Upside Down Inside Out Economics

Here is a fascination post that I found on the Winter Watch blog. I happen to agree with Aaron that oil subsidies, instead of spurring demand in China, is instead dampening it. I am quoting the text in its entirety and will comment afterwards.

Aaron Krowne wrote:

Detail on my argument about removing subsidies:

The way fuel subsidies work in India and China and probably most other developing countries is that the government mandates a retail price cap. Obviously that alone would be a huge disaster, creating instant shortages, so the governments compensate the fuel sellers with subsidy payments.

Problem is that this system induces lags and inefficiencies: the fuel sellers are out the money to start with, then must go crawling back to the government, which doesn’t really like them anyway, so who knows if the subsidies are really adequate.

The net effect is that they still get shortages, only they are not as bad.

Now, when the price caps are raised and the subsidies lessened, what happens is that the fuel sellers are more motivated to do more business. So they more eagerly go out into the world market and buy crude and gasoline. This bids up the price.

For instance we saw a price spike last November when China raised price
caps.

While raising the caps does necessarily contribute to slowing demand, I
doubt it is much, because these are developing countries. Remember that
shortages are remedied only by higher prices, all other things equal.

Posted on 30-May-08 at 1:54 pm Permalink Quote

Yesterday someone posted photos of Chinese gas stations, and the lines of cars leading up to them. The lines were ridiculously long. People sit in their cars for HOURS. Classical economics teaches us that subsidies artificially boost demand. There are then shortages because the price isn't allowed to rise. Therefore there's no incentive to produce enough product. However, we know there's more than enough oil to go around, what with all those supertankers full of Iranian oil just sitting around.

I believe that Aaron is absolutely correct when he concludes that a lifting of subsidities (at least in China) will increase demand, contrary to what we've been taught to believe.

Treasuries

Treasuries dropped a bunch yesterday, as the 10-yr yield rose to a high of 4.10%. This move happened with the news that first quarter GDP growth was revised upwards from 0.6% to 0.9% and futures markets showed 100% chance of Fed keeping rates steady at their meeting next month.

I believe that the market is much too optimistic and that the Fed will have to keep cutting. Maybe not next month, but soon. Housing is still getting worse. Unfortunately, Treasuries have rebounded today. I lost a great opportunity yesterday. I may still go in; I haven't decided yet.

What I have put a lot of thought into is my vehicle: TBT. This is a Proshares Ultrashort Lehman's 30-yr. Treasury Bond index. The 30-year duration gives me the most interest rate exposure. I can get two times leverage on the bond prices. So, if I want to bet on bonds making a rally and rates falling, I would short TBT.

The 30-yr. Treasury is still lower than it has been since stocks hit their all-time highs last October. Looking at the charts gives me a lot more conviction in this play. Perhaps it's time to dive into some real leverage and buy some 30-yr's from Schwab.

Update: I looked over the Fed's TOMO today. A week ago, the actual fed funds rate was right around 2.00%. Over this past week, that has spiked. Today Treasuries were accepted at 2.15%. This makes me suspicious that the Fed either can't keep rates down, or that they are signaling a rate hike. I think I'll sit tight on this today.

The News is Out

The BBA won't change how it calculates LIBOR, according to Bloomberg. Why am I not surprised?

Note on earlier post: I said that lawsuits may come because LIBOR was too high. Actually, banks understated the rates. So, they would not be sued for benefiting. However, somebody somewhere is not receiving enough, because LIBOR was fraudulently lower than it should have been.

Muni Bust!

Municipal bonds are going bust at 8 times last year's rate, according to info from Bloomberg. This was predicted by Russ Winter. Most of these defaults are from Community Development District bonds. These were communities built in the middle of nowhere in the last few years. They're defaulting due to falling home prices and rising gasoline costs. Their tax bases are being decimated. The record for Muni defaults was 1991, when $5 billion went bust. We may shatter that next year.

A Good Laugh!

Barclay's cracks me up. They're such blatant liars that I should take another look at shorting them. What started me laughing was a rather innocuous sounding article from Bloomberg entitled: "Libor Fix May Prove Elusive as Banks Offer Solutions."

