Tuesday, September 9, 2008

Paulson's Bailout Blunder

Ooooppppssss! That wasn't supposed to happen. Anyone want a bowl? Its going to be here for awhile:

I hope everyone sold into the rally yesterday! What a pathetic follow thru after such a big bounce. Well, here we are two days after the biggest bailout in history and what do we have to show for it? Uhhh nothing?

The bulls must be thinking: What else can the Fed and Treasury do? I say: You should have expected this!

Folks, when the math doesn't make sense you gotta be a seller not a buyer. When home buyers borrow at 10 times their annual income to buy a house, you need to expect massive delinquencies followed by foreclosures.

When unemployment rises and inflation soars, you need to assume that the economy will contract not grow.

The Fed and Treasury need to realize that providing liquidity to a consumer who cannot afford their debt payments doesn't work! People don't want to borrow more money when they can't afford to pay off what they already borrowed! This is what the Fed and Treasury has continued to try and do. Bubbles do not blow back up!

People don't want lower mortgage rates. They need affordable housing. The reality is this bailout essentially does nothing but provide more liquidity through the end of 2009. When will they realize that housing can't be maintained at these ridiculous prices! Providing liquidity at a pricing level where buyers can't afford to qualify gets the housing market nowhere. Why is this so hard for them to understand?

The stupidity of both the bailout and the bulls is beyond belief. Those bottom callers that were cheering yesterday acted like a bunch of crickets on the trading floor today. They buy like pump monkeys on the "Fed saved the day" news and then look like deer in a headlight when they get stuck holding the bag.

Wall St. needs to realize that these bailouts are not good news. They do nothing but delay the pain. We also increase the likely hood with each bailout that the pain will be worse when it occurs than it needed to be if we had just allowed capitalism to run its course.

The government needs to start focusing on where the problem is. That would be the taxpayer. We need to start spending money on creating jobs instead of bailing out a bunch of people that committed fraud! Its time to forget about the big guy and concentrate on the little guy!

Enough of the ranting. Lets get to the news:


Here is the Lehman horror show from today. There were over 400 million shares of this traded today. The stock plummeted over 45%.

"Sept. 9 (Bloomberg) -- Lehman Brothers Holdings Inc. fell a record 45 percent in New York trading after talks about a capital infusion from Korea Development Bank ended. The Wall Street firm is continuing to negotiate with other potential investors, a person briefed on the matter said."

Quick Take:

Need I say more? Many on the street are already calling them roadkill. IMO if they survive, it will be via a takeover from a larger bank. There are some nice assets like their trading desk that some banks would covet. The problem is the bid for Lehman will probably be $1-2/share.

Are you falling in love with the new interest rates?

You better hurry up and buy because they won't be here long. The reason rates have dropped is not so much because of what happened with Fannie/Freddie. It has to do with portfolio shuffling by bond funds according to Rick Santelli in the pits. This means demand for treasuries could have been artificially increased because funds were forced to pile into them as they reshuffle which would artificially lower yields which then takes rates lower.

Once this reshuffling is finished, the bond market will start trading at a more traditional levels. Interpretation: Take advantage of this now because you might not ever see rates this low again. Don't interpret this as me saying go buy a house before rates go up! You know I think now is the worst time to buy a house! I just mean if you are forced to borrow, you might not see rates like this for quite awhile.

Also keep in mind that if you buy a house at a low rate and want to sell, you will be selling into an environment of higher rates which will lower the value of your house. If you are moving somewhere for just a few years, it would be financially suicidal for you to buy and not rent.

Bottom Line:

The next few days should be interesting. The Lehman story is about to wrap up. Anything could happen here, but I doubt any of the options bode well for LEH. Don't be surprised if a purchase of Lehman similar to Bear Stearns is announced tomorrow. I am hearing Washington Mutual is also hanging by a thread but I can't confirm anything.

I have a feeling the bulls are head cases psychologically right now. Today's drop took all of the steam out of the bailout rally. The news is bad and getting worse.

The next stop for the market will likely be a very dark place. I expect to see a big flush on equities down to the lows over the next week as the negative sentiment grows.

That would put the S&P around 1200. If the bulls can't defend that level or we see a big shoe drop than look out below!


Jeff said...

Lehman to announce earnings at 7:30AM tomorrow.

Let the fireworks begin!!

Its gonna be another rollercoaster day tomorrow!

Hold on tight!

growler said...

Oye....I suspect this is gonna get nasty.

Jeff said...


From what I see, no one knows anything about tomorrow regarding LEH.

However, this is interesting regarding WAMU: Sounds like junk to me!!:

" NEW YORK, Sept 9 (Reuters) - Standard & Poor's on Tuesday changed its outlook on Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz) to negative from stable, signaling that a rating downgrade to junk status is more likely over the next two years.

The outlook revision reflects an increasingly challenging mortgage market and more scrutiny on Washington Mutual by regulators, S&P said in a statement.

In addition, the replacement of its chief executive, Kerry Killinger, by Alan Fishman carries strategic uncertainties and the potential for substantial changes to Washington Mutual's core franchise, the rating agency said.

S&P rates Washington Mutual "BBB-minus," the lowest investment grade. The rating could be cut if credit losses exceed the current forecast of $19 billion, S&P said.

Washington Mutual, the largest U.S. savings and loan, has been put under special regulatory supervision following skyrocketing losses from mortgages that are expected to weigh on results for years."