Colonial and Inmocaral plunged over 11pc.

The current account deficit has reached 9.5pc of GDP, a sign of extreme over-heating. Spain is now the second biggest net contributor to global demand after the US, far outstripping China, astonishing for a country of only 40 million still living in the shadows of the Franco regime a generation ago.

More than 800,000 homes were built last year, beating France, Germany, and Italy combined, leaving a glut of property hanging over the market. House prices have risen 270pc over the past decade to an average price of €276,000, but began to slow sharply late last year. Household debt has risen to 133pc of disposable income from 75pc in 1995.
And you thought the US had a trade deficit and property bubble. How about the UK?
Interest rates 'could reach 7.5pc' (http://www.telegraph.co.uk/money/main.jhtml;jsessionid=H1U2NZXA1BDDLQFIQMGSFF4AVCBQ WIV0?xml=/money/2007/04/24/cninflation24.xml)
April 25, 2007 (Ambrose Evans-Pritchard - Telegraph)

A group of Britain's leading monetarists have launched a harsh attack on the Bank of England's Monetary Policy Committee, warning that inflation risks surging out of control in repeat of earlier boom-bust cycles.
Our final note echoes the sentiments expressed by Jim Rogers in a recent iTulip interview (http://www.itulip.com/forums/showthread.php?t=1155):
Russian boom 'will end in pain' (http://www.euro2day.gr/articlesfna/33299050/)
April 24, 2007 (Euro Today)

Russia's financial boom will come to a painful end "in the near future", a leading London banker with long experience of the country warned on Monday.

After seven years of growth, Russia was reaching its capacity limits in an expansion fuelled by credit, much of it from foreign markets, said Hans-Joerg Rudloff, chairman of Barclays Capital, the investment banking arm of Barclays.
If a financial markets and economic correction happens all at once–US, European, China–and thus Asia–where does that leave the concept of "flight capital"? Out of which pan and into which fire?

Tet
04-26-07, 12:09 AM
The party is getting started without having any punch, for me I wonder what happens with this party when in just a few weeks the Fed changes their bias without even changing rates. I'd say we're headed to the moon and maybe even beyond. Do not for one minute even begin to doubt what happens to the market when GREED which we have not seen for the last six years enters it's head into the party. Always money to be made betting it short, but pretty soon, very, very soon even a blind monkey is going to be banking cash betting it long. Until of course the time comes when enough "Other People's Money" has entered the market before the market players decide to take it away from them. We are so far removed from there being enough "Other People's Money" in the market it's beyond even contemplating. I would buy a bargain here before it's too flippin late, still some bargains to be found for the selective shoppers, pretty soon they'll all be gone. Market players shouldn't give a shit about being a bull or a bear, a bear or a bull you just want some flippin direction, well what's it going to take before you realize what that direction clearly is? It's UP, get it yet? Watch and lose or plan and gain, or just get out of the flippin way. Who's playing some bargains and which one's are you thinking about. Intel to me looks very, very tempting.

toddpw
04-26-07, 04:36 AM
I think the deadline is the next Euro interest rate hike (June?). When that happens, the Fed must raise or face a dollar slump as more short-term cash defects to the Euro. In the meantime, the zero-fractional-reserve antigravity drive is keeping the Dow aloft. Until then, there could still be a collapse of something so big that even the Fed cannot airlift in enough money to save it -- but my money is on the downgrading of the Mortgage Backed Sausages. Once it is public just how much book value is going up in smoke, it will be hard to contain the panic.

jk
04-26-07, 11:35 AM
the bursting of spain's real estate bubble might give the ecb pause about further hikes.

bill
04-27-07, 12:27 PM
LBO Binge Could Wane If Huge Borrowing Need Exceeds Market's Supply

Around $200 billion of leveraged buyouts were announced in the first quarter of this year, of which more than half occurred in the U.S., according to Dealogic. For the past couple of years, LBO activity has been doubling annually. Given the amount of money that has been raised by private-equity firms, this could continue for a while. Barclays Capital estimates that buyout shops have about $160 billion to spend in the U.S. alone. That could translate into $750 billion of deals this year.



