Saturday, December 6, 2008

The Beginning of the End

Good Afternoon Folks!

I hope everyone is having a nice weekend. I did some research today and learned a lot more about why the market moved higher yesterday.

It appears the Fed has followed through on its threat to buy GSE debt that doesn't exist at ridiculously low yields in the treasury market in a desperate attempt to lower mortgage rates.

Here is the information from the Fed:

My Take:

As you can see this announcement on the Fed purchases came out around 2pm which is right about the time the market started to moonshot into the close.

The market took this as a huge positive because this will result in lower lending rates. This is why you say SRS plummet yesterday. Anything commercial or housing related rallied hard on the announcement by the Fed because it will result in lower borrowing rates for the mortgage market.

The problem here folks is its setting a dangerous precedent that cannot be sustained. First of all, this is very slick form of printing by the Fed. The money is not sterlized meaning the money was not raised by selling treasuries. Essentially the Fed is borrowing from itself(using taxpayer dollars) and buying debt in the credit markets that doesn't exist. This is an end game folks.

The Fed would never stoop to such measures unless things got real real bad. There are other problems in doing something so drastic. This could potentially be a death blow to the mortgage industry. Who needs them doing loans at 5-1/2% when the Fed will be popping out 4-1/2% loans. These actions could result in the Fed being the only lending game in town doing 4-1/2% loans for homebuyers.

This why you saw the insurers like The Hartford double yesterday. The lower rates will be very helpful the insurance companies.

Bottom Line:

This is why you saw your bull run yesterday. In my view this is a giant disaster down the road. You can't continue to create money in an attempt to prop up your debt markets. The market appears to moving higher based on the Fed actions.

Sometimes I think I need to stop doing research. The more I read the more I realize how screwed we really are.

In the short run, this could keep the markets moving higher for awhile. Stay away from shorting anything housing or commercial related. This is going to set up some incredible entry points for SRS down the road.

I have no short positions other than BEARX right now. However, once this bullfest loses steam, I will be all over SRS and other shorts. I believe you might be able to pick SRS up in the 60's if the Fed continues this buying spree over the next several weeks.

Ben warned us in a speech earlier this week that he was going to do this. He has backed up his words. There will be a day down the road when the Fed no longer has the resources to do this.

I don't know when this blows up folks.

When it does, the world will never be the same.


Anonymous said...

Great info, Jeff.

Jeff said...


Hope it helps.

I look forward to more insanity in the markets next week!

Kevin said...

So I guess buying $20K of SKF at 120 on Friday was a bad move? I'm only in for a swing move, but I see your point on the GSE debt.

John Maynes said...

Your research is simpley amazing. :-)

Jeff said...


Sorry about your SKF. I would avoid financials at these levels because the government refuses to let them fail. This rally has a Bear Stearns feel to it.

The market wants to move higher for now. I would get reasy to load up the shorts is we get up near DOW 10k.

Jeff said...

Thanks John.