Tuesday, September 23, 2008

Buffett to Prop Up Market All By Himself

Top Line: With the boys on the hill, the market didn't know which way to go today so they went in both directions in a wild session. The moves were sometimes very quick and powerful but in the end the market was down on the day...but after the close, there were some developments. Whatever rally may "develop" on Wednesday, we still think that the market will be lower three weeks from now than it is today.

The "development" after the close was that of Warren Buffett's $5 billion commitment to Goldman Sachs, one of the perceived winners/survivors of the mortgage mess. The news has given the overnight US futures a chance to get happy. We can only surmise that the world has now become risk free because Buffett has decided to take a dive into the market. We get to this conclusion because the NASDAQ 100 futures are way up, too, and there are very few banks in the NDX...

This article gets at some of today's top items. This time it's about CDS's which are contracts that allow a company to lay off the risk of particular bonds. Of course, other company's would be taking on this risk, as was AIG's involvement. The article says that regulation seems to be the name of the game these days. More government has never solved the problems. Again, it's the old story of the government is there to help you since you definitely need help.

CM asked a question in the comment section which goes something like this: "Why doesn't the government just suspend the valuation of these troubled assets and suspend mark to market for a set period?"

Thanks for the question CM. Maybe you were making a statement that they should do that rather than asking our opinion but we can't resist answering. It's an interesting concept because the problem seems to be the valuation of assets which is why the G-men want to buy up the poor performing assets.

Anyway, the problem is not that they are valuing the assets so low, it's that there is no liquidity in the market place. What the Fed has been trying to do, for about a year now, is to provide liquidity so that banks will continue lending. Since we are in the contraction of the credit bubble, there is less and less money around for loaning. This causes all manner of problems which the Fed has tried to solve by throwing money at it. This has done something to put off the result of a contraction in credit, that being real live deflation.

Let's say that the value of residential real estate was $22.5 trillion in 2007 and that the value of that real estate dropped say 10%. That would suggest that household wealth decreased by over $2 trillion. That's a big number and is at the heart of the financial issues faced by these financial institutions. Yes, some homeowners have not lost any real money just home equity but they have stopped their big home improvement projects.

We will have to pursue this topic more...hopefully tomorrow...gotta go to bed.

GDX 37.18
BGEIX 18.21
HUI: 344.45

FSI: 70.39 (is the Big Bounce over??? Wednesday should be interesting.)

VXO: 38.54 (Thursday's high of 45.81, getting close to 50 or higher)

SDS: 73.48 +3.28
QID: 53.02 +1.02

Dow Industrials: 10,854.17 -161.52

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