Where shall we begin?
This was quite the week to chose topics from: We had several bouts of Fed action, the best one day rally in 5 years, no (ahem) inflation. And, our strong dollar policy was re-emphasized, helping Crude Oil hit $113, and Gold break $1000. Bear Stearns (BSC) got a bail out, and if I recall, there may have been some news about NYS Governor Eliot Spitzer. I’m sure I missed an item or two.
Let’s start with the numbers — which don’t reveal the full tale this week: The big gainer was Crude Oil, up 4.8% for the week, and 89.5% over the past 12 months. Crude oil kissed $113 at one point this week, and $125 won’t be a huge surprise if it happens. Gold was also gainer, adding +2.7% to its year long 55.7% run. Also rallying were REITs, which recovered 2.3%, making its losses ~21% over the past year.
Despite Tuesday’s huge rally, equities were mostly flat for the week, ranging from the Dow (+0.5%) to the S&P500 (-0.4%). The dollar, bonds, and euro stocks all lost ground, as did emerging markets.
The Fed’s new auction facility — the $200 Billion dollar TSLF — iwas hoped to be a way to restore liquidity to tainted paper.
I’m going to say here what no one else has: These markets are illiquid for a reason. There is a difference between bonds, where you can easily determine the underwriters creditworthiness, and bundles of 1000s of mortgages, and then 1000s more. Maybe somethings weren’t meant to be traded.
Following Tuesday’s 3%+ gains, markets were trading a little sloppy. Friday, the wheels came off of Bear Stearn’s bus, sending shockwaves thru the finacial community.
Barron’s Trader column noted the extreme sentiment levels:
"That the New York Federal Reserve and JPMorgan Chase (JPM) were devising ways to bail out Bear Stearns (BSC) raises the specter of a bank too big to be allowed to fail, and the prospect of such a failure — and others that could still come — frightened investors in markets across the globe.
That distinctive smell of fear also egged on traders who counted off increasing signs that a stock-market bottom, if not yet here, might at least be near: a venerable Wall Street giant teetering on the brink of collapse, frantic government intervention, the whiff of panic everywhere you turn. The bargain hunting that ensued lifted the Dow Jones Industrial Average 118 points off its intraday low Friday afternoon, providing a wee bit of reprieve heading into the weekend."
I would remind readers of two things: First, during the 2000-03 Bear market, all of the usual metrics for picking a tradeable low — Arms index, sentiment gauges, put call ratios, etc. — were useless. So too, were technical support lines, which turned to wet tissue paper under the weight of panic selling.
Second, as long as people are actively hunting for a bottom, you can be pretty sure that a permanent bottom is still off in the future. Its not until the bottom catchers get abused for a while that any sort of true bottom shows up. Its a process that involves pain and blood and tears.
Enough sentimentality! We have a busy, fun-filled week ahead: On Tueday, we start the day with Housing Starts and Producer Prices; Then the FOMC announcement in the afternoon.
How’s this for madness: Fed fund futures are pricing a 60+% chance of a 100 bp rate cute. (Can you say $5/gal gas?)
We also get lots of brokerage firm earnings this week: Bear is on Monday, then we get Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley (MS). I’m sure the results amuse and delight.
Enough Ben Steinery! On with the linkfest:
INVESTING & TRADING
• Bracing for a Bear of a Week: Barron’s cover story: Crunch Time — Big Week for Wall Street ominously foreshadows the week to come. "Wall Street hasn’t faced a crisis of this magnitude since the implosion of the giant hedge fund Long Term Capital Management in 1998. And the news isn’t expected to improve any time soon. This week Bear, Goldman Sachs (GS), Lehman Brothers (LEH) and Morgan Stanley (MS) are slated to report results for their first quarter, ended in February. The results won’t be pretty. Despite Bear Stearns’ brave talk Friday that it could continue on its own, that may prove tough. Indeed, a deal for the firm could be announced before the markets open Monday. If none occurs, options trading indicates the stock could fall below $20 next week."
