U.S. stocks swung between gain and loss 22 times yesterday -- but at least didn’t tank in the final hour, ala Tuesday -- as Congress engages in its typical game playing. At times it seemed Paulson and Bernanke were getting through to them, other times it did not. The concern right now though is not really that the plan won’t be approved but that it will become less effective than the originally clean version as everything from executive compensation to offering additional assistance to those that bought more house than they could afford gets added in.
The market has moved to a wait and see mode and Congress better understand that the plan known as TARP needs be finalized by Monday or the reality of the situation will deliver the message in a harsh way. Warren Buffet made a huge bet yesterday (even if the terms of his investment in Goldman Sachs were supreme) that this plan will be implemented soon and one can guarantee he’ll be on the phone explaining the need for speed.
TARP’s original intent was to unclog the credit markets so the situation doesn’t lead to deep and broad implications for the overall economy that will affect even those that manage their lives in a responsible way, not to simply bail out poor decision making – as much of what the majority is attempting to push into this plan seems to think this is about. But this is Congress and it will likely take this give and take to get the deal through. That’s unfortunate because there is a risk to participation in the plan as a result and thus the pricing mechanism for these troubles assets may not work as efficiently.
This entire situation has been exacerbated by accounting standards that make zero sense, but we must first deal with the seized up credit markets and then we can get the accounting back to something that has a glimmer of common sense to it. We’ll also have to finally learn the perils of reckless monetary policy and the flawed Keynesian models that heretofore have driven the Fed’s decision making.
Market Activity for September 24 2008
Credit markets tightened further yesterday as spreads widened to the alarming levels we saw last Thursday that sparked a fire under everyone to implement a strategy that removes troubled assets from the system – the government has the luxury of buying and holding these assets so that something close to a hold-to-maturity value is realized; the banking system does not at this point. Banks continue to bolster balance sheets on concern the TARP proposal won’t happen quickly enough – speed is of the essence; it seems members of Congress have finally realized this.
The charts below show the extent to which the credit markets have tightened.
The first chart, the TED spread, measures the risk-averse nature of the market. A wider spread means the market is running for safety.
The second chart shows one-month LIBOR – LIBOR is the rate that banks in London can borrow from each other. (Important to note, some LIBOR rates are used to set adjustable rate mortgage rates here in the U.S.).
Bottom line, when these indicators shoot up it means the credit markets are not flowing freely – and at these levels that’s an understatement.
The one-week T-bill now yields 12 basis points (or 0.12%), which shows as clearly as anything that cash has run for cover. Return doesn’t matter, so long as you get your dollar back.
Despite the serious nature of this credit-market lock up, stocks have held up very well, and so long as one is properly diversified you can mange the downside. Again, if Congress is going to play around with this, the market will send them a message that will get their attention.
We discussed the TARP (Troubled Asset Relief Program) hearings enough yesterday, but I want to just touch on a comment made by one of the Congressman on Wednesday. He said he has received 200 calls opposing the bailout. (This is not a bailout, this a an attempt to stop a freeze up of the credit markets from reverberating throughout the economy and touching every citizen as a result) He went on to state: if he gathered with his constituents to say the rescue was needed to increase the availability of auto loans, they’d laugh him out of that town-hall meeting.
One could actually feel compassion for a person like this if his ignorance were not so harmful. Um, this is not about making sure some reckless consumer has the credit available to buy that 5 series Bimmer. This is about keeping commercial, mortgage, consumer, and short-term business credit going. If the credit markets are not unclogged, it is not only some foolish consumers desiring to buy something he can’t afford that will be affected. We are talking about stock market savings and home prices. The declines we have seen in these two savings vehicles (the largest savings vehicles) is child’s play if this intervention is not accomplished, which is why it will eventually pass. I’m not trying to alarm anyone, just stating the facts as this letter has always tried to do.
What we have seen late yesterday and into last night is encouraging as it appears things are starting to roll along – I think Congress believed they could drag this process into next week; they are understanding now that that would not be a good choice. The executive compensation limits that Congress is demanding to be added will find compromise and is doable. It doesn’t involve dollar amounts, but removes the “golden parachute ” – common ground is assured on this one. But then there is what’s known as “Cramdown” that some are trying to push into the plan. This grants bankruptcy judges the power to determine interest rates on mortgage loans that are in workout. This is a no go, a terribly bad choice and will not be added in the end.
Back to the normal business of the day
On the economic front, existing home sales fell 2.2% in August to an annual pace of 4.91 million from 5.02 million in July. Home resales were down 10.7% compared to the year ago period.
The median price of an existing home fell 3.4% in August and is down 9.4% over the past 12 months. This is a necessary condition to get sales rolling again. The concern is that the frozen credit markets – and holding up TARP – will cause the availability of credit to decline and cause prices to fall in a disorderly manner.
We’re not talking about those with sketchy credit -- more stringent credit standards should be viewed as a long-term positive coming out of a period with which there were no standards – but considering the way credit is jammed up right now there is the possibility even creditworthy borrowers may have problems getting a loan.
By region, the August home price declines occurred in the Northeast and West regions -- down 6.6% and 5.3%, respectively. Prices actually rose slightly in the South and Midwest -- up 0.5% and 0.9%, respectively.
The supply of exiting homes (this figure measures the number of months it would take to deplete supply at the current sales pace) did ease a bit, but nevertheless remains disturbingly elevated.
The number of existing homes for sale (a different figure that is just a straight number and not relative to the rate of sales) fell 7% in August – falling from 4.57 million units to 4.25 million units. So long as this number continues to decline, or even flattens out, the months’ worth of supply figure can drop quickly once sales ramp up . This will not occur though until the credit markets flow free. Even then, it won’t occur overnight, but will take quite a while still.
