Panics Do Not Destroy Capital...

“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”
- Mr John Mills, from Credit Cycles and the Origin of Commercial Panics

The first day of trading once the short-sell ban was lifted gave Wall Street a taste of reality. I am convinced that the naked-short is not the cause of the pressure on this market. But, the FEAR of naked-shorting has definitely put the bear rally crowd on notice. Sure there was additional news like a $3.00 up-tick on a decrease in oil inventories, John Deere (DE) missed earnings, and a second rally day for metals...particularly gold. (I was able to turn my hedge of AU 1/25s short into a 44% profit... since Friday.)

I am a Midwest type of guy... and I have always thought of California as the most concentrated spot for nut jobs per capita in the United States. So it came to no shock when I learned that the Mortgage Crisis there has spiraled OUT OF CONTROL! According to Calculated Risk, California was foreclosing houses as a pace of 1,000 per day back in April. That was only 5 months ago... and let's face it... things couldn't get worse right? Wrong. Today, California topped the 1,300 per day foreclosure mark! A 30% increase in an already UNBELIEVABLE number! (1)

Let's face it, Wall Street took everything in stride for a while. Another report came out Monday from Zillow suggesting that one-third of the houses purchased in the last five years are worth less than the purchase price. (2) I wonder how many of these folks maxed themselves out with a home equity loan so they could buy a jacuzzi, pool table, or had simply taken that well-deserved vacation. It is a bit late for banks to cut home equity lines now, the rabbit is already out of the bag. "A segment of clients was recently notified of a change in the status of their home-equity line. This is due to a change in property value and/or their credit profile."(3)

This leads us back to the last place for credit... you guessed it credit cards. According to Accounts Receivable Management, credit card debt is growing at a 7.1% rate in the United States. (4) Couple that figure with $3.00 + gasoline, higher food prices, rising unemployment, and a tapped out consumer, once again we have the perfect storm scenario. By the way, most readers do not realize that banks package this debt and even sell it as asset backed securities (ABS). This is just another sub-prime mess waiting to happen all over again.

Implications
As a result the financial sector is under additional scrutiny. Specifically, BAC and COF have continued risk. Not only is BAC in the unenviable position of now being the nation's largest mortgage writer (next to quasi-government institution like Fannie Mae), they are now dealing with an extremely large exposure to credit card risk. At the same time, COF who has some down-right scary exposure to bad debt is not sitting any better. Many would argue that COF is in worse shape. Barring the wave of Bernanke's wand, or a rabbit from Paulson's hat, credit cards are in for the beating of their life. There will be no bail out from Congress on this one either... credit card companies, and their practices have put them in the same category as loan shark.

Sources Cited
1.http://calculatedrisk.blogspot.com/2008/08/1300-foreclosures-per-day-in-california.html
2.http://mrmortgage.ml-implode.com/2008/08/12/one-third-of-us-homeoners-underwaterbest-case/ 3.http://www.smartmoney.com/breaking-news/on/?story=ON-20080806-000732-1702
4.http://www.insidearm.com/go/arm-news/credit-card-debt-growth-rate-to-remain-high-in-2008-report