The article gets interesting in the second paragraph with this announcement:

The BBA plans to announce after 5 p.m. today the first changes to Libor in 10 years after the Basel-based Bank for International Settlements suggested in March that some lenders were misstating borrowing costs to avoid speculation that they were in financial straits.

First of all, the BIS did more than suggest. It offered indirect proof in the form of published CB borrowing rates higher than LIBOR rates. Borrowing from the CB's is safer than borrowing from another bank, so the banks were lying when they said that they were paying less to borrow from each other than from the Central Banks. QED. Proof, not suggestion.

Here's where the article gets better: the lying banks are asked for their opinions on how to keep them from lying in the future. (Is there a conflict of interest here?)

Morgan Stanley, the second-biggest U.S. securities firm by market value, says Libor should be based on trades rather than a survey. Credit Suisse, Switzerland's No. 2 bank, suggests increasing the number of U.S. participants. Zurich-based UBS, the world's largest wealth manager, advocates calculating the rate later in the day, while Barclays Capital says rates should be based on anonymous quotes.

Let's go right to Barclays: if the banks were allowed to submit their lending costs anonymously, what's to keep them from lying even more blatantly? This would be an invitation for rampant fraud and manipulation. I can't believe that they can say this with a straight face. I'm laughing my ass off right now!

UBS wants to calculate quotes later in the day. Exactly how this keeps banks honest, I don't know. Maybe they think it's bad luck to start lying in the morning. Morgan Stanley has the best solution: the banks should not be taken at their word. They should back up their words with actual trades. Sounds good to me.

Here's an indication as to how bad the lying was:

When the BBA threatened on April 16 to ban banks that misquoted rates, the cost of borrowing in dollars for three months jumped 18 basis points in the next two days, its biggest increase since before the start of the credit squeeze in August, BBA data show.

Let's hope they fix this. In the meantime, lets bring in some lawyers to sue the banks for manipulating LIBOR upwards and collecting loan interest payments higher than they should have been.

China's Currency

According to this article by Michael Pettis, China is suffering from "unprecedented hot money inflows." Michael calculates the growth in foreign currency reserves at $75 billion for April. If this is correct, that translates into a 50%+ annual growth rate for China's $1.75 Trillion reserve.

I believe that China will have to float the Yuan. Sooner or later, raw material costs will start to crimp profits faster than an appreciating currency would. Also, I believe that the Sichuan earthquake will have an effect similar to Hurricane Katrina in the US: prices will skyrocket! However, the government has made the earthquake the top priority, and will probably initiate even more price controls, so it will take some time for the pressure in the system to dissipate.

Europe is another piece in this puzzle. The Eurozone is just as big a customer for China as the US. While the Yuan has appreciated against the dollar, it's still falling against the Euro. I believe that China will allow the Yuan to appreciate more to keep up with the Euro, or at least split the difference between the Euro and the Dollar.

Bottom line: time to buy more CNY.

Is it Time to Bet against Oil?

Maybe, at least for a short term trade. I was looking at DCR again today. It was at $1.08, with a token NAV of $0.01. It stops trading 6/25/2008. The NAV moves $0.33 for every $1.00 in crude oil. Basically, it's equivalent to a June $120 oil put. Now for the important question: Is that put worth $1.08? Well, NYMEX puts expiring 6/17 are trading for $1.20, so $1.08 for an extra week might be a bargain.

It seems that the consumer is finally feeling the pinch of high gas prices: "March driving down for 1st time since 1979: government." Here's the important data: "data released on Friday showed highway miles driven in March fell 4.3 percent from a year earlier."

Interestingly enough, this gets us back to the oil question. Is the time ripe for a bearish speculative sally on crude oil?

I am very tempted for the following reasons: 1. It just feels like oil is ripe for a downturn. 2. We've been hearing about oil every day for the past two weeks. 3. Oil is being blamed for everything: gas prices, stocks falling, etc. 4. Indonesia is raising the price of gas 33% because the subsidy costs too much.

Well, this is something I will definitely think about on Tuesday and watch the rest of next week.

Outrage!

Some senior staff at Moody’s Investors Service were aware in early 2007 that constant proportion debt obligations, funds that used borrowed money to bet on credit-default swaps, should have been ranked as much as four levels lower, the Financial Times said, citing internal Moody’s documents. Moody’s altered some assumptions to avoid having to assign lower grades after correcting the error, the FT said. - Bloomberg.

