More Good Economic News?

From Bloomberg this morning:

U.S. Unexpectedly Lost 63,000 Jobs in February

The U.S. unexpectedly lost jobs in February for the second consecutive month, adding to evidence the economy is in a recession.

Payrolls fell by 63,000, the most in five years, after a revised decline of 22,000 in January, the Labor Department said today in Washington. The jobless rate declined to 4.8 percent, reflecting a shrinking labor force as some people gave up looking for
work.

``All the lights are flashing red,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts, in an interview with Bloomberg Television. ``We're in a recession. I don't think there is any doubt about it at this point.''

Monthly Unemployment

Monthly Payrolls

Source: Bureau of Labor Statistics

Another report from the AP:

Carlyle Capital Reports Additional Margin Calls, Considering 'All Options'

LONDON (AP) -- Lenders to Carlyle Capital Corp. Ltd. have begun to liquidate securities held in its $21.7 billion portfolio and the fund said Friday it was considering "all available options."

The margin calls against Carlyle portend an ominous development one day after the fund was served with default notices, convulsing already skittish markets.

...Carlyle Capital said it received additional margin calls and default notices Thursday from banks that help finance its portfolio of residential mortgage-backed securities. It said it may not be able to meet the increased requirements.

The fund said it was unable to meet margin calls from four banks Thursday, raising fears that its entire portfolio could be unwound. Securities have dropped sharply in recent weeks as banks pull back on their lending, forcing investment vehicles and funds like Carlyle to dump assets.

...If the value of the security held as collateral falls, the lender will ask for more collateral, a "margin call", in order to secure the loan. If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

Highly leveraged funds have become increasingly vulnerable because their cash cushions are tiny compared with actual assets. Sudden price moves in the underlying assets can send margins spiraling, quickly depleting a fund's cash.

Source: yahoo.com

We have been so focused on the problems in the mortgage market, that a potential larger problem is still lurking out there. When money was easy to get a lot of hedge funds used this easy money, or leverage, to magnify their market bets.

The great thing about this leverage is that it typically takes very little of your own money to put a lot of other people's money at risk. Now those that had extended credit to the hedge funds are starting to become concerned that the money they lent out is worth less now. So they pick up the phone and ask, nicely, that the borrower put up additional money as a sign of good will.

The borrower or in this case a hedge fund typically runs a tight ship and does not keep a lot of extra cash around for this margin call. So they are forced to sell assets in a down market. I could go on, but basically the cycle of margin calls and selling into a down market continue. As the selling continues it spreads to other market sectors not directly affected by the original problems. This could drag on for months, or we could get lucky and a panic break outs.

We have entered a painful period of de-leveraging. I would prefer a panic over a long period of blood letting. Unfortunately too many people are interested in preventing a panic, so expect loses to continue until they stop.

Source:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJcGRsXmyltU&refer=home
http://biz.yahoo.com/ap/080307/britain_carlyle_capital.html