A Little Short

With the jobs loss in February (short month) alone of 63K, inevitably pending revision to a higher number, the market took a little dump yesterday. Actually, I was hoping for more of a 300-point swoon, but there was low volume nibbling on a drop of 200. I had an itchy trigger finger on my XLF puts as they crashed to a 5-year low, but then I stepped back and thought about what might make them go higher. I'm gonna wait it out awhile longer.

There will be some false hope in the upcoming weeks. The Visa IPO will give the facade of big deal making. This is getting done so GS and JPM can actually underwrite some new business this year. The Fed is leaning towards a 75-point cut now, not 50. Also, they're going to make $200 billion available. But as the credit crisis unravels, I am astonished by permabull response that things will get better. There is no historical comparison credit wise to our current situation. While the recession may not strike as deep as the 70s drought, financial woes may be much worse and we may arise from this with staggering, not stagnant inflation, as our dollar fades into oblivion. Again, if the Chinese decide that our treasuries are worthless and start to sell theirs, they truly will be worthless.

Washington Mutual got downgraded twice yesterday as their bonds fell into the Bs. Two scenarios are possible for this terrible company. One, they'll go the way of Countrywide and plummet to about $4, or, they'll soon be a takeover candidate and rise on this news. I'm hoping for the former as my Jan 09' 20s are starting to look good! The second downgrade came out after the bell yesterday and was harsher than the first, so it could happen. If you recall, there were takeover rumors in January after they missed earnings by a million percent, with the infamous "things can't get much worse" label attached to WaMu. Really?

Here's a figure of significance. 1 Trillion Dollars. That's how much Paul Miller of Friedman, Billings and Ramsey thinks the mortgage market is short of capital (link below). He goes on to say that 11 trillion in debt is held up by less than $600 billion dollars, or leveraged 19-1. As we've seen with Thornburg and Carlyle, this is causing some unpleasant and unpayable margin calls. As this debt gets collateralized further, mortgage rates actually increase as debt declines. This will continue to happen until leveraging returns to much more standard levels and leaves a slew of bankruptcies in its wake. In one of the comments on this story, a reader asked naively if it was the short-sellers sending this market into turmoil and if they shouldn't be banned to the casinos. Well, after leveraging your mortgage into a 19-1 proposition for their own gain like throwing a chip between 2 numbers on a roulette wheel, I responded "Isn't investing gambling anyway?"

MBIA asked Fitch yesterday to remove their ratings on 6 of their businesses. Just Fitch though. Hey Fitch, we don't like that you give us bad ratings so just make them disappear please. Thank you. What? This is ridiculous! Sue Chang of MarketWatch.com reported last night, "It (MBIA) also pointed out that Fitch's coverage of the underlying credit quality of transactions that MBIA insures is limited, which could lead to "misinterpretation" in turbulent times. In response, Fitch stated that its analysis is of the highest quality and its understanding of MBIA's municipal and structured exposure is strong. Nonetheless, the rating agency will evaluate its ability to maintain coverage on MBIA over the next few days and make a final announcement. "

TOD: Write me with your better than book movies and vice versa.

http://www.marketwatch.com/news/story/mortgage-market-needs-1-trillion/story.aspx?guid=%7B359B5377%2D39DB%2D4C8B%2D9178%2DC45726A45272%7D

http://www.marketwatch.com/news/story/mbia-fitch-ratings-process-different/story.aspx?guid=%7B5DE10C90%2DFF19%2D4B7E%2D86FB%2D2865C135E042%7D&dist=morenews