I don't know how I missed the part in bold earlier. This goes beyond lawsuit. There is only one word for this: prison.

Not Enough Info

in this article from the FT: "UBS set to finance $15bn securities carrier". The broad strokes of the picture reveal that UBS has sold subprime securities with a nominal value of $22 billion to BlackRock. These securities were written down to $15 billion in March. However, in order to close the deal, UBS had to loan BlackRock $11.25 billion.

Wow! That makes a lot of sense. What they're really doing is buying it from themselves. Actually, their accountants get to move it off balance sheet. Although they now have a loan to BlackRock on the balance sheet, they'll conveniently forget to mention that the loan is backed up by subprime collateral. BlackRock is the clear winner here, as they get a free call option on the subprime junk at a low price, while UBS retains 75% of the risk of loss. In other words, they get paid to let UBS use their name to pretend that they're offloading risk.

But why did I title this post "Not Enough Info"? Because UBS wouldn't tell the FT what the terms of the loan were. Boy, I'd love to see that contract....

Supply and Demand

Here's a quote from today's WinterWatch blog written by Russ Winter. Russ, in turn, got his quote from Michael Masters' testimony on commodity speculation before the U.S. Senate.

In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion to 2.8 billion barrels, and increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increases by 848 billion barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

So, there goes the lie that commodity prices are a result of demand. I believe that this bubble will continue to get bigger and bigger as long as the US dollar is weak and real interest rates are negative. This is an extremely vicious cycle, because negative real interest rates are an almost worldwide phenomena. Real rates are negative in the US, Russia, China, India, Japan, and most of the developing world. I believe that the rapid flight into commodities is a result of CB money printing that has been out of control for at least the last five years.

However, bubbles make me uneasy, because they always implode at some point. My first thought is that the bubble implodes when the dollar strengthens. My second thought is that this bubble is getting so big that it will actually contribute to the dollar's plunge, as the crack-up boom further affects the US economy, contributes to a psychology of dollar worthlessness, etc., etc.

So, how do I play this? I believe that the most basic goods have the most potential, as price inflation in other basic resources will raise the costs of production of all goods. The only way to win is to invest in goods whose price rises faster than the price of production. This leads me to companies like RIO, POT, the commodity indexes themselves, coal companies, copper, etc. If congress acts to crush speculators, the short-term panic they cause will be a golden opportunity to find a few bargains in this trend.

In related news, Mish shows how PPI shows Enormous Squeeze On Profits. A picture being worth a thousand words, here's a chart illustrating this:

Here's the data in numerical form. For 2007, raw materials rose 13.1% while finished goods only rose 4.2%. So far in 2008, raw materials prices have risen 18%, vastly outrunning the 2.7% pace of finished goods. Mish sees a huge profit crunch coming.

Also, as a general rule of thumb, any ETF should contribute to its own success.

Shaky Ratings

Somebody leaked Moody's secret to the Financial Times: Moody’s shares tumble on rating error. This whole story is just chock full of juicy goodness:

Internal Moody’s documents seen by the FT show that some senior staff within the credit agency knew early in 2007 that products rated the previous year had received top-notch triple A ratings and that, after a computer coding error was corrected, their ratings should have been up to four notches lower.

This has "lawsuit" written all over it. I'm sure the SEC will also have lots of fun.

In a statement to the FT, Moody’s said: “Moody’s regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody’s has adjusted its analytical models on the infrequent occasions
that errors have been detected.

“However, it would be inconsistent with Moody’s analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter.”

Who's going to pay for ratings after this?

Suddenly the market is worried about ratings again. They should be: the partially flooded sections of the U.S. dollar have been filling up with losses over the last couple of months. Most market participants have been ecstatic that the losses have not spread, but now they are starting to worry that the losses will spill over again. The banks still have huge losses in their portfolios related to fictitious ratings.

They will. However, the best way for Moody's to save face is actually to stubbornly stick to their false ratings. However, the lies are becoming more and more transparent, and eventually, Moody's will be forced to slash ratings by regulators.

Thoughts for Today

I've got a bunch of random this to blog on today.

1.

