Thursday, January 10, 2008

Fed to the Rescue and BOA Follows Suit

Top Line: The stock market staged another turn around on Thursday taking the Capital One (COF) news in one gulp to start the day lower but then up on the interest rate news from our local central bank chairman and the possible purchase of Countrywide Financial by previous investor Bank of America. What a day! The main ingredient seemed to be that there were no more sellers left after the morning hit and any news then was considered positive. We feel that the call for a rally to 13,200 is the best in the current situation. To fine tune that number a bit, we think the rally will run into trouble someplace between 13,000 and 13,200.

Just another note about the market. We know that the market is heavy with selling and are very concerned that the market will not hold. The big line in the sand is this week's low. If the Dow goes below our 12,500, the market will go down much more. This means that trading any of these rallies is not a good idea unless you are thinking of selling into them.

Here are tonight's headlines from CNN:

The Fed to the rescue: Bernanke says central bank ready to take 'substantive additional action' to cut interest rates in order to support lagging economy.
Countrywide shares soar on BofA takeover talk: Report: Mortgage lender in advanced talks to be acquired by banking leader.
Weakest holiday season in years: Many stores suffer big sales misses in December, but Wal-Mart and Costco benefit from cash-strapped consumers shopping for discounts.
AmEx expects lower profits in 2008: Credit card company forecasts housing slump and decaying credit quality will hurt its profit.
Capital One slashes profit outlook: Credit card issuer says it won't meet its 2007 forecast because of a rise in loan delinquencies and weakening economy.

What do all of these headlines have in common? The stock market went up with all of these. Most of the action followed the BOA takeover talks because the problem will be solved if a big bank takes over. For some reason the mortgage world is not well understood by the stock market. Some of the structured credit or securitized mortgages are collapsing because the home owners are Not paying their mortgages and the housing values are going down. We can't emphasize enough that money alone can Not fix this problem. The credit contraction is now underway and behind it is a serious recession brewing. We hope you have prepared as well as you can for this, like paying down your debt.

The same goes for the Fed. We don't believe The Fed can rescue anything except the banks, which is their main concern, with lower rates or more money. The market seems to believe it for now. If you take a look at an unemployed person who has to pay a mortgage payment on a house that is worth less than was paid, then you will see someone with no motivation or ability to pay that mortgage payment.

As we noted this past week, people aren't paying their phone bills or their mortgages. Countrywide announced that delinquencies and foreclosures were up. But, of course, it doesn't matter to the world because BOA will buy CFC and so don't worry about the actual home owner or the house sitting in the neighborhood.

Gold hit a another new high after the lower interest rate talk from our central bank chairman but we continue to believe that the rally in gold is about over. The next move should be significantly lower, maybe into the $600's. Check the True Contrarian's site to the left.

One other item comes from a reader, thanks CM. Here is the St. Louis Federal Reserve President William Poole's take on the world. It's a classic.

FSI: 98.05 (most of the horsemen were down on the day--not a good day for speculation)

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