• Okay, let’s get all of the Bear Stearns stuff attatheway:
On Monday, our Rumor of the Day: Bear Goes Belly Up
On Tuesday, Punk Ziegel analyst Dick Bove correctly opined: "The Federal Reserve’s actions today may have been strongly influenced by Bear Stearns’ problem."
Thursday, we reported the rumor that Bear May Go Belly Up the next day.
Friday, we live blogged the Bear Stearns debacle
Then at 2:17pm, S&P Cuts Bear Stearns’ Rating (giving all a good laugh)
Where in the World was Bear’s Jimmy Cayne? Playing Bridge (WSJ)
FT is reporting that Bear races to forge deal with JPMorgan
• Here’s the biggest joke of all: It turns out that my rather Bearish forecast for 2008 was Too Optimistic!
• MOVE OVER, FANNIE AND FREDDIE, MAKE WAY FOR FEDDIE: Feddie has offered to lend $100 billion in cash to banks, just in case they need a quick pick-me-up. Feddie also will lend $200 billion in used-to-be-good-as-gold Treasuries to Wall Street investment banks that find themselves a little short of the ready cash, taking as collateral their mortgage-backed-securities that have become a drag on the market. (Barron’s)
• Are Low P/Es A Valid Reason To Buy Stocks?: As we saw with the homebuilders, or Google and Apple, the answer is no (Wall Street Journal)
• Recession Fears Power Gold The metal has historically functioned as a haven for worried investors to park cash in times of economic concern. So as storm clouds gather over the world’s biggest economy and the dollar implodes, gold simply will grow more attractive. The greenback’s weakness has been a driving force behind the metal’s climb past $1,000 a troy ounce Thursday. The currency is making fresh lows almost daily amid the credit-market aftershocks from last year’s U.S. subprime mortgage collapse. Friday, the Comex April gold contract settled at $999.50 on the Nymex, up 2.6% on the week. (Barron’s)
• What are Broker’s Exposure to Carlyle Capital ? Carlyle Capital defaulted, and they were rumored to be leveraged at 32X
• Supreme Court Inc. The NYT Sunday magazine has a long report on how "the Supreme Court term that ended last June was, by all measures, exceptionally good for American business. The chamber’s litigation center filed briefs in 15 cases and its side won in 13 of them — the highest percentage of victories in the center’s 30-year history. The current term, which ends this summer, has also been shaping up nicely for business interests. . . . Though the current Supreme Court has a well-earned reputation for divisiveness, it has been surprisingly united in cases affecting business interests. Of the 30 business cases last term, 22 were decided unanimously, or with only one or two dissenting votes. Conrad said she was especially pleased that several of the most important decisions were written by liberal justices, speaking for liberal and conservative colleagues alike. (New York Times)
• ‘DJ Newswires had some good questions about Bear’s credibility
• Goldman Sachs’ Friedman: 80 Cents is ‘The New Par’ (Wall Street Journal) That’s a variation of my "25 is the new 75" see also Blankfein Loses Wall Street Halo
• Friday’s are a bad day to have a Market on Close Imbalance Buy Imbalance
• My nomination for the week’s most poorly timed & argued article: The usually astute Ken Fisher on Why the Credit Crunch is a Myth (Forbes)
The Wall of worry continues to build:
• We desperately need to move away from Fantasy-based Economics
• Banks face "systemic margin call," $325 billion hit: JPM Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (Reuters)
• Debt Reckoning: U.S. Receives a Margin Call:
The U.S. is at the receiving end of a massive margin call: Across the
economy, wary lenders are demanding that borrowers put up more
collateral or sell assets to reduce debts.The unfolding financial
crisis — one that began with bad bets on securities backed by subprime
mortgages, then sparked a tightening of credit between big banks —
appears to be broadening further. For years, the U.S. economy has been
borrowing from cash-rich lenders from Asia to the Middle East. American
firms and households have enjoyed readily available credit at easy
terms, even for risky bets. No longer. (Wall Street Journal)
• Insurer Losses From Subprime Approach Katrina Claims: The collapse of the subprime mortgage market will lead to record losses for insurance companies, overtaking Hurricane Katrina, the worst natural disaster in U.S. history.The amount of asset writedowns and credit losses reported by the industry has reached at least $38 billion, just short of the $41.1 billion in claims from Katrina, which killed more than 1,500 people and left more than half of New Orleans homeless in 2005. (Bloomberg)
