Tuesday, September 23, 2008

Market Summary/Paulson Dazed and Confused

Good afternoon everybody!

What a dramatic day in DC today. I listened to the hearings for most of the day. There was nothing earth shattering that came out of here in terms of news, but you could cut the tension with a knife.

One thing that was very noticeable throughout the hearings is Paulson and Bernanke have no idea if this is going to work. They seem to be flying by the seat of their pants, and this bailout is not well designed. This could easily blow up in their faces. Paulson seemed extremely defensive and dazed throughout the session.

Its also very apparent that the Senate is not comfortable with pulling the trigger on this bailout. I see this bill eventually passing, but it won't get done in its current form. The Treasury is going to need to make concessions in order to get it passed.

The longer it takes to get done, the more pain we will see in the markets, so I assume they will be working night and day to complete the legislation. The markets are hanging by a thread so if partisan politics start getting in the way, the markets could come tumbling down in a hurry.

I thought there was a great idea that was brought up by Senator Schumer in terms of restructuring the bailout. He proposed that we should start with giving the Treasury $150 billion for the next three months, and give this bailout a test drive and see how it works. I couldn't agree more.

Paulson admitted that it will take a long time for him to spend this $700 billion so why do we have to give it to him all at once? Lets piece mail it to him and see how successful he is with prying these bad assets from the banks. This will also allow us to see how much he plans on paying for them. If he starts gobbling up this garbage at .98 on the dolllar and the taxpayer gets raped, we can quickly shut down this massive dumping of taxpayer dollars.

Market News:

Lets get to the news because there was some interesting developements today. First of all lets get to marvelous Meredith Whitney. This women has been dead on throughout the credit crisis. She is frequently highlighted on THTB.

Here is a news article on her most recent research report. She doesn't believe the bailout will work and the credit crisis is only going to get worse:

"Sept 23 (Reuters) - The credit crisis that began last summer has intensified so much that any U.S. government bailout plan has "little hope" of improving core fundamentals over the near and medium term, said analyst Meredith Whitney, who expects the country's GDP to take a hit from likely moves by state governments to cut costs.

The Oppenheimer & Co analyst cut her outlook on U.S. banks and expects further dividend cuts and capital raises.

Whitney also said home prices were not close to bottoming and expects prices to ultimately be at least 25 percent lower from current levels. She expects homeownership rate to decline further.

The analyst also noted that unemployment was up over 40 percent year-on-year in key states, and said unemployment is "headed materially higher."

Given that over 12 percent of the U.S. GDP is driven by state and local government spending, and with many key states' 2009 budgets being under-funded, governments will be forced to cut costs and this will weigh significantly on GDP, Whitney said."

Credit market disruption has had underappreciated consequences on the economy... A virtual suction of liquidity has occurred in the credit and lending markets, and consumer and corporate credit is already showing the effects," Whitney wrote in a note to clients.

"Since the onset of the credit crisis, over $2 trillion less liquidity has flown through the U.S. domestic capital markets than during the same time period a year prior," she added."

Quick Take:

Yikes! That report couldn't have been more bearish. Meredith expects another 25% to the downside from here on homes. WOW!

Its amazing to read but I am not surprised. Like I said last eve, there is less money sloshing around in the economy folks. Expect assets to drop in price like a rock. This will be devestating to the banks if we go down 25% from here.

Home prices fall a record 5.3% in July/Interest rates are back on the rise.

This is a hell of a combination isn't it? This is from the AP:

"WASHINGTON (AP) -- Nationwide home prices in July fell a record 5.3 percent compared with a year ago, a government agency said Tuesday, and have now receded to October 2005 levels.

Prices were down 0.6 percent from June on a seasonally adjusted basis, according to the Federal Housing Finance Agency.

The national decline in home values coupled with reckless lending standards during the real estate boom are the driving forces behind rising mortgage defaults and foreclosures. They have spurred a credit crisis that has shaken Wall Street to its core and caused the Bush administration to propose a $700 billion financial industry bailout.

Interest rates:

Lockhart explained the government had little option but to seize control of Fannie Freddie. Both companies, he said, were unable to raise money to gird against losses without aid from the government.

Without new money, the only other option was to do stop doing new business and shed assets in a weak market. "That would have been disastrous for the mortgage markets ad mortgage rates would have continued to move higher," Lockhart said.

But rates are creeping back up.The national average rate on a 30-year, fixed rate mortgage rose to 6.26 percent on Monday up from 6.11 percent on Friday as details of the government's rescue plan remained in flux, according to financial publisher HSH Associates. The rate had fallen as low as 5.87 percent last Tuesday."

Final Take:

Rates are on the way back up folks, andFannie and Freddie continue to reign in their lending. This is a devastating combination. I really don't see how this death spiral can be stopped.

One thing is for sure:

These idiotic bailouts do nothing but temporarily relieve the markets for a day or two. Once they are forgotten about, fear and insolvency concerns immediately become the main focus of the banks which leads to higher rates and a further tightening in credit conditions.

