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Five Things You Need to Know: Citigroup Sells 5% Stake, Can Now Play Guitar Like Crazy!; Fed 25, Libor 50; Fed Extends "Lifeline" to Ailing Banks?; Retail Sales for Real; Two "Firsts" for Home Prices, Both Bad


What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Citigroup Sells 5% Stake, Can Now Play Guitar Like Crazy!

Late last night, under the cover of darkness and with US markets closed, Citigroup (C) quietly announced it is selling a 5% stake to a tall, barrel-chested man dressed entirely in black that it met at the crossroads of US 61 and US 49 in Clarksdale, Mississippi.

  • In exchange for giving up the 5% stake Citigroup hopes to reassure nervous investors that it is well capitalized, that it's dividend is safe, and that it can now play the guitar like crazy!.
  • Of course, not everyone is on board with the tradeoff.
  • CIBC analyst Meredith Whitney, who last month questioned the bank's ability to maintain its dividend, said the bank will still be forced to cut its dividend and sell well over $100 billion of assets to replenish capital, according to Bloomberg.
  • "Their earnings just don't support the type of dividend-payout ratio that they have,'' Whitney said.
  • "There's so much more negative headline risk ahead for Citigroup that I don't think investors should be tempted to bottom fish at these levels,' she added.
  • But look, you don't master the delta blues by livin' easy, and it's hard to tell, it's hard to tell, when all your love's in vain.

2. Fed 25, Libor 50

The London Interbank Offered Rate (LIBOR) for dollars rose 1 basis point last night to a four-week high, according to the British Bankers' Association.

  • The LIBOR rate has risen for 10 consecutive days and is now at 5.06%.
  • Why do we care about LIBOR?
  • In simple terms, it's the "real" benchmark rate for determining actual supply and demand for credit among large banks.
  • LIBOR ordinarily trades only a hair of a percentage point above the Federal Funds rate.
  • With LIBOR at 5.06%, 56 basis points above the Federal Funds rate, we can immediately see that credit markets are most certainly not returning to normal.
  • Moreover, LIBOR rose 1 basis point last night despite a pre-announcement from the Fed that it will be providing $8 billion in repurchase agreements to banks in a 43-day loan period, a larger amount and a longer period than customary.
  • LIBOR rising in the face of the Fed's early announcement clearly signifies that market participants are not convinced that the central bank has a handle on the magnitude of the widening credit market issues.
  • The next Federal Reserve Open Market Committee meeting is scheduled for December 11.
  • Fed Funds Futures are pricing in a 25 basis point cut, but markets and LIBOR are suggesting the probabilities of a 50 basis point cut are increasing.
  • For a Five Things LIBOR Primer click here.

3. Fed Extends "Lifeline" to Ailing Banks?

We didn't make that headline up, CNN did, but we want to talk about it for a moment because not only does it relate to today's Number 2, it also relates directly to dramatic, and in our view, dangerous misconceptions running rampant about what the Federal Reserve is doing, why they are doing it, and what it really means.

According to the CNN/Associated Press article, "by making sure there is ample cash, or liquidity, in the U.S. financial system, the Fed hopes to remove any upward pressure on its key short-term interest rate called the federal funds rate." Technically, that is true. By conducting this series of operations, called repurchase agreements, the Federal Reserve will "add credit" to the banking system, which will help reduce upward pressure on the Federal Funds rate. But there is an important assumption here that goes unnoticed: where does the Fed obtain the cash to "inject" into the banks?

The subtext of the CNN/AP article, and it's not just that article, but almost all articles written about the Fed's special operations, is that the Fed has this cash socked away and is always willing and able to offer it up to the banking system to make everything "OK" if a financial crisis erupts.

