– European stocks are getting trashed. According to the Financial Times, “Dizzying falls across the [financial] sector came across the continent and led to big overall losses on leading indices.”

– There are calls for a European-wide fund to recapitalize banks. So far, European governments are acting individually to stem the crisis.

– Iceland, meanwhile, has suspended trading in banks before the bell this morning.

– Asia-Pacific markets have tumbled. The Nikkei 225 dropped to the lowest in four and a half years. Meanwhile, the MSCI Asia-Pacific ex-Japan stocks index was on track for the biggest daily decline since January 2008, down 5.3 per cent.”

– US stock futures have also dived. “S&P 500 futures fell 29.7 points to 1,078.60 and Nasdaq 100 futures fell 34.5 points to 1,443.00. Dow industrial futures fell 264 points,” according to MarketWatch.

– “We now believe national recessions in the US and the UK will be deeper and longer than previously forecast,” said Larry Hatheway, an economist at UBS in London. “For the first time, we also anticipate recession in the euro zone.”

– Oil is down below $90 a barrel this morning. It’s the lowest price per barrel in eight months.

– Gold futures are up more than 3%, however. “Gold for December delivery rallied $27.10 to $860.30 an ounce in electronic trading on Globex,” according to MarketWatch.

– According to gold bug Ed Bugos, the yellow metal should skyrocket on recent massive expansion of bank credit by the Fed. This from Agora Financial’s 5 Min. Forecast:

The Federal Reserve has just expanded its balance sheet more in one month than it has in almost all of its first 86 years of existence. I am not kidding. Its assets, which represent the cumulative reserves the Fed has ‘created,’ totaled less than $700 billion at the turn of the millennium, and continued to expand by about $50 billion per year after that, up until this month.

In September alone, reserve bank credit inflated by almost $600 billion. It is a record, and has already affected the monetary base.

Up until September, the Fed has been careful to sterilize its liquidity provisions by selling Treasuries or reverse repos or simply by lending its securities off balance sheet. So while it has extended credit since August 2007, it has not monetized much of the liquidity. But the NET factor of increase to reserve bank credit for the month of September was about $170 billion. That is money created out of thin air… unsterilized.

This number is unprecedented. It is difficult to predict gold’s short-term response to this shock, but the market cannot ignore the fundamental effect of this crackup for long. With interventions like this, we should get a few more $100-up days soon enough.”

• Carlos Slim, the Mexican billionaire Forbes ranks as the second-richest man in the world, yesterday (Thursday) announced he purchased a 6.4% stake in New York Times Co. (NYT). Slim called the publisher of The New York Times an “attractive value” due to the stock’s 20% loss so far this year, Bloomberg News reported.

• Campbell Soup Co. (CPB) yesterday (Thursday) announced quarterly profit for its fiscal fourth quarter ended Aug. 3 increased 46% from the year ago period as the company increased prices to offset higher commodity costs. Campbell’s reported net earnings of $89 million, or $0.24 per share, compared to $61 million, or $0.16 per share for the prior year in a company statement.

• King Pharmaceuticals Inc. (KG) upped its takeover offer for Alpharma Inc. (ALO) yesterday (Thursday) to almost $1.6 billion. King raised its offer to $37 per share from its initial bid of $33 per share and said it plans to take the new offer directly to shareholders, Reuters reported.

• According to a report published yesterday (Thursday) by the Commodity Futures Trading Commission, commodity index traders only accounted for 13% of crude oil futures trading on the New York Mercantile Exchange in the first half of 2008, Bloomberg News reported. “At first glance the numbers seem inconsistent with the allegations that swaps traders and index traders are driving up the price of oil,” said Robert Webb, a finance professor at the University of Virginia.

• Bank of America Corp. (BAC) is in talks to buy Lehman Brothers Holdings Inc. (LEH), the Wall Street Journal reported, citing an unnamed source. Sources say Goldman Sachs Group Inc. (GS), also thought to be interested, will not takeover the beleaguered firm.

• Bristol-Myers Squibb Co. (BMY) yesterday (Thursday) reiterated its $60 per share offer for ImClone Systems Inc. (IMCL), even though the biotechnology company said earlier this week that a secret suitor is offering $10 a share more.

• Shares of Sunrise Senior Living Inc. (SRZ) yesterday (Thursday) reported a $31.8 million second-quarter loss. The company’s shares fell $2.56, or 13.5%, to close at $16.36 after falling as low as $16.22 earlier in the day. On Wednesday, the stock fell $1.82, or 8.8%.

