TGIF just does not cut it today.
On top of yesterday's news from AXP, we find out that BAC is "only" paying $4Bn for CFC, which works out to 1/3 of "book" value, which indicates that the remaining hundreds of Billions of dollars worth of loan "assets" on the books of various financials may be grossly overstated. How grossly overstated? Well MER, for example, just put the cherry on top of the morning's panic by taking (drumroll please…) another $15Bn write-down on bad mortgage debts in this Q's report.
This is not bad, it's good! It's "only" $3Bn more than expectations and CFC is "only" being valued at 1/3 book when a pessimistic risk assessment would indicate their book value could be negative. BAC had a right of first refusal from the last $2Bn they pumped into CFC, which froze out other bidders so it is entirely possible they are getting themselves a good deal. Let's remember that BAC has grown from $10 (split adjusted) in 1991 to $50 (until the recent drop) in 2006 by making smart acquisitions and they spent the last 6 months going through CFC's books and found SOMETHING of value – that's much better than most people thought.
I know what you're thinking: "Phil, you're bearish when the market is bullish and bullish when the market is bearish – WTF?" Think of my like a psychiatrist dealing with a manic-depressive market. I have to talk it down from it's irrational highs and pull it up from it's irrational lows. I'm neutral at this level, a consolidation between 12,500 and 13,500 is just what I've been predicting since the summer so you can expect me to "flip flop" whenever the market looks to head too high or too low.
Lost in all of "today's" bad news (and the quotes are around "today's" because this is the same old news) is Bernanke's very bold statement yesterday that "Based on that evaluation, and consistent with our dual mandate, we stand ready to take SUBSTANTIVE ADDITIONAL ACTION as needed to support growth and to provide adequate insurance against downside risks." The word substantive means "of considerable amount or quantity." I am amazed that the same media that parses Fed statements looking for the most subtle changes (like "Oh my goodness, last time they said "moderate expectations" and this time they just said "expectations") can gloss over one of the most aggressive statements ever made by a Fed Chairman.
I've been saying all week that the Fed has until next Wednesday to take action. I'm not going to go back into the rationale now but Ben knows it too and yesterday's statement was his "taking a shot" at seeing if he could speak loudly without even using a stick and the markets are just not going to let him get away with that. The Fed needs to whip out the big stick now and show some serious support for the housing market but more mindless cuts are NOT the answer. We need a coordinated government effort on an FHA-style bail-out (and yes, I'm not afraid to use that word) for homeowners that keeps people in homes AND solvent.
There are so many homeowners that are hanging on by a thread that merely giving them just enough aid to pay a mortgage is not going to bail out this economy. There are $10T worth of mortgages on US homes and over 10%, possibly 20% may go into default. This isn't about bailing out a few miscreants – our entire economy, possibly the global economy hangs in the balance. While it's easy for conservatives to baffle you with BS about how the problem is "unmanageable," the fact of the matter is you are talking about $800Bn a year in mortgage payments IN TOTAL of which almost $600Bn is interest (at 6%) that is being paid to the lenders.
ALL IT WOULD TAKE is for the government to step in and cap interest at 6%, which could be subsided back to the banks by guaranteeing the loans, dropping them into prime categories and allowing the banks to refinance their debt at lower levels. This, by itself would allow the vast majority of homeowners who face rate adjustments (2M of them this year) to remain in their homes without any other changes. The government could then set up a program aimed at helping homeowners who have already paid through the nose and plunged into debt trying to keep up with escalating mortgages by handing out $100,000 loan reductions to ANY single family homeowner on their primary residence at 2% (what they pay you for Social Security money you give them) over 30 years with no needs test and a 10-year deferal of interest. That $100K would go directly to a principal reduction on the primary residence which would knock a typical $250,000 mortgage payment of $14,000 a year down to $8,922 a year at a newly blended 3.6% rate.
The government would not be giving this money away, they would be owing a portion of the homes they collect taxes on anyway. They would be a minority partner to the bank, who would continue to look after their interests and, if they make this deal available one-time to every taxpayer, they can spur record home demand that will suck up all that excess inventory in no time. The rental markets may suffer slightly but that can quickly be remedied by allowing 2M people to (gasp!) immigrate.
The government doesn't even have to come up with all the money, they can just effectively transfer $100K of the existing mortgage obligation from the homeowner to themselves and EVEN IF THEY PAY THE FULL 10%, the cost of making this loan to each home is just $7,194.60 per year. If this loan were made to every single homeowner in America, the total annual cost of the bailout would be $720Bn a year but, as I said, this is not a giveaway, there is value being purchased. I'm sure it won't take much fancy math to figure out that this would cost the government less than $300Bn a year – surely we spend $300Bn on other things that are important?!?
So, as I often say, the only crisis this country suffers is a crisis of leadership. The do nothings that currently occupy government could have headed this crisis off at the pass but Alan Greenspan chose to come on TV and tell people that ARM loans were good, leading to an explosion in what was, at the time, a fairly obscure and untrusted product. Now it is time for the government, like MER, to own up to their mistakes and take steps to correct them. We need a new CEO, of course, but we also need a change in the whole corporate culture – remember that when you vote!
Now, back to the markets!
So Asia blah, blah down 1.5% again. China huge trade surplus, INFY (got 'em) with 25% growth and no one cares… Over in Europe the markets are mildly off but mainly in England where the pound is hurting. JPM bought a $4.2Bn loan virtual portfolio from Northern Rock, another possible sign of a bottom.
So don't panic this mornng. This is the depression stage in our 5 stages of grief and it's healthy. We're well covered, well in cash and ready for action. Of course if 12,500 doesn't hold it may be time to panic a bit but there is nothing today that is fundamentally different than there was 30 days ago, when the markets were 1,000 points higher. They were wrong at 13,800 and they'll be wrong at 12,500 – I maintain my target range of 13,000 to 13,300 for the Q1 consolidation but it's going to be a wild, wild ride!