Here's a headline from Bloomberg today: "Citigroup May Sell German Retail
Unit to Raise Cash".My thought: here we see Citi selling a good business in order to save their bad ones.

2.

Here's some great info on IPSU today from Mark Krieger at Seekingalpha.com. He points out that IPSU has more than enough insurance to cover rebuilding their Port Wentworth refinery, as well as losses due to business interruption losses. IPSU reported a one-time loss of $12 million due to losses above insurance payments. However, it is possible that some or all of that loss may be offset by future insurance payments. Here's the best part of the article:

The question arises, if they sustained $28 million worth of damages, why are they potentially receiving between $180-230 million? It’s simply due to the fact that the most of the machinery/facilities being replaced had already been nearly fully depreciated. The insurance coverage provides for replacement value. The business interruption portion of the policy could provide additional proceeds ranging from $120 to $170 million.

This article prompted me to take another look, and I was reminded of the fact that they have $8.80/share in cash. It's too cheap. Also, with the shares hitting a 52-week low, I expect some short covering. The short ratio is 21%.

3.

"Saudi Arabia Declines Bush Request to Supply More Oil"- Bloomberg. Not surprisingly, oil jumped over $127/barrel. I see this as comfirmation of Hussman's brilliant insight that oil producers are keeping oil in the ground as part of monetary policy to fight inflation.

4.

I've been thinking about increasing my natural gas exposure recently, and my slightly more focused idea is this: Look at smaller Canadian natural gas royalty trusts, for two reasons. First, most pay higher dividends than PWE, and second, I believe that they are takeover targets as PWE takes advantage of low prices in the industry to consolidate the industry.

On the Intelligence of Central Bankers

First, the inspiration for this post, from the Financial Times:

ECB concern over liquidity scheme
By Paul J Davies and
Norma Cohen in London and Anousha Sakoui in Vienna
Published: May 15 2008
23:37 Last updated: May 15 2008 23:41

The European Central Bank on Thursday voiced its “high concern” at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.

Yves Mersch, a governing council member, said the ECB was now “looking very hard at whether there is not a specific deterioration of collateral” which the central bank is accepting in return for funds.
He was speaking amid signs of some banks creating low-rated assets specifically so they can be traded for treasuries at the European Central Bank.

Hmmm... let's see here. The point of swapping illiquid securities (worthless paper) for liquid ones (good paper) is to bail out insolvent banks by offloading their impaired collateral to the ECB. Sounds like it's working perfectly. I always find it ironic when people set up some program, and then complain that it's working. Be careful what you wish for.

The Bank of England recently created a facility for UK banks to access funding for mortgages and the Financial Times has learnt that almost 90bn ($175bn) worth of bonds are being created to be placed there – almost twice the £50bn in­itially expected when the scheme was launched only three weeks ago.

How can this be surprising? The first rule of government funding is that someone will find a way to sell the government what they want. They will manufacture it. If the government pays for mental health services, for example, people will manufacture a need for mental health services. That is why government funded programs need strict controls and must be run in a common sense manner.

But the ECB, which is proud of having always had in place the same system to support bank liquidity, accepts a far broader range of collateral than other central banks. It now appears to have some worries about what is being used by banks.
On Thursday, however, speaking at the International Capital Market
Association in Vienna, Mr Mersch said the type of collateral now being
accepted was: “A matter of high concern.”

It should be "A matter of high concern". Crappy paper is dirt cheap. The Central Banks are paying top dollar for it. I think they've finally realized that they are paying people to manufacture bad loans. I wonder if they are making any new ones or just reshuffling the old ones?

His comments come as banks, whose main centres of operations are not within the eurozone, are structuring new bonds based on assets other than mortgages in order to gain access to ECB funding.

The ECB’s main mortgage-bond exposures so far are believed to be from
Spanish, Dutch and some UK deals, but the central bank publishes few details on the collateral it holds.

However, this week Glitnir, the Icelandic bank, is in the process of clearing the use of a €890m ($1.37bn) collateralised loan obligation (CLO) for
funding at the ECB. Similarly, Lehman Brothers recently structured a €1.1bn CLO, which it is expected to use for ECB funding.

