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Wednesday, 24 September 2008

US Housing & dead cats bounce

Congress is filibustering the Fed's $700bn bailout of toxic assets. But, is this the reason for the markets dropping 2-3% for each of day so far this week? I doubt it. Even Congress will not resist Ben Barnanke and Hank Paulson saying clearly that the taxpayers will profit (it was either them or the vulture macro hedge funds) when Ben Barnanke, the Federal Reserve Chairman, said that if the Treasury buys assets at a price “close to the hold-to-maturity price” rather than current “firesale” price there would be “substantial benefits”. Banks would be able to mark their portfolios to the new higher prices rather than the current firesale prices. And taxpayers would still be reasonably safe as the government would pay less than the cash flow value of the securities. In effect, he argued that there is most probably a win-win solution for both taxpayers and banks (over the medium term). I expect this view to be digested and generate positive news in time for today's US markets opening. It is a classic psychological moment, to show that the markets are trending up not down after wiping out Friday's historic gains.
The congressmen (a third of whom are up for re-election on Nov.4) are using the committee stage for free airtime, Prez candidates now too, but know that they should not blow market sentiment by getting seriously in the way of what the financial authorities are urgently advising as the only way up. The markets took dead cat bounce profits, but are expecting bank stocks to continue up once Congress backs down, to be followed by more announcements of governance details and also consolidating mergers or takeovers among financial service firms and some signs of hard floor under the US housing market. The short sellers have shifted in options & futures whose exchanges are at record highs for daily volumes.
US Housing may be touching bottoms too. Existing US home sales have already fallen nearly 30% since Sept.'05, a return to the long run trend, which is the historical bottom. New home sales fell even more sharply, and the unsold inventory is over 5m homes, condos and coops. Existing US house prices have already fallen for the longest month on month period in US history and new home prices by up to 25%. We have seen sub-prime lenders close, Fannie & Freddie taken over, and banks and others taking big writedowns etc. etc. plus Lehmans, Fannie & Freddy, AIG and one other top financial firms being investigated by the FBI on top of 400 arrests at 26 sub-prime brokerages (oh if our EU national regulators and white collar crime police were only so diligent and less concerned about financial market reputation?). For example, Fremont General, US 5th largest subprime lender, cited by FDIC for 14 violations, shut down, and New Century Financial, US 3rd-largest subprimer, is the focus of an FBI probe about accounting and securities trading. The company tumbled into bankruptcy. And many similar stories.
This surely must be what the auhorities are most anxious to be able to do now, call the bottom ASAP. It is the bottom when the lenders of last resort have gone as far as they can politically, and when even for the biggest lenders of first resort made writedowns that are well off the chart of their worst scenarios. HSBC, the world's biggest bank by capitalisation, like many others that continue soundly after experiencing a surge in bad loans, alone took a $10.6bn loan loss provision related to US delinquencies and mortgages.
It is inconceivable to me now that vulture funds and HNW wealth will not see this as just about the right time to start buying. They may wait for the $700bn deal to be voted through, but are likely to be negotiating deals now. The prospect of a Democratic administration will also be viewed as positive for prices to rebound beginning with the time-honoured political dead cat's bounce.

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