I have said this many times before and I will say again: Throwing liquidity at this market will not fix the problem!! Another $700 billion in taxpayer liquidity won't not help either! It doesn't address the problem!

Transparency and restoring trust is the only thing that will fix the markets. Confidence has been destroyed. The Fed needs to make the banks mark to market, and let the ones that failed go down! Playing hide the sausage is making the problems worse!

No one knows how to value financials right now, and investors are refusing to buy them as a result. There will soon be no bids on these stocks until we see the balance sheets. If we get into a "no bid" scenario in the market, stocks will plummet.

Bottom Line:

Stocks took another big dump today at the end of the session. The combination of uncertainty around the bailout and fear is killing demand for stocks. Investor's continue to pile into treasuries because they don't trust the market. Short term treasuries are now yielding under 1%! This tells me that the fear is as high as its ever been.

Are you surprised? You shouldn't be. No one can trust a market that's filled with intervention, fraud, and a lack of transparency.

I continue to be amazed at how poorly the government is reacting to this crisis.

Things are worsening folks and the bailout isn't going to cut it. Find a nice tall chair to hide under.

Stay Tuned!


Jeff said...


Bearish Blogger Karl Denninger will be on the NBC Nightly News with Brian Willims tonight at 6:30.

He started up FedUpUSA.org. It should be a great interview.

Bloggers are beginning to be heard.

Catch it if you get a chance.

Avl Guy said...

Chuckle & Enjoy, from Angry Bear Blog:

Pass the "Banking Patriot Act." It will solve "counterparty risk” where if Bank A can't find a greater fool to buy its garbage, it will have trouble paying back Bank B. It’s cheaper to tell Bank B to collect what it can from Bank A's inevitable bankruptcy proceedings, and then cut them a check for what's left to eliminate the counterparty risk; rather than using Paulson’s Plan.

So in the Banking Patriot Act, any bank that is in trouble must liquidate its assets immediately and pay its creditors to the best of its ability. The government would then use its $700 billion to compensate the good banks for their counterparty losses. Voila - no counterparty risk, no uncertainty in the banking system, no rewarding the bad banks, and the system operates as it should.

To ensure compliance on voluntary liquidations, a provision in the "Act" allows the government to view any communications within any bank to see if they're in trouble. And if any troubled bank is found to have defied the "liquidate immediately" order, its executives would be declared ‘enemy bankers’, would be interned at Gitmo, and would be waterboarded to find out if those enemy bankers know of other enemy bankers.


shrpblnd said...

"Lets piece mail it to him..."
I would think Paulson would defintely fall into the bulk rate category.

Jeff said...

Hey sharp

Nice to see ya:)


That is funny. they are going to shove this down our throats. I am getting out of the markets for a few days when this goes down.

I am taking everything off. God only knows what the reprocussions will be. I will jump back in once I see how this bill looks when its passed.

I am going to hold onto my gold.

Feel free to share how you are playing the bailout.

johndaniels said...


"Are you surprised? You shouldn't be. No one can trust a market that's filled with intervention, fraud, and a lack of transparency."

This quote basically says it all; and says we will see 6,500 or worse quite soon. Noone trusts these crooks; they've taken it too far, and now they're grasping at the darkness to save their hides...not on my dollar.

johndaniels said...

i am cash and metals; not trading the metals so I am long; i know there will be price suppression. My belief is that silver and palladium are the best buys now, easy...but you cant get it in quanity anywhere! my cash insures my metals bet. I also got USO for the 401k. metals/oil down a bit; i presume on day traders taking small profits.

I am of the opinion that paper assets were created by the powers that be to manipulate commodities; that is; commodities are the only real value in a market; the rest is perception and fluff.

waiting for tomorrow; formin the opinion that the financial system is screwed beyond repair; once Bank of America starts whining about needing money, that will be the driver. I dont see how with all those liabilites from merrill and CFC they can go without begging for a bailout....SOON.

happy daze!

growler said...

"Playing hide the sausage is making the problems worse!" - This comment works on so many levels.

Sorry to be vulgar, but I can't help like feeling we're all taking it in the rear end.

Jeff said...


I know. Looks like we are going to take a moonshot higher tomorrow.

Buffet just invested $5 billion into Goldman Sachs. Preferred shares at 10% interest.

Futures are up. Looks like its rally time! I am going to throw up from all of the highs and lows..lol

Jeff said...

Don't worry...

After a day or two it will be back to our regularly scheduled program Financial Armageddon!

jeff said...


Here come the cops! FBI opens probe into AIG, Lehman and the other fraudmeisters.

Its sbout time!:

"last updated September 23, 2008 4:11 p.m. PT

FBI investigating companies at heart of meltdown


WASHINGTON -- The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration.

Two law enforcement officials said the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc., and insurer American International Group Inc.

A senior law enforcement official says the inquiries, still in preliminary stages, will focus on the financial institutions and the individuals that ran them.

Officials say the new inquiries brings the number of corporate lenders under investigation over the last year to 26."