Meanwhile, Macquarie Leasing, a unit of the Australian bank, has done a
securitisation of Australian motor loans, which will have a euro-denominated slice so that the investors who buy the deal can use it at the ECB.

Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover.

“There is moral hazard . . . and we are not in the business of taking over
the market,” Mr Mersch said. “That means there must be an exit strategy.”

The importance of central bank involvement in supporting securitisation
markets has been shown again in the UK, where the Bank of England’s Special Liquidity Scheme has already attracted almost twice the level of demand originally anticipated.
According to debt market sources, the banks planning to use the scheme are the UK’s eight largest lenders.

Trade

I bought GG (Goldcorp) today. Why? Because it seems to me that the trend of some FCB's such as Australia and New Zealand raising interest rates is over. Both of those economies are now suffering from housing price drops and slowing economies. Europe and Great Britain are also suffering from weak consumer spending and popping housing bubbles.

I bought GG for two reasons: 1. Gold seems the best way to play falling world interest rates in a time of high inflation. 2. GG has the most growth potential of any major gold company. Gold ounces produced are expected to be up 30% this year. 3. Bonus: Goldcorp has one of the lowest cost for ounces produced. They may be the most leveraged against the price of gold of the major miners.

Turmoil

The global markets are in turmoil. We have huge price moves, up and down, at the same time.

Taking all imports into account, import prices rose 15.4 pct over the last 12 months, which is the largest annual gain since the index was first published in 1982. - Forbes.com

This kind of price increases make investing very difficult. Will this inflation boost or buffet a particular stock? If a company is in the wrong position in the supply chain, they will get sideswiped by inflation, instead of profiting from it.

My idea to put this to work is natural gas. Why? I don't have any really firm feeling, but the first reason is that it's a very basic product. Second is the recent rise in food prices, which have caused a spike in the price of fertilizer, the production of which uses a large amount of natural gas.

I've been looking for an opportunity to get out of IPSU, ever since I learned that they don't grow their own sugar. They import and refine it. Now I will look for a natural gas investment.

Hedging Strategies

The latest hedge fund strategy consists of buying high yielding convertible preferred shares of financial companies and shorting common shares as a hedge. This is a great strategy. The hedge is almost perfect. The upside is great with the convertible option. And the yield is probably much higher than margin rates for this strategy. I only have one question:

Is Citigroup lending hedge funds money to short their own stock?

This strategy is so tempting that I was considering it myself, for about five minutes. Then I thought, "Why hedge when I can go short?" This gives me a lot more conviction in holding onto my financial shorts. These short positions should benefit from additional short selling from hedge funds employing this strategy.

Too Funny

The housing bubble started the credit crunch, and the housing market will continue it. The reason we have a calm in the storm right now is simple. Remember the Titannic? At this point, everything seems like its getting better, because the losses are confined to the same old area. However, just as in the Titannic, when they get big enough, they spill over into other areas. How do I know that this will happen? Because the losses are flooding in faster than ever as housing prices sink like a lead balloon.

This quote from Mish's Global Economics Report is just classic.

Calvin Wimberly, a real estate agent who primarily sells bank-owned properties and has two listings under $10,000, said home prices in some areas have tumbled 200 or 300 percent in the past year. He said many suffered from mortgage fraud that artificially inflated values.

My Comment: Prices fell 300%? This guy needs a math lesson.

"Wimberly said he'd recently sold a home in West End that tells the tale of what's happened in some neighborhoods. The home sold in March 2004 for $305,000 and then in August 2004 for $700,000. It tumbled to $122,900 in a sale last year. It sold recently for $51,000.

My Comment: I would like to see a picture of that house. This smacks of fraud. In any case, the value of that home is now $51,000.

Mish doesn't state the obvious, but a 93% loss of value means a frightening loss for banks.

And S&P 500 earnings are supposed to springboard up 85% in the fourth quarter...

Economic Picture

There are several things I want to cover today. My thoughts are all over the place, so this will probably be kind of random. However, there are some very important market developments out today.

