Wednesday, October 17, 2007

Housing implosion accelerates

Now the SEC is looking at CFC's Mozilo stock sales, Washington Mutual blows up it's earnings, and Citigroup trades at a yearly low. In mortgage insurance MGIC investment (MTG 26.16) was down 4.71, and they sounded terrible on their conference call, especially with their defense of FL real estate. It's cousin, PMI (26.65) was down almost 3. Citigroup traded 100 million shares, and only rallies on rumours that Prince will be fired. Here's how it works out.

The Fed couldn't care less about strength in the NASDAQ, but they are concerned about the weakness in the banks. Treasury Secretary Paulson stump speech yesterday was a back handed attempt telling banks that they need to keep homeowners in their houses. Why? What is the $80 billion SIV for? To keep these assets off the balance sheet until pricing recovers. It's the same in housing.

The idea, that the FED will be on hold for it's October meeting is now completely ridiculous. Look for talk of a 50 basis point talk next. This lowering of rates, is the only tonic that can stop the homeowner's from bleeding, and get the cozy home lookers, off of the couch, and into a buying mood. They feel they have the benefit of time. The home seller doesn't, so the sales closed are now distress sales. Other homeowners, seeing this markdown in their equity and their nest egg evaporating, are just giving the keys back to the banks. Now the banks are feeling the pain that the homeowner felt, and it is happening at an accelerating pace. And since the problem is now shifting from the homeowner to the banks, the FED is now very concerned.

If houses drop another 10%, you'll see $200 billion more in losses in these packaged mortgage securities, and theses SIV's will be a sieve. If this SIV wasn't a problem, but just a technical issue with a balance sheet, then why was Treasury involved?

So the FED cuts. And this cut, is what the NASDAQ buyers see. And those buyers will stay around, to the shorts dismay. The bears are getting the bad news that they wanted, but the bulls don't care. That story, already played out in August. Paradoxically, this bad news, is exactly the news that the bulls needed to bury the bears. May they R.I.P.

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