As the market awaits the next widely anticipated reduction the cost of funds to banks, the prices go up. We are ever so close to the 13,750 level we have been discussing for a few days. This is a plus or minus 150 points so the move should be fairly close to being over as the Fed manages to excite the crowd on Tuesday afternoon.
Today's news about housing came in three. The first was the news from UBS was good and bad but the market didn't think the net news was much of anything. The bad news was that UBS said it was taking a $10 billion writedown in the fourth quarter but the good news was that it was receiving $11.5 billion in a transaction that would in effect give 12.4% ownership to non-US entities. This is a front page WSJ article on Tuesday.
The second piece of news is that pending home sales were up for the second month in a row. Does this sound like there is a significant tightening in credit? We see UBS revaluing its mortgage portfolio to the tune of $10 billion and still there are mortgage lenders out there?
The last bit of news has to do with WaMu, Washington Mutual (WM). WM said it was cutting its dividend to 15 cents a share from 56 cents a share, cut more than 3,000 jobs because it is getting out of the subprime market entirely. Oh, and according to the WSJ, WM said it "would raise $2.5 billion in capital, all to address 'unprecedented challenges in the mortgage and credit market.' The company also said it expects a fourth-quarter loss on a $1.6 billion goodwill write-down on its home-loans business."
As these news items seem to conflict between continued financing of mortgages and huge losses for these companies, what should we believe is going on? Our position is that the housing market will drag the economy into recession and nothing the Fed can do will stop this from happening. How can another interest rate cut help when the last couple didn't help? In fact, how can it help when that was the cause of this situation in the first place?
These are problems for another day because the market still believes the Fed can "fix the problem" even though they really can't. There are more and more economists saying we are headed for a recession and all of them know the Fed will lower rates on Tuesday. They don't think the Fed will act urgently enough.
We are almost ready to concede a 50bps move on Tuesday but we keep coming back to the last announcement that said this may be the last cut. What has happened to change their minds on this topic? Ok, we think 25bps is all they can do on funds. See you on the other side.
FSI: 107.60 (barely changed on a plus 100 point day--this is bearish)