Debt is a relentless adversary.

Debt never forgives or forgets. It gives no warning and has no preferred menu among the rich and poor. It sits there consuming everything it can. All are equally delicious. If inflation increases the interest rate, its appetite increases. If deflation get worse many victims weaken and each bite out of them is more lethal.
Last week AIG began a debt death spiral and we warned CIT was next.

CIT Group Inc., the century-old lender to 950,000 businesses that has been unable to persuade the Federal Deposit Insurance Corp. to guarantee its debt sales, hired bankruptcy specialist Skadden, Arps, Slate, Meagher & Flom LLP as an adviser amid a plunge in CIT stock and bonds. The FDIC is concerned that standing behind CIT debt would put taxpayer money at risk because the company’s credit quality is worsening. The FDIC has backed $274 billion in bond sales under its Temporary Liquidity Guarantee Program since Nov. 25.

A failure of CIT would be the biggest bank collapse since regulators seized Washington Mutual Inc. in September. CIT reported $75.7 billion in assets and $68.2 billion in liabilities, including $3 billion in deposits, at the end of the first quarter.

CIT is floundering again and the GE/NBC/Pravda smoke is a clear sign that all the bank and financial stocks are vulnerable at this time. We would not be in banks at this time.
The commercial real estate market is also in collapse.
About 40% of the states can no longer balance their budgets.

CIT and also GE became banks last year to qualify for a government bailout. CIT and received $2.33 billion in bailout funds from the U.S. Treasury. CIT has reported more than $3 billion of losses in the past eight quarters, faces $10 billion of maturing debt through 2010 and hasn’t had access to the corporate bond market in more than a year. CIT may default as soon as April, when a $2.1 billion credit line matures.

“Skadden is one of the principal law firms representing CIT,” Curt Ritter, a spokesman for New York-based CIT, said in an e-mail. “They represent the firm on a wide variety of corporate matters. CIT will not comment on any specific aspect of their engagement.” New York-based Skadden advised Circuit City Stores Inc. in its bankruptcy.

CIT’s $500 million of floating-rate notes due in November 2010 fell 3.5 cents on the dollar yesterday to 70 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit-default swaps on CIT rose 2.5 percentage points to 37 percent upfront. That’s in addition to 5 percent a year, meaning it would cost $3.7 million initially and $500,000 annually to protect $10 million of CIT debt for five years. The upfront cost reached the highest since Oct. 17, when it reportedly climbed to a record 41.5 percent.

The FED opened the TLGP channel of funding for financial institutions unable to borrow in U.S. markets after the September collapse of Lehman Brothers Holdings Inc. By paying the FDIC a fee to back their bonds, banks are able to sell debt with top credit ratings. The TLGP expires Oct. 31. Issuers must have applied by June 30.


Market forces July 13

General Electric Co. has access to the TLGP as GE’s credit situation worsens. GE was rated Aa2 by Moody’s Investors Service and AA+ by Standard & Poor’s. CIT was already slashed to speculative grade, or junk, in April. Moody’s cut CIT three levels to Ba2 from Baa2 on April 24. S&P downgraded CIT three grades to BB- on June 12.

The G8 meeting was as close to a complete failure as Obama could get. In a world that envies the power of American free enterprise Obama is a sobering reflection of the mediocrity and hopelessness of European socialism. With socialism rising in America, the world’s situation has become very grim. What nation will become the engine capable of giving the world a jump start now? Communist China? That’s a joke.

The debt crisis is truly unrelenting and Bernanke and Geihtner and other socialists do not seem to understand the gravity of the situation. Hoarding money in bank reserves to cover risk is the problem that is starving the economy and creating the risk. Likewise taxing people and corporations more to pay for a safety net is just the thing that causes economic failure.

Market Outlook

We expect U.S. stocks to soon slide faster in this fifth week of this correction. Greater uncertainty abroad is still helping the dollar with a flight to safety.

Last night most Asian markets were down: Hong Kong down -2.6%, Japan also down -2.6%, both Taiwan and S. Korea down -3.5%, and India is down -0.8%.

Most European ended last week down sharply. Today most European markets are up in a range of 0.4% to 0.7% half way through their session.

US futures indicate a mixed opening this morning.

We believe the drop in international trade has hollowed out financial markets and emerging markets. International demand for their commodities and products has collapsed and their socialist governments are squandering their reserves on public projects and internal consumption which helps the dollar but destroys and competes with their productive entities.

We will be cherry picking into the market during what we expect to be about two months of market decline. We expect the decline will be the typical rotation with sharp drops in individual stocks while other stocks flatten out and then decline so the change in the market indices will be much more gradual.