Markets Exhibiting Severe Split Personality
I’m not sure how to characterize the market’s action, but bullish looking doesn’t especially come to mind. Over the last month or two a number of high profile financial and consumer stocks have been routed. I would mention the following just to name a few; Countrywide, Moodys, MBI, WaMu, Coach, Nordstrom, JC Penny. Individual stock blow ups are becoming par for the course. Does this look like a bull market?
But it seems speculators need to keep playing with turds in the sand box. And the themes are just down right scary, with material and commodity inflation being the primary driver. It would seem that in addition to a credit confidence crisis we are now being treated to an inflation blowback crisis as well. The emerging market mania resembles an historic capital flight. At least that’s where the bets are being made. Here’s what’s holding the market near it’s highs.
In addition the market has created a Nifty Three 2000 throwback in technology with a handful of companies now possessing huge market capitalizations, GOOG at 210 billion, APPL at 162 billion, and RIMM with 67 billion.
There is also a bull market in “trading” if nothing else. I say get a real job! It’s almost as if the action in the credit and consumer market is the inverse of action in the “trading” and “inflation” markets. Does this look like the time and place for more rate cuts?
It also appears that the heroin injections of these rate cuts are transitory indeed at least as far as the credit rout goes. One would think that central banks might recognize that the inflationary and USD blowback from these eases does little to save lost cause credit fictitious capital, and is causing huge new problems elsewhere? At least one central bank, Mexico seems to be unnerved by all this, and put on a surprise rate hike. And, as this story from Germany indicates, it’s not just US consumers who are being demoralized by bogusly reported blowback inflation. And Germans hold a strong currency relative to the US Dollar.
Meanwhile here’s what credit insurance on 2007-so called AA tranches looks like. The cancer has really spread. Then last but not least, the AAA tranche which makes up about 80% or more of these mortgage asset securities, and is where the real money is. How much of this is in the hands of foreign central banks? At last count they held $801.8 billion of housing agency paper in custodial accounts. Incidentally I now believe that the label “agency” in the Fed’s report is yet another subterfuge. How much is actually “AAA” mortgage backed securities and not agencies at all? And does it even matter if home prices are in freefall. See comment 17 below for more elaboration.
NEW YORK (Reuters) – Moody’s Investors Service on Friday began cutting ratings on pieces of top-rated collateralized debt obligations to junk level due to exposure to $33.4 billion in deteriorating subprime loans. Moody’s said it cut or may downgrade at least 45 CDOs tied to $33.4 billion of subprime mortgage debt cut earlier this month, its biggest action on subprime mortgages to date.
The credit cancer is now spreading to the tax free market, which is facing a twin blow. The first, discussed in a prior post, is an economic swoon in key states like California. The second is long overdue and centers around credit and default insurance offered by Emperor wears no clothes entities like MBI and Ambac. One of my regular readers and blogger JMF offers commentary on this one. A credit downgrade on Merill Lynch, an important credit enabler in the municipal market has also crimped that market. Credit spreads and questions about these Boyz have picked up steam. This is a huge market and supported by what exactly?
Thanks to my readers for picking up the ball while I’ve been distracted in Brazil. I’ve also notice that not being around good English speakers for a month starts to show up a tad in my writing and speaking skills. Amazing how the brain works. Bernard offered up the following synopsis of the SIV commercial paper market.
The average net asset value of SIVs rated by Fitch fell to 73 on Sept. 28 from more than 100 in July. A 0.5 percent drop in value of assets is equivalent to a 7 percent decline in the so- called NAV, Fitch said. Once an SIV’s net asset value falls below 50, a clause is typically triggered requiring the fund to liquidate.
The rate of decline in the average NAV for these SIVs has been very steady from July thru September (like a straight line). The chart on this Web page shows it. The key point I want to emphasize is that if you extrapolate the NAV decline on this chart, the average NAV for these SIVs will pass BELOW 50 BY LATE NOVEMBER. This will trigger the nightmare SIV forced liquidation of ABS that Wall Street is desperately trying to prevent (because it threatens to expose their insolvency.
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