I thought it was time for a good ole fashion market update today. I have ranted enough this week on the economy:)
Today was an interesting day. The big move up is not really all that impressive given the light trading volume. None of the moves this week really show us any confirmation of a trend. I see no conviction behind this buying spree today.
Everyone seems very confused and unsure of where we are headed. Take oil for example. Yesterday, it did a moonshot up to around $120 a barrel. Today it Free falled back down $6 to around $114. This makes no fundamental sense. This is very emotional trading done on zero fundamentals.
The US dollar seems to be dictating where oil moves from day to day. The dollar showed some strength today after weakening yesterday.
One thing that I found that was interesting was the money flow chart today. It looks like the big boys are selling into the strength. The russell and xlf(financials) both saw strong money outflows. I actually bought a couple shorts today on this bounce. I picked up some (TWM) and (SRS) today. These are ETF's that short the Russell 2000(TWM) and commercial real estate(SRS).
I have been looking for a good entry point, and I believe that the bounce the last three days provided one. Please note these are very volatile and carry a lot of risk. Buyer beware.
Fannie/Freddie
It looks like the Fed is going to be forced to take action on the GSE's in the very near future. Freddie's stock is now in the 2's. Note the Moody's cut today:
"Aug. 22 (Bloomberg) -- Fannie Mae and Freddie Mac's $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody's Investors Service, which said the increased likelihood of ``direct support'' from the U.S. Treasury may devalue the securities.
The ratings were lowered five steps to Baa3 from A1, New York-based Moody's said today in a statement. Moody's kept its Aaa senior debt ratings on Fannie and Freddie stable and affirmed the subordinated debt because the Treasury will likely make sure the companies continue to make interest payments in any bailout.
Moody's joins a chorus of analysts and investors who say Fannie and Freddie's limited access to ``economically attractive'' capital will give Treasury Secretary Henry Paulson little choice but to bail out the beleaguered mortgage-finance companies."
My Take:
This is going to be your next market mover folks. The big players in the markets want answers here. The common stock is pretty much worthless, and Paulson has said he will back the GSE's. The big money is essentially saying "Ok Mr. Paulson, put your money where your mouth is!".
What the Treasury does here is going to be very interesting. Do they guarantee all of the $5 trillion in debt? Do they just guarantee all the loans going forward and issue warrants on the $5 trillion of debt in order to spread out the risk? Do they not guarantee any of the $5 trillion and totally screw Russia and China.
This is a very tough decision. In the long run it doesn't really matter because the economy is screwed no matter what the Fed does. It doesn't change the fundamentals of the economy. Its not going to stop housing from dropping further. In fact, if they decide to backstop all $5 trillion its going to kill the housing market.
The reason I say this is because the bond market will hate this decision and their appetite for debt will drop dramtatically. This will send treasury yields through the roof which in turn sends mortgage rates to the moon!
I am expecting a bounce no matter what the Fed decides because the "bubble boys" are going to try to pump the news IMO. This pump will be a great time to place some bets if you like to bet short. Once the market digests the reprocussions of bailing out Fannie/Freddie, I think we selloff badly.
Bottom Line:
We really didn't learn much this week. The markets were pretty flat and the volume was light. This won't last for long though folks. The big boys are getting back from vacation, and the GSE disaster needs to be resolved.
This should create plenty of fireworks in the near future. I think you are also going to see something done with Lehman shortly as well. They have writedowns that must be taken in the very near future. Fuld is scrambling around looking for a buyer because they need capital in order to take the losses. Lehman either finds the capital or goes belly up in my opinion. I have no idea how this plays out.
Buckle up everybody! Its going to get very interesting over the next few weeks. Happy Friday!
2 comments:
Your blogs this week captured the enormity of what is unfolding economically, yet I feel our political environment is cloistered in some Twilight Zone. Listen to the candidates’ public statements and there’s scant evidence that either one or their party’s bigwigs actually grasp the size and inter-locking complexities of the problems dissected every day in blogdom (note how I'm generously giving ‘Johnarack McBama’ a pass on also offering up SOLUTIONS).
Yes, they talk to home foreclosures, energy & gas prices, and the symptom of spiked food prices. But there’s nada on the biggest underlying issues of asset deflation and credit contraction on the scale of $ trillions, and their long-term implications.
I know most readers weren’t of voting age in summer of 1980 when Reagan & Carter were heading into their respective party conventions. But believe me, the fundamentals of the economy was right up there with the Persian Gulf in their public statements.
By comparison, 2008 reminds me of a World Series game where the ‘fans’ ignore the score and field tactics, and focus on the easy stuff like the colors of the teams’ jerseys. Sheesh, I'd love to hear Johnarack McBama utter the words 'credit contraction' and 'wholesale asset deflation'.
Thanks avl
I couldn't agree more on the lack of press this crash is getting.
I can remember Reagan putting the economy center stage. I also recall how the the federal deficit was always in the news.
Lehman was intersting today:
Many bloggers are complaining today about bubblevision pumping the Lehman buyout rumor all day when it was refuted by the supposed buyer.
The Korean bank that supposedly bid for Lehman refuted the story around lunchtime and CNBC didn't say a word until the end of the day.
Another thing thats been pointed out is Lehmans stock shot to the moon on the rumor but gave it almost all back in the last half hour of trading.
By law, companies can't buy their own stock the last half hour of trading.
Gee you think Lehman might have made a few purchases of their own stock during all day?
The fraud gets more and more disgusting with each day.
There will be a day when all of this crap stops. Hopefully its soon!
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