Thursday, August 23, 2007

Bill, Bill, Bill

The stock market again marked time on Thursday even though the world has again seen that the great mortgage disaster is behind us. In our post last night, we talked extensively about the Bank of America “rescue” attempt for Countrywide Financial, the largest mortgage originator in the country. As the stock opened on Thursday morning, there was a lot of fanfare as the price jumped about 2 ½ points or about 10% (Funny how last night it was trading up about four points). From the opening, CFC drifted lower most of the day to close up just fractionally for the day. This was quite a ride for the stock.

Bank of America seems to have made one sweet deal, given that CFC survives. The company bought preferred stock which is convertible to common stock at $18 a share compared to today’s close of about $22. On top of that, B of A gets 7.5% on its money while it waits. There were rumors that B of A was a large contributor to the $11.5 billion credit line we mentioned yesterday and which you have no doubt heard about over the past few days. The rumor we heard was that it was $10 billion—no confirmation to that but with that much at stake, B of A probably wanted to “protect its investment”.

On to what we consider the big news of the day: In what appears to be Bill Gross’s lowest moment, we heard today that the bond king has asked the government to bail out the homeowners who are having difficulty keeping their houses. First we have a Presidential candidate pushing for the Fed and the Treasury to step in to stabilize the markets and now we have the bond king asking the government to step in to save the day. Almost against our better judgment we are providing a link to Mr. Gross’s latest statement of opinion, this time on the housing bailout.

We cannot believe his nonchalance as he portrays the situation we have gotten ourselves into. After Senator Dodd suggested that the Fed/Treasury stabilize the markets, we imagined that stable meant “not going down” rather than stable. We then began to imagine a world where the market was manipulated to only go up. That sounds nice but is Impossible, sorry. Now we have the leap to government intervention on the housing by a seasoned professional bond trader. Mr. Gross says that since we bailed out Chrysler and the S&L’s that we should now take care of the current round of troubles: “This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.”

So many people have already lost their houses. There are many reasons why homeowners are losing their homes and all of them are based on the last round of credit expansion by the Fed, ok maybe we can’t say all, but certainly most of them. The Fed, under Greenspan, wanted to “protect” the world from a recession so it lowered rates and created the real estate bubble and all of its attendant hazards. We are seeing all of these unintended consequences take shape in front of our eyes over the past few weeks. Now, there are cries for a bailout.

Our opinion doesn’t count for much in this world but we believe that the government will try to bail out the homeowners and the Fed will do its part, too. That has been our premise in these pages from the beginning. It looks as though it is just a matter of time now. One problem that will fall out of this solution will be that the stock market will not be happy, no matter what Senator Dodd says or does.

Before we close this evening and week out, we received a comment that we should respond to here. The comment asked a couple of questions, one was why the market ends higher every day. First answer is to make Senator Dodd happy maybe??? Ok, maybe not but we are confused about the market ending higher every day. We want to know which one this is so we can invest in it. If the question is about the US markets, we look at two indexes, the Dow and the RUT. From the highs of July, the Dow is down from 14,000 to today's close of 13,235 so you can't be asking about that one. The Russell 2000 (RUT) had a high of around 855 back in July and closed today at 788 so you can't be talking about that one either. Let's get to the other part of your question, the one about the Asian markets.

You asked why the Asian markets have completely recovered. Well, the only one that has fully recovered is China and that is not all of Asia by any means. Japan is still down 10% from its highs and so is South Korea and Hong Kong. So, if you are trading China, then you are up a little over the past few weeks, otherwise, you are probably down about 10% so far.

Your final question is the relationship between Asian markets and we presume the US market. Over the past several years, the global equities have all swelled up together with some basis in the US due to extraordinary demand created by low interest rates here. This is the reason for the huge economic expansion in China and Asia in general. With current stock prices in China going to the moon, the foundations for those prices should be justified by continued economic growth. We anticipate that the current credit contraction in the US will slow economic growth in the rest of the world.

Thanks for the comment and let's continue the dialogue. Any other comments? Other readers are welcome to join the discussion.


Anonymous said...

my point is this - all the doom and gloom from the subprime does not seem to correlate with the up market of the last few days - even dow - 14000 was momentary - so say the average before the subprime hit the news was about 13800 - it is only about 5% down? and then shanghai is at all time high - even korea is 5% from all time high and hong kong is near all time high. japan is no factor in asia. so what is shaping the trend?

Glenn said...

Doom and gloom of anything does not immediately correlate to the markets. If the markets followed the news, then everyone could just get up in the morning and watch tv and see what's going on in the market that day and make money.

One thing this blog tries to show you is how to use the news to time your trading ideas. The news doesn't drive the market--the market moves and then the media explains it to you after the fact. That's why you need to have a strategy in place.

You speak of these Asian markets being at or near all time highs so are you saying this is the time to buy these markets??? We here at the Update believe the time to buy is when prices are low. The time to sell is when prices are high, you know, the old buy Low Sell high idea.

As far as the markets only being down slightly from their highs, that doesn't mean they are going up from here.

We see the credit contraction as the driving force behind global illiquidity and this will drive the markets down. You ask what shapes the trend and our answer to that is the money flows and the decision makers. The premise of this blog is that the powers that be can Not influence credit creation This time around. The credit contraction has begun and will not stop just because the market is up 50 points one day or two.