Michael Gracie

The rally that wasn’t

• Jim Cramer called the end of days. He’s widely considered such a dope that whenever he says something peoples’ first reaction is to fade his advice.
• The Federal Reserve is now letting non-financial enterprises step up to the trough. I give credit where credit is due around here - Nouriel Roubini called this one last week on the RiskMetrics webcast.
• More credit: Henry Blodget and Company have been saying web advertising would take a hit, and they’ve been saying it for a while. You can continue to question the thought, but while you’re pondering Facebook’s COO says the web needs a new business model (albeit late), and VCs are still trying to sell free. Results from the second half of this year will certainly shed some light on the subject, but I wouldn’t bet against the Alley Insider right now.
• The rich are hurting too, and “the rich” includes institutional investors like pension funds. Take their actuarial perspective towards funding, throw in an alternative investments market including hedge funds and private equity (that have either gone neutron or can’t find an exit with flashing neon signs), and then lop on top an S&P 500 that has (as of today) been flat for a decade, and you’ve got a recipe for retirement ugly.
• Bad credit: Mortgage equity withdrawals closed in on zero for the second quarter of this year. I’ve heard more than a few stories about equity lines of credit being shut down even when there has been no drawdown at all. The good part of this is people won’t be digging themselves deeper into debt at a time when they should be concentrating solely on getting out. The bad part of this is that the consumption-based economy will suffer. For the rest, there’s always eBay and Bill Me Later.

And last but not least…

• Government gives handouts, but previously hat-passing Wall Street is now going to say no thanks? No wonder there was so much pork in the bailout bill. Congress can’t seem to get much right, and their timing is just as bad. Good thing they’ve got the blame game to fall back on.

Adieu.

In a poll from Glenn Reynolds almost half of respondents chose…

Can’t answer — too busy stockpiling shotgun shells and canned goods.

Based on panel estimates from Quantcast, Instapundit readers are solidly middle class, and over 80% are college or graduate school educated. In other words, I’m not sure they were just joking.

I’m not sure I blame them either.

Wall Street Journal:

The House of Representatives delivered a stunning defeat to legislation designed to rescue the nation’s troubled financial system, sweeping aside a call from President Bush to “send a strong signal” of confidence to markets at home and abroad.

The 228-205 vote Monday exposed deep unease among rank-and-file lawmakers in both parties with what would be an unprecedented intervention in the private sector.

The financial markets reacted with disaccord…

Tallies for the day: Dow -777.68 (-6.98%); Nasdaq -199.61 (-9.14%); S&P 500 (above) -106.59 (-8.79%).

Side note: Barron’s added that the Nasdaq was headed for one of it’s top ten worst days. Today’s result wound up ranking #3. Paul Kedrosky says watch out for rolling boulders.

UPDATE: Today’s market result was also the biggest one day point drop for the DJIA.

A chronology

I wonder who will take credit for the plan next.

As the press goes, last week Fed Chairman Ben Bernanke told ‘congressional leaders’ that the US faced an imminent meltdown. We heard from the horses’ mouths that this was scary. It couldn’t have been written any better for a movie. Surprise - now we have yet another bailout plan.

You can find the full proposal (for now) at the end of this post. The first thing you’ll notice is that it is pretty short, and the second thing you’ll notice are some of the egregious terms. The press and the blogosphere were quick to point out the latter, and various conspiracy theories were quickly generated around Section 8, which deals with the Treasury’s unilateral and unobservable authority, included protection from litigation. Amateurs, each and every one of them.

You don’t go to the negotiating table with a proposal, particular one that outlines to a country full of people how weak they’ve become without a game plan. And you especially don’t bring such a proposal to a band of lawmakers that you know have a penchant for changing things to directly benefit themselves, and who, while complicit in the problem to begin with, will do everything in their power to try and convince said country’s people that they are there to help them. The sticking points in the proposal are nothing more than “throwaways” - terms purposely put there only to create a little unrest and be caved on later - terms designed specifically to make those on the far side of the negotiating table think they won something.

Will it work?

I’m going out on a limb here…no. First and foremost, we are talking about the purchase of fairly complex mortgage instruments, including but not limited to the over-the-counter insurance which backs them in case of default. It’s that insurance that is causing most of the problems - a market of many 100’s of trillions of dollars - and if it collapses at one point it sets off a ripple of defaults elsewhere in the transaction chain. So while this move is probably quite necessary, the problem has been known for years. The Treasury really doesn’t have a clear idea of how much these assets are worth because the bankers that presently own them don’t - the market for these assets has become extremely inefficient, with few buyers asking very low prices, and the bankers demanding higher because they paid much more just a few years back. Sound familiar?

Now a new buyer steps into the fray - this buyer has well-publicized, deep pockets, and has publicly stated it is willing to pay more. How do you expect these sales are going to go? The Treasury is going to wind up paying entirely too much for these assets, and when the obligations finally sell taxpayers are going to be looking at a loss. The cap on purchases has been initially set at $700 billion, but I say that’s a drop in the bucket - the Fed injected roughly $150 billion into the system just last week to prevent a money market meltdown. As a result of this cap, the Treasury will be forced to liquidate positions prematurely in order to buy additional product. The result - more losses. They’ll be back at the national debt trough in no time, which brings up the second problem, borrowing capacity.

