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!