Monday, December 03, 2007

Hope Now

The stock market opened down a tad but soon the buyers were in there taking the market back up. The market then spent some time moving back down toward the close with most indexes closing near their lows of the day. One of the four horsemen, RIMM, has not fared well over the past two days dropping nearly 15%.

We still think the market is settng up for one more run up in what chartists would call "fill" as in fulfill. After the lows were set up last week, the stock market rebounded out and has now settled into a consolidation range. From here, the market should ful-"fill" some buy orders by jumping up another couple hundred points. Once these buy orders are "fill"-ed, then we should see the next event which is a major reversal into the abyss.

After the market moves up and the participants see there is no chance for a rally to new highs, the reaction will be to sell. This will be a time when the buyers disappear and the recognition of the down trend is finally accepted by many. When this happens, and maybe we are a bit premature with this talk, sellers are in control and prices should go into a freefall.

The stock market is finally working off its oversold condition and we have the appointment with a rally coming up in order to put the market in a bit of a neutral position or maybe slightly positive. This move should give us a good opportunity for further selling at pretty good prices. The trading over the next several days, probably until the FOMC meeting, should be viewed with the previous paragraphs in mind. We will be watching very closely.

As far as the news today, the biggest news continues to be the "government is here to help you" lines from the Secretary of the Treasury, Paulson. They even have a Name for their new plan, Hope Now. While the plan has received a lot of criticism, we are superficially in favor of it.

We have said many times how difficult it is assess blame in this mess, sort of like the chicken and the egg, which came first? Was it the Fed fearing a recession and lowering short term rates to 1% and holding them there for a long time? Was it Wall Street financing any type of mortgage just because it might have slightly better rates of return? Or, was it any number of other parties such as theregulators, the mortgage brokers, the appraisers, the realtors, the speculators, the builders, or who knows who else?

Hope Now gives a break to a small sector of home owners who should never have been allowed to buy a house in the first place due to the impending rate reset two years out. Some investor was silly enough to loan these people money through the magic of AAA credit ratings. Hope Now proposes to go find out who was given a loan that can pay the lower rate but not the reset rate, a process we think should have happened at the time of the mortgage origination. With the reset not happening, the investors will be receiving less than they "should" but more than they would if the mortgage defaults. This should put some of those black boxes to work pretty hard to determine what effect this will have on valuations.

We are trying to be sympathetic to the poor homeowners who are getting thrown out of their houses due to foreclosure but...We have said for a couple of years that the unwinding of this housing push would affect all homeowners even those that did not participate in the speculation or the option ARM's. The Fed has allowed, and Greenspan encouraged, the use of ARM's as a way for the public to buy houses cheaper. The consequences of overbuilding and speculation means that many will suffer and many are. We read about the neighborhoods that have empty houses that are being stripped of contents or boarded up and wonder if the Fed actually considered that could be one of the end results of their policies.

We are not trying to make a political statement here, we only have interest in the stock market and how it will react to the current situation. The politicians are trying to say the right things but there isn't enough money to "take care" of this problem. The stock market may think for the moment that the politicians can solve the problem so it can justify the rally phase its in but in a few days or a week the market will come to realize the problem is bigger than they first realized...that will be the start of the recognition.

FSI: 102.55

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