Wild Imagination is Now Strongly Encouraged

I just heard there is a potential snow storm on the way for Tuesday night! This had better be the last one, I am at the end of my rope for this winter. Fishing season seems so far away.

Wild Imagination is Now Strongly Encouraged
What can you say about a day like today? With so many out there wondering if the Bear bailout was the market "bottom" I can offer this; It was the inflection point where Wall Street decided to suspend any rational thinking and simply start pretending and imagining on a whole new scale. With so much information pouring out today, it can be hard to isolate the most important developments. I will give it a try.

Bear Stearns Benefits From a Legal Miscue: A small one line rider was slipped past the JP Morgan lawyers which basically put JPM on the hook for a ton of BSC losses if the deal did not close. I mean, what do you want for a Sunday afternoon rush job, perfection? Faced with an amazing new bargaining tool, the deal was pushed up 5X in price from $2 to $10. Word is the FED, to sidestep any "bailout" accusations, told JPM that $2 was going to be THE price. Of course now that the market had "expectations" that this deal would go through, the all clear was given immediately to the new sale price. Why BSC stockholders will stop at $10 is beyond me. They should push for more. Come to think of it Countrywide shareholders may want to rethink their deal with BAC and get more money too.
Take Home Point: This deal which has allegedly saved the Universe was so poorly put together it had to be redone at a 5 times price difference. Instills allot of confidence, yes? Bullish obviously.

Housing Sales Rebound Baby!: Existing home sales ticked up from month to month by 2.9% (whoopee) but are down 24% from a year ago levels. This report was seen as a sign of the real estate turnaround, and helped push the market higher. A largest in history price drop was seen as a non issue.
Take Home Point: Sales down huge, and prices collapsing at faster levels certainly does not help the problems faced by the banks. falling prices can only impair mortgage assets further, yes? Who cares, 2.9% rise in 1 month is what dreams are made of. Bullish.

Fannie Says Loan Defaults Accelerating as they Prepare to Buy More of Them: The unifying theorem that Fannie and Freddie are going to pour cash, government backed cash, into the mortgage market has had Wall Street sporting wood for two weeks. Today we are told by miss Fannie herself that loans defaults are accelerating at an alarming rate. While Fannie only buys the best paper there is, even the best is pretty bad.
Take Home Point: Withe ever escalating losses now may not be the time to extend the buying power of FNM and FRE. The market has expectations that they will, so even though they will be adding to loses, at least they are still buying! BULLISH BABY!

Morgan Stanley and Lehman Fizzle on a Euphoria Day: Both MS and LEH turned strongly negative even in the face of a bull run today. Late day downturns on heavy volume are not usually good signs. Not much attention was paid to this move, but no matter. If they go any lower, FED bailout time baby. Even the Wells Fargo CEO went on the record saying he was open to FED assisted mergers! See what you started Bernanke?

Wrap it all Up
Today we had solid information that stated in no uncertain terms;

• Mortgage Loan Defaults are INCREASING
• Home Prices are falling further and faster
• The BSC deal was rushed and poorly executed
• The FED is going to have to print a lot of money to absorb the losses they are going to hold (hide?) for the banks at months end

In the face of all this, the markets were on fire, the dollar was gaining ground, gold was still being battered and CNBC was all smiles. The FED has succeeded in their efforts to wave shiny objects in front of the market and get a party started. I think this could last quite some time. 2 days? 2 months? 2 years? Who can say. The willful and deliberate suspension of disbelief gripping the markets right now is too strong to argue with. When you see quotes floating around that the FED will buy anything and everything that goes bad, silly season has arrived. Delusion will be the major market driver for the next segment of time, this time span is impossible to give a duration for. I would guess it to be about 2-3 months. 2007 market highs are an absolute real possibility. I have a new poll up along these lines.

Only another major failure will wake the markets up, and even that may not be able to make a dent. While the FED can pat themselves on the back for this recent effort, they have set up a situation where risks and due diligence will not be reasonably considered going forward. With a pocket filled with the FED balance sheet and a way to stash losses, banks are not going to sit tight, rebuild their balance sheets, and lend under good terms. Speculation is ready to run again. In this regard the FED may regret their kid glove treatment of this debacle, as they are only encouraging more of the same. Witness the BSC slap in the FED's $2 stock deal face as proof positive of an atmosphere without fear.

Have a good night.