August 2007

Just saw a commercial ad on TV from Capital One, they advertise “Home loans with a fixed rate below prime”.

Holy cow! The prime rate is 8.25%. So all they can say about their loans is that the rate is below 8.25%.

It will take couple of weeks before the new mortgage conditions will bubble up to the related statistics, like home sales, default rates and consumer spending.

I think we are more or less in the recession right now, but we will be firmly in the recession by the end of September, so I expect negative Q4 GDP growth


The McClellan oscillator:


Looks like if finally bounced off the bottom and now we can face couple of weeks of up and sideways market actions.

All the credit default swaps bounced from the lows, junk bonds are not falling anymore, Feds are believed to be in full control.

In conclusion, longs should patiently wait before exiting the market and short must patiently wait before shorting more

I like pictures worth thousand words. This is money market price:

Money market

We are at the levels we’ve being after September 11 2001. This is not just recessionary. Last time this happened it was 6 months after the recession started.

So I think we are already firmly in the recession by now (I’m writing this at August 20). The official statistics will need couple of months to catch up with reality, but it will mark this recession start at August 2007.

Or even before that, who knows?

Update. It was the biggest decline in Treasury Bill yield since World War II (there is no charts of that period). It’s 65 year record that we saw today

I feel that I’ve got a little bit more clarity in my understanding of the Fed thinking. My previous post on the Fed policy is here.

I’ve heard a lot of opinions today that the cut of the discount rate today is mostly symbolic and not much helpful. After all, the average daily borrowing at the discount rate was only $190 million this year.

But I think this action demonstrated once more that Feds are very concerned about the dollar franchise in the world as well as the suffocating liquidity problem in the markets. The discount rate cut was not very bearish for the dollar. Yes, the yen carry trade unwound, the oil increased a little bit, but besides that the dollar survived.

But was it really helpful? Yes, I think it was.

First, I think the Fed announcement before the market open at the last day before the options expiration inflicted the big damage on the bears (not me, I was a well-prepared bear). It should be a first indication of the existence of the Bernanke put.

Second, it should help the real problem, i.e. the credit squeeze at Countrywide Financial. Countrywide is the biggest mortgage dealer in US (in the world?). As such, they keep a huge portfolio of the meaningful prime mortgages, to people with solid income, 20%+ down payment and full income verification. Those people are coming to Countrywide for mortgages at around 6.5% rate. Before today this kind of mortgages could not be financed by the discount rate, which was at 6.25%. Today, the rate is 5.75% and suddenly it became possible to finance those deals through the discount window. Countrywide may use those mortgages as collateral, raise many billions of short-term financing and still be cash-flow positive on that deal. I don’t think that the bankruptcy of Countrywide is a possibility anymore.

In conclusion, I see the Feds at work and I think they did the work well

Karl Rove announced that he is resigning. Good buy, evil assh*le, go back boil in your pit

Day one? We have over 18 months of deteriorating RE market, which already pushed few states into recession (like California), how come today is the day one?

Today Countrywide published their new matrix of mortgage quotes. Suppose you are a successful doctor with solid income, huge pension account and almost maximum credit score. You want to buy a new primary residence for, say, $800k (which would be very, very modest 3 bedroom home in may area). You are putting 20% down and can show 2 months worth of payments on your checking account. Obviously you document your income, this is a full-doc loan.

What is your rate? It will be 7.9% for 5/25 ARM loan.

Now the real estate game is over, whatever happened before today was just a preparation for what will happen next

This week was extremely interesting in the sense that I feel that I had a brief glance at the Bernanke hand (in cards term). Let me try to explain.

It all started when Cramer almost collapsed in front of the camera saying that we have liquidity Armageddon. Then it was the Fed meeting and what we got was just usual “we are vigilant on inflation and bla-bla-bla“.

Weird. I thought that if even not-so-well informed Cramer knows that there is an Armageddon (shish, even I know that very well), than how come Bernanke is still playing his old inflation hand?

The answer came Thursday, when few more European hedge funds collapsed (nothing new with that) and European Bank opened unlimited discount window which was tapped for $200 bil in two days. Compare that with U.S. $70-80 bln injection after September 11, it’s almost triple that. Bernanke took a pause and injected “only” $30 bln, quite a lot, but nothing comparing to Europe.

What we got? Euro is dropping against the Dollar.

It all seems to me that Bernanke was playing the blinking game with the rest of the world. Whatever happens – he would not blink first. The world financial markets is the game of confidence, where everyone is bluffing, but the one who drops the cards first will lose. The money injection by European CB provides some liquidity for US as well, so why not make someone else do the job?

My conclusion is that Bernanke is not a political hack, who is getting his instructions from the White House to tune-up the economy before next elections. He is not a Wall Street slave as well, not a person who makes his financial decisions by looking at Dow Jones index.

He is a strict monetarist, whose target is the desired rate of the Treasury bonds of various maturity, which is strictly speaking the cost of money. He has some thought on where the 10-year Treasury bond yield must be and he will drain or inject until it settles in the desired range. Wall Street be damned. There is no Bernanke put

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