Thursday, November 29, 2007

Let's Go to School In Florida

With the market not giving us much to talk about this evening, we were encouraged to see a comment out there today. We will get to that in just a second but first, we wanted to mention the news you probably already have heard by the time you are reading this post. That would be, our friendly Fed Reserve Chairman decided he couldn't contain himself anymore and had to say that the Fed would consider a rate cut if they judged the threat to the economy was growth over inflation.

Here we are about two weeks in front of the FOMC meeting and we have heard from two big guns at the Fed in as many days say that the Fed may (we read it "will") lower rates at the meeting. We are almost surprised that they haven't pulled the trigger already in an panic move where they would lower rates between meetings. We think that just the fact they are out prancing around with the "Fed will take care of it" talk suggests they believe the world will act better if they say they will do something if needed.

This all fits very nicely with the rally attempt going on right now. The Fed has jumped into the mix with both feet and this should push up the market on Friday, the last day of November, how nice.

The other news on Thursday was the headline that should scare a few people:

Home prices: Worst drop since '70

New home prices were down 13% in October, yet sales pace still falls well short of forecasts. August and September sales reading cut.

We want to mention that 13% by itself sounds pretty bad but take a look at a $400,000 home purchased in October of 2006. That house has just dropped $52,000 to $348,000. The 13% amount can't be applied to Every house but that's a big number. Not only that, the lower prices didn't bring out buyers. Inventories keep going up and buyers keep their distance.

Getting back to Charles' comment on the Florida fund that froze their accounts Thursday: We had seen an article on this yesterday but didn't include it in our post. The news on Thursday indicated that Florida had decided to halt withdrawals. This "run on the pool", which invests money for schools and local governments, took the fund down from $27 billion in assets to $15 billion today after $3.5 billion had been withdrawn earlier today. These are Large depositors taking their money out of this fund which was supposed to be short term safe money market funds.

What this action does is to disallow others from withdrawing funds. The hit from the subprime is going to be borne by somebody. There hasn't been enough information available so far as we can tell that indicates what the level of losses is, just that losses have happened. If you read today's article, there are some familiar names and some names that are SIVs. We wonder if the rules for withdrawing the first $12 billion which has already happened will be different than for the remaining $15 billion, like spreading losses.

Please clarify the second question on the "feds" and funds under their jurisdiction. If you mean the Fed, we want to emphasize the point that the Fed didn't buy any "loser" investments, they just provided short term funding to the banks by buying some of their top rated assets.

FSI: 106.09

1 comment:

Anonymous said...

Nice article on hedging