Thursday, July 17, 2008

Have we lost our minds or just our money?

Bull move in bear market?
Fannie and Freddie stocks are see-sawing, but they have recovered somewhat. The overall market is having its weekly rebound. We warned of the possibility of a rebound this week based on the fact that stocks were so oversold - down for four to six weeks in a row depending on the index. We previously highlighted that immediately after a BEAR market signal, markets tend to show some resilience...for a while. We also point out that there are few (very few) episodes of markets falling by 20% then rebounding very quickly thereafter. So while this rebound does not surprise us we don't think it signals anything in particular either. So don't get carried away with optimism. It's just a normal stock thing; stock fling.

A rationalized view of market behavior?
Markets appear to be still chaotic. Today markets are acting like the housing starts rebound is for real. We know that some technical rule changes in NY spurred building in one of the the few existing hot spots in the nation's real estate market. It's not real and definitely not nationwide...Stocks also are up strongly on Thursday on some mixed bank earnings but is that really news you can depend on? Bond yields are moving higher. But oil prices are falling. It is too soon to call the drop in oil prices 'stimulative' but oil is now making a significant drop from it's recent high. Any respite is helpful to consumers strapped for funds. But stocks and bonds are still trying to sort out the investment environment and its risks. For the moment it still looks more like chaos than like some new strategy.

Politicos are on the fence
Politicians are worried about putting taxpayer money into Fannie or Freddie or even making backstops for them that may not be needed. But without backing they will not be there to help housing recover and without that assistance, a housing recovery is a matter of fiction. So it's not a case of playing a game called 'Congress Mae I?' The 'nays' for the 'Maes' cannot carry the day. Like it or not assistance will have to be supported. It's time to put past problems with the GSE's behind us for a while and get the new management on board with the new plan.

Bank is still a four-letter word
Its nice to see that some banks can report better than expected earnings. But let's not get carried way. Regional banks in particular are chock full of mortgage loans and the housing market is still getting worse. It is far too soon to look for good news from banks. They are tightening up lending standards, something that will limit them making more bad loans but it also will limit revenues from new loans. That leaves them in a tough spot.

IMF says risks remain-
While the future for the economy is still unclear and politicians are talking about yet ANOTHER stimulus package. The IMF remains worried about the second half particularly about US growth in Q4 when the current stimulus package has run off, when housing may still sliding, and when foreign growth may be weaker impacting US exports. So don't kid yourself. We are not out of the woods. And there is still more money to be lost - or made. Don't go bottom-fishing prematurely not even for Fannie.