Let's see if we can end this week with a bang!
We got our callers off the table and it would be great to get a nice pop to sell the Decembers into but I'm not going to get my hopes too high, the market has a way of crushing your dreams lately. I've got my eye on a WSJ story this morning that the $2.5 Trillion tax-free muni-bond market is having troubles, not because of the instability of the local governments who back them (that WILL be an issue if the economy worsens) but because the insurance companies like ABK who back these bonds put THEIR money in the wrong places (CDOs) and may not have the reserves needed to maintain the integrity of the system.
ROFL – what do you do when your insurance company is no longer insuring you? What if you paid them in advance? This is not just a concern for municipal bond holders but what about those beleaguered title insurance companies who got paid in full when you bought your home but now you have companies like FAF (and ABK reinsures title too!) involved in lawsuits with the NY AG, and having their pension program questioned while earnings are off 50% from last year and the stock is ALREADY down 40% since June. With title claims on the rise due to a very active foreclosure market – do these companies have adequate reserves?
That's a pretty big other shoe that may drop on the markets. GS's chief economist, Jan Hatzius finally got around to reading my column and matched my target saying his "back-of-the-envelope estimate of credit losses on outstanding mortgages, based on past default experience, was around $400 billion." According to Reuters: "Unlike stock market losses, which are typically absorbed by "long-only" investors, this mortgage-related hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises. And leveraged investors react to losses by actively cutting back lending to keep capital ratios from falling — A bank targeting a constant capital ratio of 10 percent, for example, would need to shrink its balance by $10 for every $1 in losses."
"The macroeconomic consequences could be quite dramatic," Hatzius said in the note to clients. "If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion. This is a large shock," he said, adding the number equates to 7 percent of total debt owed by U.S. non-financial sectors. Hatzius said such a shock could produce a "substantial recession" if it occurred over one year, or a long period of sluggish growth if it occurred over two-to-four years.
Ouch, just when we were trying to cheer up too!
Again, I will file this under "tell us something I haven't been saying for a year" and we're not going to worry about it until we actually break below my trading range. I'm looking at this problem being a global, not local issue and we go back to my August bull case of US equities winning by default as the least sucky place to put your money. Always question the motives and timing of a GS comment – someone wanted to force a bottom I think!
Asia was a very sucky place to put your money this morning as the Hang Seng gave back 1,136 points (4%) and the Nikkei dropped 241 points, wasting the whole week's gains and then some. The proximate cause is China cracking down on illegal fund outflows (and our foreign inflows are suffering) as well as raising natural gas (by de-subsidizing) prices by 50% to curb consumption.
Europe is having another bad day as their financial sector is under tremendous pressure but our markets are looking up because – where they heck else are you going to put your money when not even municipal bonds are safe and inflation is outpacing bank interest?
We still need more capitulation in the energy sector, the dollar is hanging tough around 76 but oil is hanging tough at $92.67 and gold didn't look tough at all with a $27 drop to $787 yesterday so we have a lot of collapsing commodities to look forward to if the dollar cracks back up.
It's expiration day so I have to run but let's not get irrationally exuberant – that's what we have callers for!
