Tuesday, August 21, 2007

Just a Day of Rest

The stock market continues in the non-volatile mode for another day. This is reasonable given the violence of last week and the oversold nature of the market. Today’s volume was bad to anemic levels so there is much resting going on. We still recommend selling any rallies like the one we had in tech today.

The big news continues to be reactions to the mortgage “bailout” by the Fed with COF (Capital One Financial) announcing some more bad news on their Alt-A company. With the full range of non-conforming mortgages going through some credit contraction, COF said it must close down their GreenPoint mortgage unit. According to the WSJ, GreenPoint had been “valued at $6.3 billion just three years ago”. COF will be coughing up a fur ball when it reports earnings this year with GreenPoint dragging its annual earnings down about 30%. The stock market was “happy” with the news as the stock moved up on the news today with their low on this move (so far anyway) coming over the past week.

More chatter being heard from Washington as one of the Presidential candidates assures the world that the Fed chief is going to do “absolutely” everything he can to stabilize the markets. Somehow, that doesn’t seem to have translated properly but Bernanke did not correct the statement. We are sure that the Fed will make sure to bail out the banks but we don’t really know how “millions of Americans” won’t lose their houses without some federal government involvement, that sort of thing is outside the Fed’s jurisdiction.

Most of the news we hear is that the mortgage situation can be contained but that is what has been said for several months now and we just don’t think it is true. The mortgage situation is a result of one more bailout from the Fed. They think that by lowering interest rates, credit will expand. We’re not so sure this time. This is what is known as “pushing on a string” in some circles.

When the Fed lowers interest rates this time, there needs to be someone out there who can and will borrow money. Of course, they would also need to spend it in order for it to keep the economy going. With the population starting to default on their mortgages, we think it will be difficult for them to get a loan under the new standards. This is the place where the Fed finds itself and they have not really accepted it. The Chairman got his helicopter title when he said he could drop money from helicopters to jumpstart the economy. Well, that may be what he does. We just hope we are near the drop point.

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