This housing data was mostly ignored by the market yesterday as all focus was on Bernanke and Paulson, but I thought it was important to mention.
This morning we get August durable goods orders, initial jobless claims and new home sales.
Have a great day!
Brent Vondera, Senior Analyst
The market has moved to a wait and see mode and Congress better understand that the plan known as TARP needs be finalized by Monday or the reality of the situation will deliver the message in a harsh way. Warren Buffet made a huge bet yesterday (even if the terms of his investment in Goldman Sachs were supreme) that this plan will be implemented soon and one can guarantee he’ll be on the phone explaining the need for speed.
TARP’s original intent was to unclog the credit markets so the situation doesn’t lead to deep and broad implications for the overall economy that will affect even those that manage their lives in a responsible way, not to simply bail out poor decision making – as much of what the majority is attempting to push into this plan seems to think this is about. But this is Congress and it will likely take this give and take to get the deal through. That’s unfortunate because there is a risk to participation in the plan as a result and thus the pricing mechanism for these troubles assets may not work as efficiently.
This entire situation has been exacerbated by accounting standards that make zero sense, but we must first deal with the seized up credit markets and then we can get the accounting back to something that has a glimmer of common sense to it. We’ll also have to finally learn the perils of reckless monetary policy and the flawed Keynesian models that heretofore have driven the Fed’s decision making.
Market Activity for September 24 2008
Credit markets tightened further yesterday as spreads widened to the alarming levels we saw last Thursday that sparked a fire under everyone to implement a strategy that removes troubled assets from the system – the government has the luxury of buying and holding these assets so that something close to a hold-to-maturity value is realized; the banking system does not at this point. Banks continue to bolster balance sheets on concern the TARP proposal won’t happen quickly enough – speed is of the essence; it seems members of Congress have finally realized this.The charts below show the extent to which the credit markets have tightened.
The first chart, the TED spread, measures the risk-averse nature of the market. A wider spread means the market is running for safety.
The second chart shows one-month LIBOR – LIBOR is the rate that banks in London can borrow from each other. (Important to note, some LIBOR rates are used to set adjustable rate mortgage rates here in the U.S.).
Bottom line, when these indicators shoot up it means the credit markets are not flowing freely – and at these levels that’s an understatement.
The one-week T-bill now yields 12 basis points (or 0.12%), which shows as clearly as anything that cash has run for cover. Return doesn’t matter, so long as you get your dollar back.
Despite the serious nature of this credit-market lock up, stocks have held up very well, and so long as one is properly diversified you can mange the downside. Again, if Congress is going to play around with this, the market will send them a message that will get their attention.
We discussed the TARP (Troubled Asset Relief Program) hearings enough yesterday, but I want to just touch on a comment made by one of the Congressman on Wednesday. He said he has received 200 calls opposing the bailout. (This is not a bailout, this a an attempt to stop a freeze up of the credit markets from reverberating throughout the economy and touching every citizen as a result) He went on to state: if he gathered with his constituents to say the rescue was needed to increase the availability of auto loans, they’d laugh him out of that town-hall meeting.
One could actually feel compassion for a person like this if his ignorance were not so harmful. Um, this is not about making sure some reckless consumer has the credit available to buy that 5 series Bimmer. This is about keeping commercial, mortgage, consumer, and short-term business credit going. If the credit markets are not unclogged, it is not only some foolish consumers desiring to buy something he can’t afford that will be affected. We are talking about stock market savings and home prices. The declines we have seen in these two savings vehicles (the largest savings vehicles) is child’s play if this intervention is not accomplished, which is why it will eventually pass. I’m not trying to alarm anyone, just stating the facts as this letter has always tried to do.
What we have seen late yesterday and into last night is encouraging as it appears things are starting to roll along – I think Congress believed they could drag this process into next week; they are understanding now that that would not be a good choice. The executive compensation limits that Congress is demanding to be added will find compromise and is doable. It doesn’t involve dollar amounts, but removes the “golden parachute ” – common ground is assured on this one. But then there is what’s known as “Cramdown” that some are trying to push into the plan. This grants bankruptcy judges the power to determine interest rates on mortgage loans that are in workout. This is a no go, a terribly bad choice and will not be added in the end.
Back to the normal business of the day
On the economic front, existing home sales fell 2.2% in August to an annual pace of 4.91 million from 5.02 million in July. Home resales were down 10.7% compared to the year ago period.
The median price of an existing home fell 3.4% in August and is down 9.4% over the past 12 months. This is a necessary condition to get sales rolling again. The concern is that the frozen credit markets – and holding up TARP – will cause the availability of credit to decline and cause prices to fall in a disorderly manner.
We’re not talking about those with sketchy credit -- more stringent credit standards should be viewed as a long-term positive coming out of a period with which there were no standards – but considering the way credit is jammed up right now there is the possibility even creditworthy borrowers may have problems getting a loan.
By region, the August home price declines occurred in the Northeast and West regions -- down 6.6% and 5.3%, respectively. Prices actually rose slightly in the South and Midwest -- up 0.5% and 0.9%, respectively.
The supply of exiting homes (this figure measures the number of months it would take to deplete supply at the current sales pace) did ease a bit, but nevertheless remains disturbingly elevated.
The number of existing homes for sale (a different figure that is just a straight number and not relative to the rate of sales) fell 7% in August – falling from 4.57 million units to 4.25 million units. So long as this number continues to decline, or even flattens out, the months’ worth of supply figure can drop quickly once sales ramp up . This will not occur though until the credit markets flow free. Even then, it won’t occur overnight, but will take quite a while still.This housing data was mostly ignored by the market yesterday as all focus was on Bernanke and Paulson, but I thought it was important to mention.
This morning we get August durable goods orders, initial jobless claims and new home sales.
Have a great day!
Brent Vondera, Senior Analyst
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