• Deutsche Bank AG (DB) will today (Friday) announce the purchase of a controlling stake in Postbank, a profitable German institution worth about $14.6 billion, the International Herald Tribune reported. This opens up the door for a potential bidding war with Banco Santander SA (ADR: STD), which said Thursday that it wanted to negotiate the purchase of all of Postbank.

Source: Global Investing Roundups Friday, September 12th, 2008

“The Rude Awakening’s editorial director Eric Fry thinks Hank was way off the mark. Eric says financial stocks will by a buy one day, but he doesn’t believe we are looking at a bottom now.

In the second part of The End of Peak Greed, Eric says investors are better off putting their money into companies that are making the world go around than betting on financials, which are sending it not a tailspin.

But recent dismal results from the financial sector show us still that the bottom may not be in. Almost no one can buy a house these days. But almost everyone is eager to buy the shares of the companies that can’t sell the houses that nobody can buy. And I think that’s about all you need to know about the financial sector and the housing sector to know that we’re probably not at the bottom yet.

These financial stocks will be a buy one day, there’s no question about it. And maybe they are right now. I am not arrogant enough to say that I know. I mean, maybe this is the greatest buying opportunity of all time in the finance sector. It could be. And I mean that genuinely. But I don’t believe it is.

Any investor who is tempted to bottom-fish in the financial sector, should take a look at this chart:

It compares the Nikkei Index to the Topix Japanese Banking Index. You can see that the Topix Banking Index is down 80% from its high in 1989. That’s a very, very long time. Not only that, the index rallied around 40% to 60% seven times during that period. Seven different times investors believed that this index was recovering. And seven times, it did not.

One of the reasons is that during a period of de-leveraging, such as Japan suffered, equity disappears. Equity struggles. A lot of good things can happen to businesses; a lot of good things can happen to individuals; credit can flow again. It doesn’t mean equity is going to recover. Equity suffers. It goes away.

These things will be a buy someday. It’s just that I prefer to miss the first 20% of the upside. And I’d rather buy into something where I can see at least a sign of a rebound. So why not invest in the companies that are making the world go around, and are performing well, instead of the companies that are making the world go into a tailspin?t

Addison Wiggan and Ian Mathias in Agora’s 5 Min. Forecast are equally skeptical about U.S. banks’ financial health. This from yesterday’s edition:

Here’s another worrisome new trend in the financial sector: Two sovereign wealth funds just took a pass at purchasing a gigantic stake in Lehman Brothers. Rumors abound this morning that Lehman has been offering to sell 50% of itself to state-owned banks in China and South Korea. Both foreign investors balked at the last minute.

P.S. Read on here for the first part of Eric’s post on the U.S. financial sector: Avoid Bottom Fishing for Financials: It’s Way Too Risky

Source: The End of Peak Greed, Part II

That’s not such a bad thing. Caution sounds boring, but it’s not nearly as boring as it sounds. In fact, I think being cautious is kind of an uncelebrated virtue. It’s a little bit like being free of venereal disease. You can’t really brag about it at a cocktail party, but it’s still a pretty darn, good thing at the end of the day…

To illustrate the virtues of caution, allow me to cite the example of Warren Buffett. There’s a story that some of you might know about him. He operated a partnership from the late 1950s until 1969. And that partnership during those 13 years delivered almost a 30% annualized return and made him his first $25 million. What some of you might not know is that he just shut it down one day. He said that he couldn’t find any opportunities to invest in that appealed to him. So he just shut it down and he sent the money back.

He said at the time, “I didn’t know how to be a hero anymore…I had been a Niagara Falls of new ideas. But I became an eyedropper.” Not knowing what to do, he did nothing…and that was brilliant.

This is a slide I showed last year. In fact, I ended my speech last year with this slide:

“Risk comes from not knowing what you’re doing.” – Warren Buffett

I think this quote is more germane this year. In an era of caution, you want to make sure you know what you’re doing. As it turns out, it was very important to HAVE known what you were doing twelve months ago.

The Era of Peak Greed was not so much an era of greed; it was an Era of Peak Stupidity. Lots of people did lots of stupid things. Not just that, they leveraged up their stupid things. So American finance companies embarked on a frenzied borrowing binge and they levered up big time in order to fulfill their corporate mandate, which was to maximize returns to management.

Here’s how bad it got:

A few of us were at a Grant’s Conference in New York in April and David Einhorn spoke. He’s been in the press a lot lately for being negative on Lehman Brothers. And he said: “A few weeks ago, the financial world was presented with the imminent failure of Carlyle Capital Corporation. It had leveraged itself more than thirty to one. The press scoffed about what kind of insanity this was. Who in their right minds would take on such leverage?”

