Real Estate Blog - Blackerer Tuesday or Wednesday (10/22 & 10/23)...going out on a limb! (update II)

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Blackerer Tuesday or Wednesday (10/22 & 10/23)...going out on a limb! (update II)

Tuesday 10/23 post closing: Dow closes down 236--Lehman CDS contract auctions "appear" to have gone without a hitch...we'll see, might have a slow fuse. This is only the bottom of the first inning...much more exciting news to come from the Derivatives market in the next 4 months that will hamstring a rebound in the Equities market.

Wednesday 10/23 posst closing: Dow closes down 514--indexes lose almost 10% in two days. The ripple effect, everything is connected and all the remedies have side effects. Strong dollar? Our trade deficit will skyrocket. You name it, whatever direction we turn, there is a roadblock of another shape and size. 6200 is Still the capitulation point for the DOW.

You ain't seen nothin' yet,
B-B-B-Baby, you just ain't seen nothin' yet,
Here's something that you never gonna forget,
B-B-B-Baby, you just ain't seen nothin' yet.

Bachman-Turner Overdrive...my favorite LDS Band!

All of the governmental efforts so far have, and will, amount to a "finger in the dyke!" The billions, nay, trillions set aside to stave off the impending defaults amount to Han Brinker's finger.

Next Tuesday and Wednesday, another set of contracts for Credit Default Swaps come due via auction. The last one fetched 9cents on the dollar...the hedge funds are on the hook for the other 90cents...fun times. More and more of these will be hitting the auction blocks over the next 3 months and if you think that this will pass unnoticed in the credit markets AND the shadow banking system of derivatives and off-balance sheet contracts you are sorely mistaken.

I am not sure that the impact of next Tuesday will be felt in the equity market (particularly the financials) immediately, it might take a few days. But there is a huge possibility that the HEDGE funds will have to unload all their equity positions to raise cash to cover the auction spread. Maybe they already have...if that is the case, then the impact will be delayed. But, just for fun, watch the play it gets next week in the media. The earnings reports will be killers next week!--it that weren't the only challenge!

Paulson said that the bailout, at this point, won't be used for Hedge funds...I think he will retrace his steps a bit on that point!

Posted by Rich Sweum on 10/17/2008 11:30 AM

Comments (10)

Post is included in group: All About Mortgages/Mortgage Networking
Post is included in group: Mortgages

10 Comments on Blackerer Tuesday or Wednesday (10/22 & 10/23)...going out on a limb! (update II)

OCT

2008

Rich - very interesting. I am starting to think the bottom may be closer than I had previously thought. I do foresee the bottom NOT being a soft landing and in fact being a big time crash. Interesting insight. You could be right on....... ahhhhhh the media - the people who say that there is no money to lend for mortgages........

Yea...the talking "nobs" on CNBC and Bloomberg ALL were part of the rally cry trying to get the public on board for this $700b bailout...everytime I heard those idiots say "no one can get a mortgage" I wanted to slap them upside the head! The reality is that the people who were able to get loans in 2000 through 2006 aren't able to get loans (or as big of loans) now because of sound lending criteria...not because of availability of funds.

The "nobs" are the minions of the Equity market. I think that the S&P 500 will be a more reflective index of the coming collapse.

OCT

2008

OK...in a two day period we lost almost 10% in the major indexes. Can you imagine what would have happened if Hank Paulson hadn't bribed some folks to purchase the Lehman Credit Default Swap Contracts yesterday???? We would have been down 1200 to 1500 points in the DOW...The upside of that scenario is that we would have gotten closer to the bottom much more quickly and thus been that much closer to beginning a recovery!

Did you happen to hear the rate link webinar today?

No Amy, send me an email about it!

It wasn't really anything new. He was talking about how interest rates were affected by different events. You can get a free 30 day trial if you aren't signed up with them already. It's an awesome tool. They do weekly newsletters with your profile information on it. Go to www.ratelink.com and say you heard about them from the Webinar - or from me and you should get the free trial.

I don't wish doom and gloom but I think a hard, hard bottom is very near. In all reality this may be what is needed before a recovery can take place......... let me ask this - with all the signs pointing down, as history would show, why are rates not screaming downward?

Lewis...that is a GREAT question! If you look at the trading of older MBS's as compared to pricing and yield on newly formed agency MBS noes...you get a little picture. I think there are about 8 things that are supporting the favorable price of the 5.5 and 6.0 MBS Agency notes...

1) The government is backing them (in fact) via the Fan/Fred takeover.

2) They are issued with current guidelines that are tighter and are at less risk of default.

3) The other options are not as attractive from a ROI perspective; T-bills.

4) They are more attractive than Municipal bonds at this point which will be exploding.

5) They are more attractive than Corporate bonds which will be exploding.

6) It's part of our leverage with China and Japan...if you don't want our economy to sink and if you want any guarantees on your preferred stock with Fannie and Freddie...you'll keep buying our MBS's.

7) Equities (stocks) are more volatile and are on a downward spiral.

8) They taste good!

Rich: Well thought out. I agree with you. I don't believe the market has bottomed. But we're close. I expect a levelling off within the next 6 months. Just about the time our world starts to show signs of a recovery!

OCT

2008

Paul...one of the wildcards (and I think there are a baker's dozen of them) is UNEMPLOYMENT...consumption drives our economy and recovery. This is why I was advocating a bottom up approach that would keep consumers buying things, generating tax revenue for local government (muni bonds are going to implode next) and keeping service jobs afloat, as well as well as supporting import consumption which is critical to for keeping foreign money at the T-Bill and MBS table.

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