Wow what a day today. The market started out higher based on the ADP payroll which was much better than expected.
"July 30 (Bloomberg) -- Companies in the U.S. unexpectedly added an estimated 9,000 jobs in July, a private report based on payroll data showed today.
The increase followed a revised drop of 77,000 for the prior month that was smaller than previously estimated, ADP Employer Services said.
Over the past six months, payrolls have been negative each month while ADP has only 2 negative readings over the past 7 months."
Keep in mind this number has been way off the past few months. The real jobs number has been coming in significantly lower so take this report with a grain of salt. We will see the REAL jobs number on Friday.
The volatility continues to amaze me this week. Stocks flew up on the jobs number, then broke down as oil went berserk before rallying strong at the end of the day. You really can't fight the tape on the long side. The massive stimulus by the Fed combined with the new shorting rules on financials is almost forcing the market higher.
Of course this is based on ZERO fundamentals. This is nothing but trading folks. The Fed is now plugging the leaks of the debt bubble on an almost daily basis. They are putting up the good fight, but the end result will be the same. Take a look below at the colossal debt bubble that the Fed is desperately trying to keep inflated.
Here is the debt bubble in 2002 as we passed by the debt levels last seen in the 1930's:
Now lets take a look at the debt bubble as of the end of 2006:
Final Take:
As you can see, the debt bubble as of 2006 now almost dwarfs the debt records we hit during the depression in the 1930's. Imagine what this graph looks like now in 2008.
Its even bigger today because thats how ponzi scams work. The bubble needs to keep growing or the debt cannot be serviced and the whole thing bursts.
When do bubbles burst?
When people can no longer make the payments needed in order to keep servicing the debt. This is why the lending got so loose the last couple of years. The bubble must continue to grow or it pops. As the bubble became to large for incomes, they were forced to loosen the lending because people were unable to make the debt payments.
This is why subprime and 100% neg am loans were invented. This kept the payments low for two years and allowed the game to keep going.
Today, the only way the Fed could continue to blow up the bubble is through Fannie and Freddie. They started allowing them to take on more and more debt in order to keep maintain the debt payments.
Bloomberg shed some light on this today after Feddie disclosed its mortgage portfolio:
"July 30 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage-finance company, said its portfolio expanded at a 23 percent annualized rate in June, the fastest pace since 2003.
The holdings rose by $12.7 billion to $749.6 billion, the Washington-based company said in a monthly volume summary today. McLean, Virginia-based Freddie Mac last week said its investments swelled at a 33 percent annual rate to a record $792 billion.
Since regulators lifted growth caps and eased capital requirements in March, Freddie Mac has boosted its portfolio by more than 11 percent and Fannie Mae by almost 4 percent. Most of the growth is from purchases of mortgage securities they created and guarantee. Concern that the expansion is unsustainable amid a need for the companies to preserve capital drove yields over benchmarks on the bonds near a 22-year high set four months ago."
Quick Take:
As you can see above, the Fed keeps huffing and puffing in an attempt to keep the debt bubble filled with air by injecting massive amounts of stimulus into Fannie/Freddie as well as other parts of the economy.
Now that we have bailed out Fannie, the GSE's MUST be more conservative with their lending.
The loose lending game is over because the housing bailout forces the taxpayer to be on the hook for any losses by the GSE's. The last thing these entities want going forward is to continue to bleeed red. Fannie/Freedie hope that we will eat the housing bubble losses without much of an uprising.
However, if they continue to lose money and make bad loans, there will be people with pitchforks outside their offices! It will simply be unacceptable in the future for the GSE's to lose money as Americans are forced to pay for Wall Streets mistakes. The days of easy lending are over, and expect responsible lending going forward.
As the banks continue reign in lending, the public is suffocating from their huge debt payments on houses, credit cards, and student loans. As a result, we are defaulting on debt at record rates.
This combination of defaults and bailouts marks the end of the game because there is no way to keep blowing up the bubble.
One more puff and it POPS!
Bottom Line:
The market is currently trading on speculation versus fundamentals. If you like to take risks and trade long and short be careful. Keep your positions small and be nimble.
The end result in my opinion is clear. This bubble is in the process of bursting and the Fed is running out of resources to stop it. Every bubble ends in the same way: A spectacular collapse that brings us back down to historical averages.
This bubble will be no different.
4 comments:
Meredith Whitney just crushed the financials again tonight on CNBC.
She said we are less than 50% through the credit crisis. She expects dozens institutions that will be forced to raise capital.
Video:
http://www.cnbc.com/id/15840232?video=808357964&play=1
Great video - it chills me how she says these hundreds of billions are just plugging holes. It's very ture.
Yeah
I think cheerleader Maria B. was hoping that Meredith was coming around to the bull side on the financials.
Its clear that she is nowhere near being bullish.
Did you see Meredith pause and stammer when Maria asked her if Lehman would survive?
You could tell she wanted to say NO but thought the better of it. That was classic.
Interesting comments here from 50 year Wall St. vet Art Cashin. Its time to recognize the losses!
We will be in much better shape when we do:
A Burning Problem – Wednesday's Comments had gone to press before we got to Holman Jenkins insightful essay in
yesterday's WSJ. His topic was Fannie, Freddie, foreclosures and the like. He touched on, and expanded upon, a couple of
stats I have previously cited. Here's a bit:
In California's Central Valley around Stockton, one household in 25 received a foreclosure filing last quarter. In
the Inland Empire, one in 32 did. In greater Las Vegas, one in 35 households received a notice. We use
household advisedly since nobody lives in many of these homes or collects the mail. Close to the ground, a
growing suspicion is that the numbers even understate the troubles because banks see no point in foreclosing on
empty, unsellable homes. Local governments complain of not being able to find anyone to dun for upkeep
because the owner has absconded and yet no bank has filed foreclosure papers.
To be sure, the disaster is not entirely confined to vast tracts of exurban no-man's lands in the Southwest. The
Star Ledger of Newark, where home prices once were rising 50% a year, describes 66 Norwood Street, financed
by Countrywide for a speculative buyer who rented it out while never making a payment on her $325,000
mortgage. Fannie now owns the house, which burned twice between a final order evicting the tenant and
Fannie's crew arriving to board the place up.
Mr. Jenkins goes on to note the hapless approach of Washington to the problems:
So far, Washington has put its political capital into trying to refinance salvageable homes for unsalvageable
homeowners, when a relevant policy would consist of judiciously buying unsalvageable houses and demolishing
them. Fannie and Freddie's strength is housing market software: They could be put to work devising a least-cost,
maximum-bang strategy for demolishing unoccupied homes to preserve as much value as possible for the
homeowners and mortgage creditors who remain.
Of course, right now their overriding imperative is to avoid recognizing losses rather than rushing toward them --
which is why Fannie and Freddie should be nationalized (and later privatized). One way or the other, taxpayers
will end up owning thousands of unwanted houses. It's not too soon to begin limiting our costs.
Not a pretty picture and worsening by the day.
Consensus – We'll watch crude and how stocks react to the morning's economic data. Today's action may be critical.
Stay very, very nimble.
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