The first is oil. The mainstream media keeps reporting that "supply pressures" are causing price pressures. This is patently false. Iran, at this moment has 10 VLCC's full of crude that it has yet to sell floating in the ocean. That's about 20 million barrels, $2.5 billion, or a lot of oil. One of the reasons for skyrocketing oil is the falling dollar. The other major, but unseen, reason is hoarding. Evidence of hoarding: Iran using VLCC's to store oil (VLCC's aren't cheap. Current spot price is $160K/day), Bush pumping up the Strategic Petroleum Reserve, oil producers leaving it in the ground as part of their monetary policy (see Hussman's market report for this one), etc. Seeing that this price run-up is part of a lie that is not widely understood inclines me to buy into this trend. However, there are two things that make me wary: the strength of oil prices over the past month, and the fact that producers, such as Iran, have now joined in the hoarding. This shows arrogance and overconfidence in the trend. However, there is an explanation, although it is complicated. The story is that Iran produces high-sulfur sour crude, which is processed mainly by Asian refineries, which are currently undergoing their season maintainance slowdowns. The best investment for this play, at least until a pullback in oil, is probably Frontline Tankers. I wonder if any hedge funds have the balls to charter a VLCC for a couple of months ($9.6 million) and fill it with $250 million in oil......

Next, Citigroup announced that they are selling everything. I wonder what they'll get....

Finally, the Democrats in Congress are trying to push through a $300 billion housing bailout. Bush has promised to veto this. All this will do if passed is to prop up the housing market for 6 months while the losses will show up in higher Treasury interest rates down the road.

Been Waiting for this for Months

U.S. March Trade Deficit Narrowed More Than Forecast - Bloomberg

Seems that imports dropped the most in six years. Somehow this has again "surprised" economists. Wow. And I thought that people imported more stuff when their money was devalued by 20%+ and the economy tanked. Well, I guess we won't hear any politicians whining and moaning about the trade deficit this election cycle.

Demand for goods from China suffered the biggest slump last month, helping to narrow the trade gap with that nation to $16.1 billion, the smallest in two years. At the same time, exports to China were the second-highest ever. - Bloomberg (see link above)

I'm still expecting this trend to cause more carnage in the Shanghai stock market. Unfortunately, my speculation in FXP (ultrashort Shanghai 25) has so far been a 30% loss. This is mostly due to the fact that Hong Kong shares have rallied even as the Shanghai traded issues have remained weak. I knew this would be speculative and volatile, and I will continue to stick it out. I expect Chinese inflation will continue to accelerate, putting upward pressure on the Yuan. This loss of sales together with higher exchange rate costs will put huge pressure on earnings growth in the Chinese export dominated economy.

In other news, AIG announced almost $8 billion in losses. Funny, they still continue to say that financial company quarterly reports are "earnings" announcements, when they should really be called "losses" announcements.

I've stuck with my shorts through two months of bear market rally now, and I expect it to pay off soon.

The Idiocy Continues

Once again, mainstream media economists make idiots out of themselves, as reported here:

Consumer borrowing unexpectedly surges in MarchWednesday May 7, 3:18 pm ET

By Martin Crutsinger, AP Economics Writer

Consumers increase their borrowing in March at the fastest pace in 4 months WASHINGTON (AP) — Consumer borrowing rose in March at the fastest pace in four months, more than double the increase of the previous month.The Federal Reserve reported Wednesday that consumers increased their borrowing at an annual rate of 7.2 percent, compared with a 3.1 percent rate of increase in February.

Why don’t we try a new headline: “Stupidity of Economists Showcased by Complete Failure to Make Accurate Predictions.”

Also, great link here for Fitch's report on bank HELOC loans from Winter Watch.
Countrywide is the worst, by far. In second place for the most risk is WaMu, followed closely by Well Fargo in third. Wells is the most promising short, as their stock has been hurt much less than WaMu or Countrywide.

Blurb

Just a quick catch-up post. This last week has taken me from the fog to seeing pretty clearly again. I've gone from wondering if the bailouts were working to being convinced that more bad news is coming. 1. Citigroup panic/euphoria model has reached "euphoria" in the past month. 2. Everyone's bullish. 3. This bounce came on a dollar bounce. 4. The Fed's slashing the dollar again, taking AAA ABCP for Treasuries in its swap-o-rama. The dollar is about to resume its fall because of this. 5. B of A just yesterday announced that it won't assume Countrywide's debt: $38 B in bonds, and $47 B in Fed Home Loan Bank advances. That's $85 B in losses coming