Wednesday, August 6, 2008

The Adverse Market Delivery Charge

No, this doesn't apply to the negative impact of simply owning stocks this year. This is the term Fannie uses to account for increased charges on loans they're buying and repackaging as of 10/1. The rate will go from 0.25% to 0.5%. Hmm, I wonder if those lenders will then add that additional 0.25% to loan originations, sending the 30-year rates up a quarter point? Seems logical. And in a time when people are going bankrupt, the Fed's loose fiscal policy will have imploded again as mortgage rates rise while foreclosures go up and homes flood the markets. Great job.

The disconnect between economic reality and stock prices the last 3 weeks has been greater than the disconnect between Green Bay's front office braintrust and their delusional chances of winning without Favre. I'd like to make offers similar to what they did. Hey, CEOs, we'll pay you to retire before you run the company officially into the ground. But don't let Freddie Mac hear that. Their CEO was warned by no less than 20 employees about CDO risk, but that didn't stop him from plowing forward. And S&P, well, apparently if paid, will rate cow products.

Earnings season is almost over. Despite the impending collapse of the Big 3, the worst earnings possibly ever, and the continuous denial of such firms as Merrill Lynch about their true situation, the markets have rallied. What is going to carry this charade further? Carmax noted a 17% decline in sales in just the last 2 months. Bennigan's went out of business. Another bank failed. What about uninsured deposits, such as payrolls? Uh oh. Are you telling me that if my bank goes under while holding my $50 million payroll, I'm out of luck? "Uninsured depositors, including company payrolls, are the next "potential iceberg" for the U.S. economy, said Larry Lindsey, CEO and president of The Lindsey Group economic advisory firm. "All you need is one case where the uninusured depositors, the big deposits, don't get covered, and you have the potential that they start to run," he said."

Citi continues to bleed from every whole, including credit card securitizition. They refuse to acknowledge the Merrill markdown of 22 cents (actually 5 cents) on the dollar for even less-risky CDO products. When the bill comes due, it will take a large toll. Pandhit is playing with fire. As we mentioned months ago, we have breached the next tier of crappy loans, Alt-A. They are piling up in default and right next to them, much not to my surprise, is a smaller pile of prime loans beginning to sour. Even Jamie Dimon admits JP Morgan will lose triple its initial estimates on these loans.

So hold tight. There's 3 months before another round of inflated earnings against grossly low projections can buoy stocks again.

Oh, one more thing. For the executive from Schwab who keeps reading this blog to gain enlightenment and borrow ideas, feel free to contact me. I have spoken with your staff and despite having 2 people call me, you did not offer me a job. I find that strange. As I said in my letter, my service may not always remain a free one. Post at your leisure with a good time to contact you. Thanks.

1 comment:

Tiger Coach said...

Ax... Interesting that the "housing bottom" has hit. In order for that to happen, there needs to be another set of qualified buyers... and hopefully qualified with close to 10% down and 30 year mortgages. Gone are the days of interest only...

My prediction is that the DOW will finish down for the entire week. After all, momentum is about to shift.

You'll appreciate the latest installment of megatrends. Maybe we can get the Schwab guy to post to your site once Thomas Lee posts on mine.

Is there a chance that armatures like us can be as good as the professionals??? Let's start an investment fund tomorrow.