Monday, February 25, 2008

Bond Insurers Have Their Day

Top Line: The stock market had a slow start on Monday but when the Standard and Poor's affirmation of MBIA's AAA rating. This news gave the market a real lift as the Dow jumped about 100 points in one minute. This lift has left us with a larger lack of confidence about the very near term move. We still envision the 12,750 area as a pretty good area for resistance.

The news from S&P doesn't sound as good as the market traded. When the news hit the wire, the stock market was only paying attention to the headline. That headline was that Ambac would Not lose its rating. The fine print was, "not Now".

Last Friday the market jumped on the scent of the "bailout" for Ambac. While Ambac was working on getting some funding/capital to keep its rating, the shareholders were getting worked over. One of the proposals for Ambac was to sell some additional shares in the company. Let's see, how many shares would you like? Stock is trading around 10 and now they want to triple their stock outstanding to get the needed capital infusion. We suspect the price of the stock might not stay at 10 bucks.

But, let's get to the bottom of this stock market analysis. How does this affirmation give us confidence that the market should be bought? Does the Problem go away now and what was the problem exactly? We think the market has also been suckered into believing that there is some connection to bearishness when Ambac was rumored to be downgraded. Bearishness in the global sense, not just for Ambac as a company but the stock market as a whole.

While it is true that the major defaults would not be a good thing for the market, having a little AAA insurance seems to be good enough. We suggest that the problem is bigger than a little insurance. This blog has a core belief that the economy will suffer from the housing problem. Ambac insures some of the mortgage backed securities that are directly tied to the houses that we are talking about. Somehow, Wall Street thinks that as long as there is insurance, there is no problem.

Oh, and by the way, MBIA decided to forgo its dividend to shore up its capital situation. On Monday they were also planning to split up there business into two pieces, the mortgage (they call it asset backed) and the municipal. As Fleck said, bad plus good equals less than 0.

These two companies, Ambac and MBIA, have both dropped about 80% the past year and have done several things to bolster capital against the screaming mortgage market. When will that problem be over? The bottom line is that the market has, for the moment declared this problem solved. Let's see what transpires now.

We noticed that there have been a few articles that might have been written by us over the past few days. We thought you might think so, too. The first is one from Bloomberg on the stimulus package announced by the Fed and the Government.

Here's one on people digging into their 401(k)'s. The article talks about how they had to tap into their retirement fund and now also need to sell the BMW!!! because American Express had reduced the limits on their credit cards??? What is wrong here??? We would say that people wanted to take advantage of easy credit (remember, we call it debt here at the Update).

There are more stories just like this one. We couldn't find the article but the woman was quoted in the article saying she couldn't make the payments on her child's preschool education. Why? Because a bank had called her and told her that her home had gone down in value and they were reducing her home equity line of credit. She had been writing checks on her HELOC for the costs of preschool!!!

FSI: 76.54 (GOOG was down hard on Monday)

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