It isn’t just the US markets that are roiling - this is a worldwide financial crisis. Even China, who until now has had an unquenchable thirst for US Treasury securities, is getting tired. And with the US economy slowing, even they are going to see their need for dollar-denominated government securities wane. Either they (and every other foreign creditor still standing) starts getting bonds at deeper discounts, or interest rates have to rise - either way yield is headed up. If the former happens, Congress is going to be mighty busy raising that debt ceiling. If the latter, nobody is going to be able to afford domestic credit.

This is all a temporary fix just like the last three (or is that four) bailout proposals presented over the last year, including the one which laughably sought to have Fannie Mae and Freddie Mac doing the bailing (those GSEs are now being bailed out themselves, in case you’re just joining). It’s just that this one is bigger.

Regardless of its merits (or lack thereof), I suspect this proposal will pass. There will be oversight, and there will be further help for struggling homeowners.

And there will be more proposals.

UPDATE: It looks like the proposal may now include auto loans, student loans, revolving credit lines, and other ‘troubled assets’. The price tag is getting bigger already.

UPDATE 2: Congress seems to be biting on the wrong stuff.

Read more »

Linkfest Link Barrage Tidbits on real estate and oil, since this last weekend was about sun and fun (at least around here).

• After reporting homes sales were up 4% in New Jersey for the first quarter, the NAR decided that was a tad too optimistic. Revised first quarter…down 30%. As it turns out, a member agent pointed out the error of the NJ faction’s ways. I told you agents were getting pissed.
• The Washington Post is running a three-part series on the housing meltdown, just in case real estate agents, homeowners, investors, etc. still believe the NAR propaganda (i.e. it’s all the press’s fault).
• Countrywide’s Congressional Mortgage Discount Club does not exist. Any thinking to the contrary is “outrageous.”
• David Merkel hands out a few notes on crude oil. Up front, and of particular interest, is the rail against government action to discouraging speculation. Mentioned previously.
• The whole oil mess might be a non-issue anyway - scientists have discovered bacteria that eat garbage and “poop” oil. Will the debate over abiotic oil heat up from here?
• Peak oil or no peak oil, Donald Rumsfeld isn’t waiting around to find out. He bought a Vespa.

Adieu.

Getting ready for the weekend

Topping the sleaze charts:
• Government officials got big loan discounts from Countrywide. “Friends of Angelo” included, who else, but the heads of congressional banking and finance committees. Note - these folks voted for a government mortgage bailout plan, and no wonder - they’re getting foreclosed on.

Voted “Best Value From Your Stimulus Check”:

• To hell with retail purchases - get “more bang” for your stimulus check dollar. A new “core inflation” measure is just around the corner…ex food and energy and sexual favors.

And last and least:

• A judge recuses himself from obscenity case over a purportedly obscene website, but it seems what was truly obscene was the media’s lack of fact finding standards. The media will continue to cry about the internet killing them, never understanding the simple truth - their product is for shit.

Just a summary of nuttiness

• Congress is nearing a quest to sue oil producing countries over prices. Even if they won such a lawsuit, who would determine the damages, and who would enforce the judgement? Is the Justice Department going to say “pay up, or you can’t export your oil to us anymore”?
• It’s time to lay down further regulation of the commodities markets. Despite skyrocketing global demand (and blatant stockpiling on China’s part in advance of the Olympics), the government still wants to blame everything on speculators. Forget never ending trade deficits, soaring national debt, and a plummeting dollar…it’s time to further regulate the exchange of futures contracts by Joe Trader In The Bathrobe.

What is going to happen when and if this bubble bursts?

UPDATE: Revisting peak oil (seen the chart before, and I’d recommend downloading and looking at it on a big screen).

UPDATE 2: More blaming the traders.

UPDATE 3: Hoarding may be reality.

Not politics…just facts.

Nancy Pelosi announced today that Congress will be presenting an economic stimulus package early next week.

The S&P 500 Index reacted by shedding almost 40 points (and the Dow was down a cool 307). Maybe Pelosi & Company should stick to stimulating the gourmet food in the House cafeteria?

UPDATE: The markets didn’t like the Administration’s response either. All most people are going to do with $800 is pay their gas and electric bills.

UPDATE 2: Paul Kedrosky calls the Bush Administration response “rushed” and “panicky”.

National Public Radio noted that there were a lot of data theft incidents in 2005, but the government didn’t do much about it. They may wonder why - I don’t.

If you were a politician, and you had the following two choices, which would you pick?

1) Stay up late, read about the consequences of data theft and how the cost is passed on to your constituents, then take all your cohorts to lunch, one by one, and try to convince them the bill you just drafted makes sense because it serves the people;

or

2) Listen to a paid consultant for some big data mining company talk about how difficult it is to stop data theft, while you sip champagne, in a Gulfsteam 5, on the way to a $500 round of golf.

Tough choice.