Friday, October 19, 2007

Market Selloff

Is a function of the weakness in housing, and the market's recognition that the homeowners losses are now shifting to the balance sheets of the banks. It wasn't Citigroup's ugly earnings that started this; they have been a serial under performer as long as Chuck Prince has run it. It was the weakness in Bank of America earnings, which is considered well run. Couple that with the complete carnage in the mortgage insurers, PMI and MTG, and their refusal to recognize the extent of their future losses, and the market blanches. The write downs in housing loans by Washington Mutual added just more fuel to the fire.

Today I'm recapping what has happened, but I'm just recapping what I wrote before it did.

On Wednesday, there was only a 32% chance of a Fed rate cut in October, when I wrote about the housing's implosion accelerating. I said there would be a 50 basis point cut:

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.

Thursday morning, when discussing the breakdown in BAC's earnings I repeated it in case anyone missed it:

Thus the FED cuts in October, and they do 50 basis points. That is not in the market.

Today the Fed fund futures rate is now pricing in a 100% chance of a quarter point cut in October. The street has now come halfway to my viewpoint. That's a good start.

Thursday morning I talked about Goldman Sachs Level 3 assets, which I called "mark to myth." Today GS is down 10 points. Did someone else decide to read the 10Q or this blog? If you did, you saved yourself 10 points. You can get your news before it happens; here, or you can get when it has already happened, somewhere else.

This market selloff is all about housing. The homeowner was stuffed with higher mortgage payments, and unsalable homes; now the market has recognized their problems are now the banks. Being stuffed with bad loans is preventing banks from doing business, just as the multiple mortgage payments stopped the consumer from spending.

The good news, though is the Fed will be highly proactive and aggressive in their rate cuts, the dollar be damned. They need to stop the spiraling down of home prices, and prevent the banks from owning more homes. The homeowner needs the value of his home to go up, and he needs lower rates to stay in his house.

Nothing makes a central banker move faster, than when they have a whiff of fear. Especially, when their "children" are losing money in bad loans, and the mortgage insurers are losing the confidence of the market.

So the Fed cuts. And this time, there won't be a peep about "moral hazard."

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