Well, as it turns out, no one in their RIGHT minds would take on such leverage, but everyone on Wall Street took on that kind of leverage. Every investment bank was leveraged more highly than Carlyle, against assets that were inferior to Carlyle’s. So somehow, these highly leveraged balance sheets, offset by various versions of toxic waste, passed for normalcy, passed for prudent investing, passed for prudent stewardship. Everyone was doing it.

But it turns out that operating an insanely leveraged balance sheet is not such a good idea. It turns out that leverage is not a great thing at all in extreme applications…And all of this leveraged stupidity of the last several years was nurtured by the ratings agencies. By Moody’s primarily, and by S&P.

The analysts at Moody’s, despite all their advanced degrees, and their whiz-bang quant models, weren’t any more capable of determining the credit-worthiness of a CDO than a monkey with an abacus. They were unable to quantify what was essentially non-quantifiable. The stuff was just too complicated. And that’s why I never bought a CDO…knowingly…and that’s why I was afraid to buy a banking stock. I just wasn’t smart enough to buy a banking stock. I always kept Buffett’s phrase in my mind that “risk comes from not knowing what you’re doing.”

So to illustrate that point, I also presented this slide last year. It’s from Chuck Prince, the former CEO of Citigroup:

This quote is one of the most remarkable mementoes of the era. Prince uttered these words just a few weeks before last year’s Vancouver conference and he was booted out within three months. I displayed this quote last year and I said, “This is all you really need to know about Citigroup. This is all you need to know about finance in America. This quote!”

And that’s why I urged people one year ago to avoid financials and that’s why I urge people now to avoid the temptation to bottom-fish in this sector…unless you REALLY know what you’re doing. There’s still too much complexity; too many unknowns; and too much downside, potentially, remaining.

I would refer to this recent quote from Charlie Munger:

“Include me out!…A lot of rot has crept into the financial system. We’ve got a lot of scandals coming.”

This is why we are now entering the Era of Caution – not because of what happened during the last twelve months, but because we do not know what will happen during the NEXT twelve months.

What we KNOW is that we are in a period of de-leveraging. DE-leveraging. We are going to reverse what has been happening for the last several years. And this de-leveraging will occur at every level. It will occur in the derivatives markets; it will occur on personal balance sheets; and it will occur on financial balance sheets.

America lives on credit and without it, we will have a hard time. The hard time will be even harder than normal because we have already piled up liabilities that we now have to deal with. The banks are struggling to deal with them. So are a lot of individuals. Here’s another wonderful quote from Charlie Munger:

“One thing about accounting, the liabilities are always 100% good.”

So we’ve got to pay off the liabilities, but without any new credit. That means banks will sell whatever they can, including parts of themselves. Individuals will sell whatever they can, including the roofs over their heads. And both of these activities will depress asset values. We Americans are prepared for no such thing.

We’re dressed in string bikinis, financially speaking. Now I admit, I love string bikinis, but I don’t wear one very often and I certainly wouldn’t wear one on a polar ice-fishing expedition.

This image here is not simply gratuitous, it is also [a metaphor for] the approximate economic model of modern America: Look good until you perish.

So what do we do?

There are a lot of ways to describe the same general idea. I’ll mention a few of them:

Sell risk, buy caution. Sell complexity, buy simplicity. Sell the beneficiaries of discretionary spending, buy the beneficiaries of necessary spending.

Source: The End of Peak Greed – Preparing for the Era of Caution

S&P’s said the “outlooks on the large financial institutions sector in the U.S. are now predominantly negative” and that “the pace and extent of earnings improvement could be considerably more muted than we previously anticipated.”

“Lehman Brothers, the most vulnerable of the three houses downgraded, got it the worst,” say Ian Mattias and Addison Wiggan in the 5 Min Forecast. “Traders pushed LEH down 8% during yesterday’s session.”

This morning, the suits at Lehman are putting together a plan to raise more emergency capital. Having already raised $6 billion over the past year, Lehman is far and away the most likely candidate to play the role of “next Bear Stearns” during this encore production of the credit crisis.

“What does Wall Street expect?” asks Dan Denning in The Daily Reckoning Australia. “We’re in a bear market in credit.”

The grim news Stateside is that the board of directors of Wachovia, the fourth largest bank in America, fired its CEO Ken Thompson. Wachovia lost US$708 million in the first quarter of 2008. It didn’t help Thompson that he engineered the acquisition of mortgage lender Golden West Financial in 2006 – right at the peak of the mortgage lending bubble.

Thompson joins a long list of CEOs falling on their sword for thinking a credit boom would never end. It has. It’s still ending, in fact. Ratings agency Standard and Poor’s lowered the credit ratings of three big Wall Street firms earlier today. JP Morgan, Lehman Brothers, and Merrill Lynch were all downgraded because the S&P reckons the firms will have to take further asset write downs this year.