• More People Pushed Into Part-Time Work Force: Overall, the part-time share of the job market has been fairly constant for decades, accounting for about 17% of jobs. Overwhelmingly, people in part-time jobs continue to take them by choice for the shorter hours and greater flexibility, and both that group and the overall part-time workforce dipped slightly last month. But economists expect the share of those in economic need to keep rising as full-time employment falls. "You’re going to see a lot of part-time workers who wish that they were working full time," says John Silvia, chief economist at Wachovia Bank. (Wall Street Journal)
• A 16-Year Housing Slump? It Could Happen The current weakness in U.S. home prices could persist for years, especially if you count the toll exacted by inflation. For all the wishful thinking in the housing industry, home prices can be remarkably stubborn. Just look at what happened in the ’80s and ’90s. The inflation-adjusted average price of an existing home peaked in 1979, didn’t bottom out until 1984 and didn’t return to the 1979 level until 1995. In other words, real home prices went nowhere for 16 years. (Barron’s)
• The next shoe to drop in housing:
The credit crunch has finally hit the traditional mortgage
market.Investors are now shunning mortgage-backed securities issued by
government sponsored enterprises Fannie Mae and Freddie Mac, which have
been critical in keeping the real estate market from completely falling
apart.Some fear this development will make it harder for people, even
those with strong credit histories, to get a home loan (CNN) see also Money Magazine: Why it’s not too late to refinance
• Glut of Homes on the Market Grows, New Data Show (WSJ Developments)
• Minding the Gap:Home-Price Downside: The economic balance hangs in large part on how much further home prices will fall. A look at one important measure — the relationship between home prices and household income — suggests we might not even be halfway there. (Free WSJ) see also Gauging Value in Real Estate As Home Prices Slide
• US Foreclosure Activity Rose in February: Nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates, a research firm said. (AP)
• Federal Rules Let Too Many Poor People Buy Houses
— Freddie Mac Chief Executive Office Richard Syron said he’s urging
changes in federal rules that enabled too many low- and moderate-income
Americans to buy houses they can’t afford. (Bloomberg)
• Home prices are dropping, but should first-time buyers jump in? Everyone likes a bargain. So it’s no surprise that as home prices fall in many markets, those who have been priced out of owning a home are beginning to take notice. And some in the real-estate industry are saying that factors are aligning to make this a good time for first-time buyers to be in the market because they don’t have to face the challenge of selling a home in order to buy another. (MarketWatch)
Lots of Fed speak this week, and commentary also:
• I am one of the few people advocating this position: Recession could be best medicine:
Several economists, including one member of the Fed’s policy-making
committee, have argued that more rate cuts are the wrong solution to
spur economic growth. Some even believe a recession might be the best
answer for the economy in the long term. That’s still a minority view
• Calls for 1-point rate reduction grow louder:
The Fed’s apparent willingness to loosen the money supply, combined
with nearly daily blowups in the financial system, has pushed up the
odds on futures that price in the likelihood of rate changes. Traders
in this market are now anticipating a 100-basis point cut in March.The
April contract Friday jumped to 97.88, which translates to 100% odds
the Fed will lower interest rates by 75 basis points, and more than 50%
odds of an additional 25 basis points — which would bring short-term
interest rates to 2%. (Marketwatch)
• TIPS’ Yields Show Fed Has Lost Control of Inflation: Bond investors have never been so sure that the Federal Reserve will lose control of inflation. They’re so convinced that they’re giving up yields just to buy debt securities that protect against rising consumer prices.The yield on the five-year Treasury Inflation-Protected Security due in 2012 has been negative since Feb. 29, and traded today at minus 0.17 percent. The notes, which were first sold in 1997, have never before traded below zero. Even so, firms from Deutsche Asset Management to Vanguard Group Inc., the second- biggest U.S. mutual fund company, say TIPS are a bargain. (Bloomberg)
• The Fed Can’t Fix Home Prices: Is a housing bailout the solution for clogged-up credit markets and a faltering economy? What the Fed has been doing and did again yesterday hasn’t really worked, notwithstanding the pops it produces in the stock market every time it shovels liquidity into the system. The Fed’s latest move provides financial institutions another $200 billion in direct short-term lending against their unsaleable housing collateral. The Dow Jones jumped 416 points. But it won’t restart markets for the underlying collateral. (WSJ)
• Lastly, A secret Fed memo recovered
• What, you thought we would forget Spitzer?
