(There were some major factors last night. See Overnight Markets Commentary. TB)
…yesterday was simply too much…a rally without resistance…are the bears reloading? Judging from the below average volume they simply chose not to fight…perhaps waiting for Friday’s payrolls!
We have long criticized the rating agencies for looking through the rear view mirror, yet the willingness to pay has replaced the ability to pay in credit decisions. This is severely flawed as several potential creditors might be making a decision on an individual at the same point in time.
Thus a person might get $20,000 in credit from two credit card companies, approved for an auto loan or lease, and buy a home (before last August). Then, we compounded the problem by assessing penalty rates that would have formerly been termed usurious, except by the Mob, and with teaser rates at which the borrower qualifies with total disregard for the impact of a reset, and loaned them from $200,000 to a million or more, on incomes of $100,000 or less.
Furthermore, we now routinely charge the necessities of life such as gasoline and food…as Robin Williams’ Mork once quipped to Orson: you can’t use a credit card for groceries…I guess they are too hard to repossess. The main reason was groceries were a low margin business and still are, further reduced by credit card fees, as the supermarket has replaced the bank as an ATM.
It is within this context that TB is critical of the Paulson plan which rewards those least likely to be able to pull thru while penalizing those who are marginal. It seems we have all of our priorities bassakward! TB reiterates: beware of financial stocks…and maintains that there will not be a continuing rally in stocks but it might take till yearend to play out.
While the details are sketchy (Hank plans to have a press conference this mornng, flanked by mortgage lenders, investors and advisors), it appears to be a non-bailout bailout. They did this over the dying carcasses of banks. They are going to fix subprime mortgage rates for FIVE years…FIVE YEARS??? Also, unlike the Caleeforneea plan of the Governator which only applied to owner occupied homes, this apparently has not been included in the plan…that would include speculators (FLIP THIS!) with three, five…TB even heard of one with 40 homes he is renting out! Where is the fairness in that? Oh and true to the American Creed…this is for true subprime borrowers…those with FICO scores of >660 out of a possible 850 and haven’t risen by 10% since the loan was taken out (between Jan ‘05 and July ‘07). will be given priority. So you see…if you paid down credit card debt and that caused your score to rise and now you might not qualify! Got that? A penalty rate for doing the right thing. Also, how many above 660 will remain there AFTER their loan resets??? Is this worthy of a stock market rally? We are all nuts!
Here are some other areas of concern:
1. Banks – will have their margins severely strained…where will the REPLACEMENT REVENUES come from? Guess that justifies the current P/E’s…not (same goes for brokers!). Also remember the banks have a bunch of subprime home equity loans which are being whittled away…and credit card and auto loan delinquencies are rising…are we all stupid? Furthermore with more underperforming loans just how willing will the banks be to increase loans…especially if it requires raising their Tier I capital. By the way our banks would be in deep trouble had they adopted Basel II yet: that would mean MORE capital.
For a second day, Jim Cramer was saying buy bank stocks…because in previous periods when the Fed has eased the banks make money…Good Grief! Is the man blind? Can’t he see that the yield curve is NOT inverted…and banks no longer make bets on long rates…their portfolios are almost exclusively variable rates…tied to bills or LIBOR or short treasury’s…and the majority of adjustable rate loans on their books will reset at LOWER rates! Remember banks had high interest rate loans on their books then, not teasers…but they do have adjustable rate home equity…that is the mess Wells Fargo is in without a single subprime mortgage on their books but a load of home equity loans that are going to kill them. How do you perfect your interest in a property if you have a second lien? By picking up the first mortgage and when THAT is above the market value you tend to hesitate. Think about this before you buy bank stocks especially before they come totally clean…and this whacko idea falls on its derriere. There is another issue: the banks investment portfolio…which includes municipal bonds…many of which are backed by monoline insurers. Yesterday Moody’s announced that within two weeks they will come back with a decision on rating insurers risk. This could mean downgrades…and if credit deteriorates on the bonds with MBIA, FGIC, SCA, and ABK all weak…ACA and CIFG in worst position…there could be risk to bond valuations.
2. The Fed – despite begging for a 50 basis point rate cut at the next meeting…some said a 150% emergency cut immediately…would that be good for stocks…initially yes but then the gains of the dollar today (which is also weird) would be eliminated…a more modest 25 basis point cut would be better and more in keeping with a weak economy.
3. Housing Market – despite a slight drop we still have a very high 8.5 months of unsold homes. Also, the homes that are selling are the above average ones causing the median to fall while the mean is stable. Who cares right? Average is average. Also, those who HAVE to sell are driving prices down even more and if it is a tract the developer is undercutting everyone…get the picture? Condos? Who is going to pay the association fee? Ah, tack it on to the property as a lien…good luck.
4. Credit card companies – if you heard the testimony before Congress, there are likely to be laws passed to limit interest rates or at least charges or better disclosure or period between notification of a rate increase being extended or…all of the above. TB has no sympathy for them…greedy thieves!
5. GOVERNMENT – state and local government will see lower revenues (unless Congress acts quickly and if the AMT is any indicator, loan forgiveness will be taxed thus putting borrowers in even worse shape…hmmm does a contract modification equal loan forgiveness??? Who the heck knows! Then there will be appeals on property taxes since the value has dropped…30% or more in some areas, but does it matter as a lot of those subprime loans have no impound account…and in California property taxes are due on 12/10 and 1/10… most pay them together to get the tax deduction…that is IF they can. Look for lower revenues…and with more pension fund exposure to CDS coming to light that might mean even more problems…a trifecta: lower income taxes, property taxes and pension funding…ain’t that swell!
6. Auto companies – if you heard GM’s point man on auto sales yesterday and what he said made sense to you, there is a place for you at the asylum! A friend is a BMW salesman…one of the hottest selling cars right? It was…until August…since then sales have dwindled down due to requiring HIGHER credit scores on leases and he is even being asked by customers if he can get them out of the leases…the culprit? They too used a combination of credit scores and stated income!
There are obviously more…corporations who squandered their cash on stock buybacks…many like FNMA and FHLMC issuing preferred stock to buyback the common, or those like Home Depot who issued debt to do it, lowering their credit rating to just above junk. Hedge funds who will likely be using less liquidity and there will be fewer of them next year.
If you like Hillary, I hope you heard her last night on CNBC. She wants to cure the AMT and replace it by just increasing a part of the capital gains tax…since so many American families own stocks…in their IRA’s Hillary…and will eventually be taxed as ordinary income. She blew it! Badly! But she is right: increase the very top bracket and not preference as capital gains passive income…like dividends. Some of you might not like that but how many middle class workers would you sacrifice for the 5% that own 95% of the wealth? Yet we have to keep the capital gains tax attractive to promote risk capital…got it?
Trust the government: trust them to screw things up even worse…Paulson included…by the way some GOP lawmakers are upset with his plan…of course the banking and credit card lobbyists that are into them are probably already working for concessions. The above comments don’t even begin to cover the issues. In short: this plan FAILS…miserably! Even IF the plan were to succeed…it is a Band-Aid…that will curtail lending for years…decades?…to come. Of course, if CEO’s were to take less and give more to the workers…naw, not even on the table.
We are living in a time where all the rules of finance have been tossed out. Those rules, like 20% down on a home have been tossed out the window. After you repeal all those rules what do you have to protect yourself and to provide capital to someone who is truly worthy of it? A mess of our own making!
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint…sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC December 6, 2007