But do they? Where do they get this cash? The answer is they don't get it anywhere. They make it up out of thin air. How? Through something called a "fractional reserve banking system." That's a mouthful, but what it really means is that our banking system allows banks to issue more credit than assets held as reserves. If I ask you if I can borrow $100 for a week, but you only have $20, you cannot literally lend me $100. But, if you are a bank, you can certainly lend me $100, even if you only have $20, thanks to the fractional reserve banking system. In this way credit expansion occurs without backing. In other words, credit expansion occurs "out of thin air."

Ironically, it is credit expansion "out of thin air" that created the credit crisis we are now facing, even as the Federal Reserve, with the complicity of media outlets that take fractional reserve banking at face value ("Hey, it's the way the Fed says it is supposed to be, so it must be OK!"), claims that credit expansion "out of thin air" will solve the crisis.

Credit expansion out of thin air necessarily destabilizes the system by creating an environment in which businesses receive false signals from the economy. The same thing happens physiologically with the abuse of narcotics. The drugs create signals of health - euphoria, intensity of emotion, pain relief - that the body's system naturally mistakes for positive signals. After all, people don't become addicted to narcotics because they are stupid. They become addicted because their bodies mistake the signals the drugs send for symptoms of health; because the drugs make them feel good.

After a period of time - we don't know how long because it varies by individual - not only does the abuse of narcotics begin to degrade the body's system, it requires more narcotics to produce the desired effect. And so the vicious cycle of addiction begins.

Similarly, after a period of time of credit expansion out of thin air (economists don't know how long) the financial system begins to deteriorate as false signals of economic health send the drug (credit) coursing through the wrong veins, boosting investment in areas with less substance than meets the eye. Increasingly, in late stages of addiction, more of the drug (credit) is required to sustain the system.

What all this means is that the headline, "Fed Extends Lifeline to Ailing Banks," doesn't mean what the editors who were working on that story think it means. Substitute the word heroin for "lifeline" and addicts for "banks" and a clearer picture emerges.

4. Retail Sales for Real

Today we received a bit more clarity on retail sales from the International Council of Shopping Centers (ICSC) with the release of their weekly chain store sales data.

  • Yesterday the retail debate was between bulls who latched onto the ShopperTrak data as evidence of consumer resilience, and bears who cited the more accurate National Retail Federation data as evidence of weaker average spending.
  • According to the ICSC and UBS (UBS), retailers saw their sales increase 2.5% on a year-over-year basis, but experienced a slight sales decline -0.1% for the week ending November 24.
  • The chart below shows the ICSC weekly retail chain store sales index.
  • What is unclear is why the ICSC uses a crayon-like font on the chart to write "ICSC-UBS U.S. Retail Chain Store Sales Index."
  • So who is right? Probably all three.
  • Yes, ShopperTrak's video camera "evidence" (the company tracks store foot traffic with more than 40,000 video cameras) shows traffic may have increased, while the National Retail Federation (NRF) shows the average sale per shopper declined, and ICSC shows on a monthly basis retailers saw a slight sales decline.
  • But the real story is discounting.
  • Wal-Mart (WMT) has said it will mark down toys and some consumer electronics through this week.
  • Bloomberg reported Kohl's (KSS) sold jewelry at 60% off the first few days of the holiday shopping period.
  • And more than two-thirds of online retailers surveyed by the NRF offered Internet discounts.
  • Meanwhile, to add insult to injury, consumer confidence this morning as reported by the Conference Board dropped to 87.3, down from the revised 95.2 in October.
  • It was the lowest reading since October 2005 in the aftermath of Hurricane Katrina.

5. Two "Firsts" for Home Prices, Both Bad

Home prices in the U.S. fell in the third quarter by the most ever and with all 20 cities tracked showing outright monthly price declines for the time time ever.

  • Home values declined 4.5% year-over-year in the third quarter, the most since records began in 1988, according to a report today by S&P/Case-Shiller.
  • Home prices in the 20 U.S. metropolitan areas tracked dropped 4.9% year-over-year ending September, the most since S&P/Case-Shiller began recording them in 2001.
  • "There is no real positive news in today's data,'' Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement, so we'll just leave it at that.
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