Tuesday, September 9, 2008

Post Seizure Reality

Dang! but we called it well yesterday.

We thought the Fannie Freddie rally made no sense. Today it made no dollars. Stocks gave up what they gained yesterday. Financial stocks have been bludgeoned.

The proximate cause is the weakness in pending home sales. But an economic report that is a report about a report (pending home sales is a prelude to the NAR's existing home sales) is hardly the thing to drive the Dow down by nearly 300 points.

Markets have re-fixed their gaze on the economy. Certain financial sector 'mines' are still out there floating in the financial sea. For the most part we are seeing financial firms banged up and dented but not their existence threatened. We continue to see a steady diet of 'oops anther bank failed this weekend.' The count is up to ten. But it hasn't been anybody that has really worried us. Lehman is a different case. it's a large brokerage and known name. Still after the Fed arranged its shot-gun wedding for Bear some officials said it probably could not do that again because there are no firms strong enough to pair with a disabled one.

So now the bloom is off the Fannie and Freddie rose. We are back to looking at the economy and at economic reports. Most are seeing the seizure as less than a panacea. Financial damage is still a factor and that news can swing markets but Lehman seems to be the last big thing out there to threaten us with. If Lehman does fall who will be next? Do markets need a poster child of weakness to attack? I don't know. But I don't think so. Still, I do not know what I do not know.

One thing we can say about these new securities that were supposed to -- with credit rating enhancements, and all sorts of fancy bells and whistles and tranches - eliminate or compartmentalize risk, and that is: nobody understands them. They continue to do damage like a masterless Frankenstein.

So you can never say never.

Sounds like a movie title, doesn't it? Bond. CDO Bond. I like my markets shaken and stirred. License to buy or sell and create havoc...cue the music, please.

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