Finally: A Bounce!

Good Evening Folks!!!

I almost fell out of my chair today. Stocks actually went up! I was starting to wonder if this was still possible.

Today's move wasn't much of a surprise. We were way overdue for a bounce off of extremely oversold conditions. I was happy to stocks actually rise for a change. The price action recently has been pretty hopeless and I think everyone needed a break.

Stocks got rolling this morning based off of news out of China:

"Wednesday's rally kicked off in Asia, with Shanghai's index jumping more than 6 percent to close at 2,198.11, amid mounting expectations that the Chinese government will unveil a big stimulus soon to boost the economy, which has come off the boil in the wake of the global economic downturn. As one of the few major economies still expanding, China is being closely watched amid hopes its demand and trade can help the world weather the most severe global slowdown in decades."

Quick Take:

This does nothing to boost the world economy long term, but I guess we will take anything we can at this point. When are the governments of the world going to realize that government stimulus is equivalent to giving a drug addict a deep hit off the crack pipe?

Stocks also got a boost on Obama's loan modification plan:

"March 4 (Bloomberg) -- The Obama administration set loan modification guidelines for its $75 billion homeowner rescue plan, agreeing to pay lenders for altering troubled mortgages while reducing borrowers’ interest rates to as low as 2 percent.

The voluntary initiative, announced on Feb. 18, would require applicants to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

“This is not going to save every person’s home,” presidential Press Secretary Robert Gibbs said during a briefing. The plan offers help “for those who have played by the rules.”

President Barack Obama’s initial proposal, the biggest federal foray into real estate since the Great Depression, ignited criticism from Republican lawmakers that the government would end up subsidizing homeowners who are financially capable of surviving the economic slump on their own.

“Banks across the country will be inundated with phone calls asking how do I get a 2 percent mortgage, because 100 percent of homeowners will feel they are due now this largess from the federal government,” said Representative Scott Garrett, a New Jersey Republican. He said the plan rewards “bad behavior” and exposes taxpayers to higher risk by imposing too many policy demands on Fannie and Freddie."

Quick Take:

Can you say moral hazard? You already know how I feel about these cheap money plans. Enjoy that 2% loan: You will be living in that house the rest of your life! This agreement is like selling your sole to the devil! Why would you agree to do this? Its not like you are going to be able to sell the joint when interest rates are at 10% 3 years down the road as we fight the inevitable inflation that will be created by these massive bailouts.

Question here folks:

Say you are a potential home buyer and you are looking to buy: How in the hell are you going to be able to value a house in any neighborhood once this plan gets implemented?

Example:

Say you have a neighborhood where all of the houses sold for around 500k. Post Obama's plan lets say 30% of the people in the area qualify for the 2% loan while the other 70%(the responsible ones) are stuck paying for the same house with a 5% mortgage.

What in the hell do you now do as a buyer? If one guy is paying $4000/month while the subsidized guy is paying $1800 for the SAME house WTF do you do? How on earth do you even make an offer in this situation?

The family that is paying off the 2% loan could only qualify to buy a $250k house if they used normal lending terms from the banks.

Congratulations Obama, you have now turned thousands of neighborhoods into a total cluster**** from a home buyer's perspective.

Think of the repercussions here:

- No buyer in their right mind is going to pay more than $250k for any these houses because 30% of the neighborhood is paying off a loan that would be valued at $250k based on the current mortgage rate of 5%.

- If you are one of the 70% that got hosed, why on earth would you continue to pay a 500k mortgage on a house that's worth 50% less? Any sane individual is going to mail the keys back to the lender and walk away.

- The problem will only become more magnified when lending rates inevitably rise as treasury demand drops and rates in the bond market rise which will increase lending rates. Down the road, the rise in rates will be even WORSE once inflation hits as a result of all of this money thats been created in order to pay for all of these stupid bailouts!

The housing market is now a complete disaster as a result of this plan. The risk of moral hazard here is EXTREMELY high in my view. We may be a nation of renters before this is all said and done.

ADP

Not everything was Rosy today. The ADP jobs report was horrific:

"March 4 (Bloomberg) -- Companies cut 697,000 jobs in the U.S. in February as the recession’s grip tightened, offering no sign the pace of the decline in payrolls is easing.

The drop in the ADP Employer Services gauge, a survey based on payroll data, was larger than economists forecast and followed a revised cut of 614,000 for the prior month.

Employers are cutting staff as demand plummets in the face of strained credit and battered housing and equity markets. The Labor Department may report in two days that employers cut payrolls in February for a 14th consecutive month, putting jobs losses in the current downturn at more than 4.2 million, according to a Bloomberg survey."

Quick Take:

Flat out ugly. Is that take quick enough for ya?

GE

GE fell again today and poses another problem for the market:

"March 4 (Bloomberg) -- General Electric Co. dropped for a fourth straight day in New York trading on investor concern that its finance unit may require more capital.

GE fell 32 cents, or 4.6 percent, to $6.69 at 4:15 p.m. in New York Stock Exchange composite trading. The Fairfield, Connecticut-based company told investors in an e-mail today that claims it needs to raise capital soon are just speculation, and the stock pared losses after earlier touching $5.73, the lowest price since December 1991."

Quick Take:

GE's problem is GE capital. This financing division got caught up in the same bubblenomics as the banks did. GE's balance sheet is now over $600 billion and the banking division could very well end up bankrupting GE. Who could have ever imagined that one of our greatest companies may not survive this debacle?

The big concerns around GE lie around their lending in two key areas: Commercial real estate and loans in Eastern Europe. The default rates on these loans will likely be staggering. These are the last two places on earth that you would want to have loans from if you were a bank right now. Both areas are on the brink of collapse.

Bottom Line:

Lets see how the rest of the week plays out. We were due for a bounce. I actually added a short position near the close today. Apple popped up over $93 on the rise and I couldn't resist so I bought a few PUTS.

I sold my SPG and grabbed a few SPY PUTS on Monday. That one hurt a little today, but the pullback on the close made it less painful.

Still short heading into the jobs number folks. All of my positions are very small because this is a brutal tape to try and trade. Keep an eye on the insurance companies this week. I see some shoes that are about to drop in this area.

Oh I almost forgot. My "short sale" story. I have a friend who joined an investment housing speculator group in 2006(I tried to talk him out of it). They paid 500k for a house in Vegas in '06. He called and told me yesterday that they sold it via a short sale.

They had a buyer come in and offer 250k on the 500k house. The group went to the bank with the offer and asked if they could work out a deal. The banks are so desperate out there that they agreed to a short sale price of 275k. Mortgage is now considered fulfilled and it did not effect their credit scores.

25k and they are out folks! If you are stuck in this type of situation please start negotiating with your bank. Use this collapse as leverage.

They have no desire to add to their foreclosure list!