Traderbill's Financial Markets Weblog

…for this week anyway. This is not the time to be buying stocks and we could see a test of the lows by the end of the week. This is strictly a low volume short covering rally and beware as they have reloaded and could start taking it down as early as today or by Friday. That is TB’s humble opinion, based on what he sees in the economy…recession or not that is merely arguing the number of angels that can fit on the end of a pin. The biggest asset class is a mess (housing), and the biggest contributor to GDP (consumption) is slipping. Meanwhile we have gone from an inflationary to a deflationary mentality…can this be good?

Housing: Everyone is all atwitter about the new guidelines (not approved yet as far as TB can tell), that raise the conforming mortgage to $417,000 to 125% of the median per area to a max of $729,750, which as TB showed in some areas of the country is below the median. But what about the minimum 10% down…how many have $50-75k lying around for the downpayment…or can qualify by using no more than 35% of income for home expenses? The Existing Home Sales reported Friday and New Home Sales Monday were telling  …not only is the price dropping precipitously…New Yorkers won’t notice though as the Northeast rose 6% while the South and West fell 6% (and that doesn’t include the upgrades and other incentives on New Homes that are contracts only not final sales and they don’t back out cancellations), while the inventories rose to 9.6 months supply, highest since 1/91  …average was 4 months from 2000-2005. The inventory of homes available for sale fell by 1.8%…but the time to complete a home has risen to 6.3 mos. from 4.3 mos a year ago (above courtesy of Merrill’s Richard Rosenberg), so guess they are in no hurry to add to inventories! The average home price is the lowest since 1993 while sales are at the lowest level since 1995. Inventory to Sales ratio now stands at the highest level since Oct 1981 – the last real consumer recession…yet homebuilders stocks rally?

Consumption: Heard a lot of chirping on CNBC this morning about re-fi. Still pointing to the MBA numbers showing a big pick up in re-fi – applications…they don’t track the actual numbers…so do you think people are filing multiple applications for re-fi? You betcha with appraisals lower and FICO scores falling while the minimum requirement rises. Lower rates are to help banks rebuild capital not make more loans…at a smaller margin too!

Markets (see Overnight Markets for comments on S&P 500 and General Electric long term performance): TB has read several unnerving articles lately. One quotes an SEC Commisioner, Paul Atkins, saying that hedge funds will solve the subprime problems…really? Didn’t they buy contracts they didn’t understand…are having the worst January in 3 yrs…and are losing insurance on CDS contracts due to subprime insurers (TB also notes that credit default insurance on counterparties is sharply up…do you remember when TB told of a Bear Stearns trader recommending this way back in 2004? 

Then there was an article in the NY Times by Ben Stein…who still believes the subprime problem is no big deal…guess he didn’t do the math on the derivative side. Stein cited a story from a broker on how IBM once released great earnings and the sales manager of a major Wall Street firm told the sales force lets see how far we can drive it down…and they did. Still think the markets aren’t one big casino? TB is still seeing red over the elimination of the uptick rule for shorting which has greatly increased volatility!

The quote above was influenced by an article in the Washington Post (Jan. 28, 2008): Good and Bad Capitalists. It talks of the number of capitalist firms that are destabilizing the financial markets and lays the blame right at Wall Street firms (as in the Stein article, firms have no concern over the damage they do, only that they make money…then they whine for bailouts). So perhaps it will be the hedge funds!

Lastly, how about Sir Alan of Greenspan? First, he did nothing to stop an equity bubble (although he performed beautifully in the ‘87 crash…but it went to his and the markets head), then he created a housing bubble and did nothing about the growing subprime crisis despite warning from Fed Governor Ed Gramlich. Now he is out and Bernanke is proving to be too much of an academic and didn’t learn from Greenie’s ability to speak indecipherably. Greenie started stumping and making confusing statements about the Fed which along with Wall Street exacerbated Bernanke’s problems. Then he was hired as a consultant by Deutsche Bank, and then PIMCO (as if they need his advice but might want to use him as a contrarian indicator…certainly Gross’ comments do not mesh with Alan’s). Yesterday, it was announced that he would be an advisor to Paulson & Company (no relation to the Treasury Secretary), a hedge fund that made billions by shorting subprime paper! Perhaps they want him as a contrary indicator too? By the Way Paulson & Company was cited as a hero in the Post article cited above? He saved us from ourselves…gosh to be a hero and get rich at the same time  …kind of like George Soros getting rich while breaking the Bank of England over their stupidity…it’s good to be king!  

FOMC Meeting: Market fully expects a 50 bp cut…or even 75…one observer said the way this Fed acts he wouldn’t be surprised to see them to 25 today and another 25 tomorrow if stocks selloff! Cute! The point is they are pushing on a string  …your banker doesn’t want to make more loans and is focusing more on how to stop the hemorrhaging and wondering where the replacement revenue for all those charge-offs and non-performing assets. With delinquencies rising and foreclosures can this bounce in financial stocks be anything but short-covering?

Bankruptcies: Tousa Inc. a Florida-based homebuilder filed Chapter 11 yesterday. Casino operator Tropicana Entertainment LLC is in violation of bond indenture and bonds may be accelerated. New Century Financial Corp asking for a 24 day extension to file a liquidating Chapter 11 plan. These are part of a 20 page article on Bloomberg on bankruptcy actions…but we aren’t in a recession!