Monday, January 7, 2008

FED Rate Cuts on The Way - Whats the Problem Mr. Market?

Thanks to those that left vacation possibilities in the comments. I appreciate all feedback that I can get. In weather news, it was 40 degrees for most of the day, and tomorrow it will hit 60 degrees! New England weather can be pretty wild. Let us hope for calm, reasonably warm days and nights for all of the upcoming Patriot playoff games!

Countrywide Financial - Something Wicked This Way Comes
Longtime readers will remember my post from October 26th 2007 in which I went over in detail the boldness and the lunacy that was on display during the CFC earnings report. Allegedly the next quarterly report for CFC will come in late January. I say allegedly because the earnings report at this time is not scheduled and I cannot find a date for it anywhere. Perhaps not a coincidence, CFC stock cratered today, down another 9.3% in one day! The stock closed today at $7.64. Remember the Bank of America "cash infusion" that set terms at around $18/share? That was supposed to be the bottom. Funny stuff.

I bring up this stock today because it certainly seems that somebody knows something. Recall that CEO Angelo Mozilo predicted a profitable quarter and a profitable year for 2008 in total ( I am not kidding). I said at the time that the forecast would prove to be a total dream. I fully expect CFC to have some kind of news out in the coming week that will try and delay their earnings report or even a move towards bankruptcy. Taking a look at the 6 month chart for CFC, there is nothing here that says anything but "bye bye".

FED Rate Cuts on The Way - Whats the Problem Mr. Market?
The FED Funds futures are now pricing in a better than 65% chance for a 50bps FED rate reduction at the end of January meeting. I think that should be a 100% chance for 50bps, and a 75% chance for a full 100bps. We know where rates are going (1%) so there is no real need to pretend anymore. The news here is that the market, especially the financials, are going south on the news. The good old "Don't fight the FED" mantra seems to be a bit muted this time.
What does this mean? It is still early in the year, but I will venture that the realization of the core issue is finally beginning to set in. As is often stated by Michael Shedlock, the FED can provide liquidity, but not capital. The main issue right now facing the banks is not whether they have enough cash on hand to continue operations, it is that the assets that back that cash are impaired. How impaired? We still have no idea and will not for all of 2008. This is a key point. The housing bust is just starting to roll. A commercial bust may be on the way. 2007 in many ways was the year of holding ones breadth and hoping for a turnaround. 2008 will be the year that action is taken because no turnaround is in sight.

Even permanent cheerleader Hank Paulson is seeing the light, as this headline shows:
Paulson: No Easy Answer to Mortgage Woes
Monday January 7, 5:45 pm ET By Martin Crutsinger, AP Economics Writer
Paulson Says There Is No Simple Solution to Housing and Mortgage Crisis
WASHINGTON (AP) -- The Bush administration is working to combat the country's severe housing crisis but there is no simple solution, Treasury Secretary Henry Paulson said Monday, adding that a correction in the housing market is "inevitable and necessary."
"By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy," Paulson said in a speech in New York. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."
Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.
"After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary," Paulson said.

And there you have it. Paulson is throwing in the towel. After attempting to build a Super SIV fund to hide losses, all the way to the "Hope Now" campaign to stop foreclosures Paulson has kept up a reasonable facade of optimism. My take is that after really going through the books and looking at what kinds of loans and what kinds of borrowers are in trouble, He now must manage expectations.

With FED rate cuts on the way, Mr. Market seems to still have a serious problem. We will have to wait and see if the new reality show called the "Credit Crunch" is here to stay. If FED rate cuts cannot jump start the market however, 2008 is going to be very interesting indeed.

Have a good night.


Anonymous said...

'Treasury Secretary Henry Paulson said Monday, adding that a correction in the housing market is "inevitable and necessary."

Policymakers of the 1930s observed the correlates of the monetary contraction, such as deflation and bank failures. However, they questioned not only their own capacity to reverse those developments but also the desirability of doing so. Their hesitancy to act reflected the prevailing view that some purging of the excesses of the 1920s, painful though it might be, was both "necessary and inevitable."

Chairman Ben S. Bernanke
At the Fourth ECB Central Banking Conference, Frankfurt, Germany
November 10, 2006

Uh Oh!


getyourselfconnected said...

Excellent citation Kevin!
As they say, History does not repeat, but it often rhymes!

Anonymous said...

History does not repeat, but it often rhymes!

"By the Law of Periodical Repetition, everything which has happened once must happen again, and again, and again -- and not capriciously, but at regular periods, and each thing in its own period, not another's, and each obeying its own law ... The same Nature which delights in periodical repetition in the sky is the Nature which orders the affairs of the earth. Let us not underrate the value of that hint." -- Mark Twain

I like the way Twain put it.