What did you expect? It’s a bear market in credit. The story comes straight from the department of news so obvious a rock would know it. What does it mean?

Well, a bear market in credit is bad for firms with heavily leveraged balance sheets. That includes most financial and banking stocks. Why any investor would go bottom fishing in the financials when we still have a bear market in credit is beyond our reckoning capabilities.

William Patalon III in Money Morning reckons investors should take the fresh warnings about the credit crisis from Oppenheimer & Co’s analyst Meredith Whitney to heart.

Whitney now says the worst may be yet to come. The banking-sector financial crisis will last at least until the end of next year, and may actually stretch well past that. And that could lead to a major U.S. downturn.

“We believe the credit crisis is far from over,” Whitney wrote in a research report last week. “In fact, we believe what lies ahead will be worse than what is behind us.”

The so-called “first wave” of the credit crisis hit banks’ trading books. But the second lightning strike will hit lenders where it hurts the most – right in their lending businesses. If she’s right, the impact on the economy will be devastating.

Here’s why. The banking system’s “originate-to-distribute” model changed the rules of the game. No longer did banks make loans that were based on very careful risk-of-loss analyses. Under the new system, banks make loans – such as subprime mortgages – which are then “securitized,” or packaged together, into debt instruments that the trading operations of banks, investment banks or institutional investors might then purchase, believing it was a way of achieving higher returns.

Initially, this led to higher profits. Which induced banks to boost lending so that they could boost securitizations. But here’s the problem. First, since the banks were no longer going to keep the loans, they relaxed lending standards. In fact, they actually had to since, second, they wanted to boost those volumes.

When the underlying loans unraveled as the subprime-mortgage crisis spiraled deeper and deeper out of control, companies such as The Bear Stearns Cos. Inc. (BSC) took losses that just kept growing. Bear Stearns is now being taken over by JPMorgan Chase & Co. (JPM), with the help of the U.S. Federal Reserve.

The sins weren’t limited to banks, however. Consumers stoked this credit inferno – and, in doing so, unknowingly created their own funeral pyre.

Consumers grew accustomed to the “rolling loan gathers no loss” mindset, Whitney says. Housing values were soaring, and as long as those values continued to rise, homeowners could continue to roll over their loans into new borrowings – often packing in a lot of ancillary consumer debt from credit cards or car payments long the way.

When the housing market collapsed, however, homes were no longer a real-estate-version of an automated teller machine (ATM) that consumers could turn to each time they needed to eradicate debt from car loans, home loans or even credit-card debt.

When banks stopped lending, consumers had nowhere to turn to roll over their loans. Making matters worse were two other factors:

• First, many of their loans had so-called “re-set” provisions that permitted the loans to reset at much higher interest rates – a fact that caused the overall monthly mortgage payments to increase, sometimes by as much as 40% or more. And since their incomes weren’t rising in kind, many consumers could no longer make these payments, and defaulted on their mortgages.
• Second, the downturn in the housing market sent home prices into a severe tailspin, in some cases leaving homeowners with mortgage balances that were much larger than the new (lower) market value of their home. And if the mortgage loan also reset, that homeowner was hit with a double-whammy blow – a boosted mortgage payment on a house whose value had plunged.

Those resets have caused foreclosures to soar, the news is going to get lots worse, real estate data firm RealtyTrac Inc. said last month. Indeed, U.S. home foreclosures likely won’t peak until the fourth quarter, Money Morning reported last month.

“What we’re really looking at is ongoing fallout from people overextending themselves to buy homes they couldn’t affordand using highly toxic loan products to get into the houses in the first place,” Rick Sharga, RealtyTrac’s vice president of marketing, told The Associated Press. “We’re going to see quite possibly a record amount of foreclosure activity in the third or fourth quarter,” reflecting the spike in monthly payments because of the re-sets on adjustable-rate subprime mortgages that will take place in May and June.

And that brings us back to Whitney.

The banking sector’s lending pullback will fuel these losses and foreclosures, for many of the reasons we’ve detailed here. Already, banks will likely have to set aside an additional $170 billion in reserves through the end of 2008 – just to keep up with mounting loan losses.

To do that, banks will have to further rein in lending – to the tune of about $2 trillion worth of available credit lines, BusinessWeek.com reported. For some context, the annual gross domestic product (GDP) of the entire U.S. economy is approaching $14 trillion. Two-thirds of that is driven by consumer spending.

That’s why the lending pullback is going to have a massive contractionary effect on the U.S. economy.

“New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most-draconian of investors,” Whitney wrote.