Global Market Comments for September 23, 2008
1) Yesterday was a real 'Sell the US' day. Stocks, bonds, and the dollar all fell big, a very rare occurrence. It shows you that foreigners were making large scale withdrawals of capital from the US, not wanting to get caught up in the Fall of the Roman Empire. Congress is making sausage here and it is not very pretty. Traders are watching Paulson's original three page bail out bill grow to hundreds of pages of pork and are getting nervous. The Paulson plan would not be so hard to swallow if this administration didn't have such a long and proven track record of lying. I am still waiting for them to find the weapons of mass destruction in Iraq. And why are we hearing this proposal six weeks before a presidential election? If congress doesn't deliver this week, expect the Dow to drop below 10,000 very quickly.
2) If you take the US banking system back to the 1970s you have to take house prices back to 1970s valuations. That means borrowing only four times your annual income, putting 40% down for an expensive conventional 30 year fixed rate mortgage, and a FICO score of 700 or better to qualify for all of this. This will cause the destruction of several trillion dollars of purchasing power by the American home buyer. Home prices will fall for several more years, especially in high priced markets like California and Florida.
3) Lehman senior debt is currently trading at 20 cents on the dollar and may be a buy here. The low price reflects distress sales by institutional investors like pension funds who are not allowed to hold less than single 'A' paper. CreditSights, an independent London based research firm, anticipates a recovery value in 18 months of 50 cents on the dollar. Substantial funds will be raised through the sales of Lehman's asset management division, real estate division, and the US broker. Lehman listed $600 billion in assets on its balance sheet that will have to be liquidated. It may all come down to how much of Lehman's distressed CDO's can be sold to the Treasury at a decent price as part of its $700 billion bail out.
4) About 24% of all sub prime loans are now in foreclosure. The underlying securities are trading as if 80% are going into foreclosure and that there will be no recoveries on the foreclosed properties. As soon as the government restarts the market, enough private market will step in to keep it running.
5) Fear is still rampant in the credit markets. The TED spread (the spread of US three month LIBOR interest rates over US three month T-bills) peaked last week at a record 300 basis points, but is holding in at a stratospheric 225 basis points. So far this year the spread has traded around at an average of 70 basis points.