See also The NYTimes Spitzer Scandal FAQ
• The Bush family’s budget legacy lives on: George W. Bush reportedly thinks he can rally conservatives to the presidential campaign of GOP maverick Sen. John McCain. But looking at budget trends in the Bush years, it’s hard to see what his conservative credentials are.
In fact, George II looks pretty much like what George I — his father President George H. W. Bush — once said he was: "A government guy."
TECHNOLOGY & SCIENCE
• Microsoft Talks With Yahoo Make Price Negotiations More Like Microsoft Corp., the world’s largest software maker, may have opened the door to price negotiations with Yahoo! Inc. after the two companies met this week, making a deal more likely.The software maker sent executives to talk with Yahoo officials on March 10, their first meeting since Yahoo rejected a $44.6 billion takeover bid, according to a person familiar with the situation, who refused to be identified because the talks are private.The discussions may signal a thawing of relations between the companies and may make Microsoft more willing to pay a couple dollars more” (Bloomberg)
• Check out the wicked cool Google Sky
• Shown on the same scale as the Earth: All the water in the world (1.4087 billion cubic kilometres of it) including sea water, ice, lakes, rivers, ground water, clouds, etc. and all the air in the atmosphere (5140 trillion tonnes of it) gathered into a ball at sea-level density.
• YouTube Videos go HiDef Actually, higher quality. Not HD, but close.
• The world’s 50 most powerful blogs: Not a market or economics blog in site.
• Incompetent People Really Have No Clue, Studies Find: One reason that the ignorant also tend to be the blissfully self-assured, the researchers believe, is that the skills required for competence often are the same skills necessary to recognize competence. The incompetent, therefore, suffer doubly, they suggested in a paper appearing in the December issue of the Journal of Personality and Social Psychology (San Francisco Chronicle)
MUSIC BOOKS MOVIES TV FUN!
• I just started Bill Fleckenstein’s Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve. Its a fast reading, and quite entertaining.
• After this crazy week, I picked back with some Andreas Vollenweider
• Speed racer Trailers
• 20 Biggest Record Company Screw-Ups of All Time Notably missing: When John Fogerty left Creedence Clearwater Revival to begin his recording solo, his record company sued him, claiming the songwriter had plagiarized himself. The entire tale is sordid and ugly and makes the labels look even worse than they really are, which is kinda hard to do.
• Bear Stearns Anagrams (FT/Alphaville)
• Best prank ever: Stopping time at Grand Central Station: Over 200 New Yorkers recently walked into one of the busiest train
stations in the world, New York’s Grand Central Station, and at exactly
2:30 pm, all froze in place. There’s one guy in the video who froze
just as he was stooping down to pick up some scattered papers. Talk
about commitment. Get the full briefing on the backstory here. Part 2 of this prank in London is also impressive.
That’s all from a weekend spent car shopping! The first quarter isn’t even over, and we already have a strong contender for quote of the year: "The best thing about 2008 is that it will end next winter." -Ken Goldstein, labour economist at The Conference Board.
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