March 11, 2008

Market Comments for March 11, 2008

1) The Fed announced that they would accept $200 billion in triple A mortgage backed securities which is one quarter of its entire balance sheet. This was absolutely the right thing for the Fed to do. Apparently the market thinks so too, with the Dow up 417 points, the largest up day in 5 days. Banks were the leading sector, up 5-10% across the board, with WAMU (WM) up 25% in one day.

2) Crude hit $109.80 overnight, and Natural Gas $10.10. It then plummeted to $106 on the Fed announcement, telling you what the real driver of the market  is. The Euro backed off from $1.55 to $1.53. The International Energy Agency cut its forecast of global energy consumption for the second time this year due to an impending US recession.

3) Citibank (C) announced that it was putting in $1 billion to bail out six of its in house muni bond hedge funds. These funds typically used leverage of 30-40 times and were asking for trouble.

4) China announced that its inflation rate jumped to 8.7%, an 11 year high. This is eventually going to hit us.

5) Over the last 25 years stocks have dropped an average of 34% during a bear market. At the Monday lows the average stock was down 31%.

6) The new issue market for muni bonds has been closed for 4 months now and an enormous backlog has developed. In the secondary market 'AAA' paper is now yielding 6% which implies a taxable 10 year yield of 9% versus 3.4% for ten year Treasuries. This shows how far out of whack prices are getting. Some clever investors and hedge funds are now buying munis even though they have no use for the tax free interest income because they expect imminent large capital gains when the market recovers.

7) Homebuilder Hovnanian Enterprises announced a record loss. The stock has dropped from $80 to $6 and is now back up to $9. It is a strong buy here.