The PE Groups participating in a panel discussion at the Milken Institute conference have indicated they may be going public to raise cash for foreign deals. As the PE Groups indicated this would enhance their ability to expand and of course give opportunity to the general public future share holders.
This is a clear indication they want their private investors cash to move on (out of the dollar and US</ST1:p assets) and fill the existing done deals with public money.
<O:p</O:p
David Rubenstein of the Carlyle Group in a interview http://www.streetiq.com/buzz/050306.shtmlalso indicated infrastructure and and alternative energy would be of interest to them. Governor Schwarzenegger announced at the conference he would sue the EPA for moving to slowly on California's<ST1:p request to regulate greenhouse gas emissions. http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/04/25/BAGDFPF98P3.DTL
<O:p></O:p>
Conclusion:
Over the next couple of years the dollar should continue to devalue against other foreign currency and US asset prices reflect the same. The PE Groups make aggressive investments in foreign markets and establish another high degree of success. With such a high degree of success rate with their new found foreign partners the PE Groups should have no problem extracting capital from them to invest in the US in a couple of years. At such time the deals in the US</ST1:p will be priced right for foreign currency holders and laws passed for investment opportunities to go forward.

Louis0111
04-27-07, 04:11 PM
Every opinion on the dollar is negative. The only difference is whether it is going to just drop, or crash.
Can the crowd be right? Is everyone going to be right about the dollar? Forget contrary opinion, there isn't any. There is only unanimity. Huh? Doesn't this bother anybody?

Jim Nickerson
04-27-07, 04:35 PM
You are correct Louis. Yes, it bothers me, and that is why I have at least mental stops for my anti-bonar positions.

grapejelly
04-27-07, 04:45 PM
Every opinion on the dollar is negative. The only difference is whether it is going to just drop, or crash.
Can the crowd be right? Is everyone going to be right about the dollar? Forget contrary opinion, there isn't any. There is only unanimity. Huh? Doesn't this bother anybody?

well, the buyers of the dollar the central banks and the hedge funds as far as I can see. Also dollars are (for now) required to buy oil and other commodities.

There are also Americans who don't believe the dollar is headed towards worthlessness. They save their money in dollars if you can believe that :eek:

EJ
04-27-07, 06:29 PM
well, the buyers of the dollar the central banks and the hedge funds as far as I can see. Also dollars are (for now) required to buy oil and other commodities.

There are also Americans who don't believe the dollar is headed towards worthlessness. They save their money in dollars if you can believe that :eek:

Lunatics. I'd sooner stuff newspapers under my mattress than dollars.

Discussion: Too Many Dollar Bears here (http://itulip.com/forums/showthread.php?t=1271).

spunky
04-29-07, 02:42 AM
Every opinion on the dollar is negative. The only difference is whether it is going to just drop, or crash.
Can the crowd be right? Is everyone going to be right about the dollar? Forget contrary opinion, there isn't any. There is only unanimity. Huh? Doesn't this bother anybody?

Nope doesnt bother me. I vote for the long, slow fizzle downward. Just gotta be prepared.:cool:

Tet
04-29-07, 01:28 PM
Every opinion on the dollar is negative. The only difference is whether it is going to just drop, or crash.
Can the crowd be right? Is everyone going to be right about the dollar? Forget contrary opinion, there isn't any. There is only unanimity. Huh? Doesn't this bother anybody?
My San Diego daily fishwrap had a front page D0llar gloom article pointing out that the Euro is at a record high yesterday, even though it's not. Before the Euro was created the ten original members currencies were trading at a combined 1.42. My San Diego fishwrap made no mention of the d0llar drop from 2001 when Uncle Buck was trading at 120 on the index all the way until Uncle Buck was trading at 85. How they missed this 29% move is beyond me other than nobody wanted the masses to know. Now it's front page news, the move is over and the only thing left to do is scare the masses out of the d0llar before it heads higher. Somebodies got to get stuck holding the bag and it's certainly not going to be Wall Street. The crowd is never correct, how can it be in a zero sum game when the real players need a million cows to bet the wrong direction in order for the powers that be to make a buck. Looks like it's about time to unload my Euros that I bought at $1.07, never a bad move to take your profits and go play a different game. Shitty overpriced tech stocks looks like a pretty good bet, or at least they have been since August.