Rain is finally over. Both the Merrimack and Concord rivers are as high as I have ever seen them. It has been a wild winter so far, and still about a month to go. Is the weather tracking the wild times in the financial world? Who can say?
Ambac and The Amazing Stock Movements on Friday
I had missed this particular action of Friday, but there was some really strange stuff going on with ABK stock as the trading day closed. Mish has a great post on all the particulars, so I direct you there for a full briefing:
What it all boils down to is that there was MASSIVE buying right at the close and the orders were set to fix the price at $9.50 at the bell. From Mish's article, here are the relevant volume numbers with timing:
2.8 million shares in last minute
4.8 million shares in last 5 minutes
7.1 million shares in last 10 minutes
12.5 million shares in last 30 minutes
86.1 million shares for the day
Pretty wild. Checking the Yahoo Finance current bid is $8.00, so Monday bears some watching. I still would love to now who the chumps are that are buying the 1.5 BILLION dollar stock offering ABK is making to stay afloat. At what point will all realize the game is up for the insurers?
The Cloak of Deception that was the Credit Boom
I am a huge fan of anecdotal evidence and stories. It is the little things that sometimes can be very revealing when looking at complex issues. I have a personal story from Saturday that I felt was revealing and important enough to share.
I needed a hair cut very badly, as it had been over 2 months since my last one. My hair grows EXTREMELY fast and I had an almost mullet going on it was so long. I went to the local hair cut chain to get it done. The lady was very pleasant, and we had a conversation about the weather and other small things. I had mentioned I had recently moved, and at that point the flood gates opened up as she was very animated about talking about homes and the current mess.
The lady remarked that no less than 6 of her coworkers or friends had bought big houses over the past 3 years, and now Five of the Six were facing foreclosures and the 6th was doing a short sale. The important part of our talk occurred next. The woman said to me:
"I was so envious of those homes my friends had. I wanted one very badly, but just could not afford it. Now that my friends are in trouble, they are being more open about their finances. I was shocked to find out they had no money too! I mean, they are about the same as me as far as income goes! Here I thought that having a big house meant they were well off, but it was just a game with some kind of mortgage plan they had. I feel much better now."
And there it was. Another very insightful look at the credit boom that was the housing bubble brought to you by your neighborhood hair stylist. Having a home used to mean many things, but mainly that the buyer had solid finances, money to put down, and found a bank that thought it was a good idea to loan them money. In the boom years all you had to do was apply and sign some forms.
There could be an awakening happening. Many working class Americans have been pelted with images of a big house, newer cars, all the electronics toys, all the upgraded appliances that the "average" person should have. By playing the debt and monthly payment game, many of these items could be had by even entry level income earners if they gambled with exotic mortgages, home equity extractions, and debt rollovers via endless refinancing. All would have been fine had those pesky home prices kept rocking higher to the tune of 25% a year! No one would have been the wiser.
Instead we are finally getting the answer to the question that had bothered me for so long; "How in the world are these people affording all this stuff?" The answer of course was always that they could not. And now with the crumbling of the facade, they cannot.
I am not making commentary on the good or bad aspects of measuring oneself against others by something like material things. The point is that many do exactly that, day in and day out. The problem has been that you can only do that if you are playing on a level field. The hasty and flagrant extension of credit to anyone and in any amount that was requested has warped the perception of wealth for many people. I think that when all this is settled out years from now, a good lesson may have been learned. Or, like many important lessons, it may fall on deaf ears.
If we are entering an era of credit deflation and rough economic times, the new battle of the Jones may become who has the least amount of debt. Imagine that! Imagine if people looked at debt as an enemy to be eradicated and a sound balance sheet as something to brag about? What would America look like? What if Americans in general looked to develop solid balance sheets and started to save money for the future? Things would be very different indeed. I believe it is this very thought that keeps Bernanke and company up at night. An America that is not on spending steroids would cause massive damage to the very financial institutions that are our economy. It makes you wonder about the validity of a financial system that depends on the masses spending themselves broke just to keep things going forward. Maybe that has been the plan all along. Something to think about.
Have a good night.