Reply #2: Market WrapUp [View All]

Halloween Scariness in the Financial Sector
BY FRANK BARBERA, CMT

Another day, another week, and soon a new month, and the news just continues to fall off a cliff. As investors woke up this morning they were greeted by the headlines of Home Prices falling for the eighth month in a row, with no turnaround in sight. Turns out, Home prices fell in August by 5% from a year ago, recording the biggest decline since 1991 when prices fell 6.3% in April 1991. The Case-Shiller Index showed its lowest annual returns ever recorded in August, with Cleveland down 4.1%, Las Vegas down 7.6%, Miami down 7.8%, Minneapolis down 4%, Phoenix down 8%, San Diego down 8.3%, Washington DC down 7.2% and Tampa, with the biggest loss of all down 10.1%. The picture in the Housing market is bleak, with panelists at a Housing Industry conference in California, Jeffrey Mezger, CEO of KB Homes, and Angelo Mozilo, CEO of CountryWide Financial along with California State Treasurer Bill Lockyer, suggesting to the Wall Street Journal that “home prices in California could decline on the order of 10% to 15% in the year ahead.” After reaching a cycle high of $484,000, the latest September median home price came in at $430,000, already more than 10% off the cycle high.

Of course, none of this news is helpful to the world of Structured Finance, where CDO pricing remains under intense downside pressure. Using the indices tracked by Markit.com, the TABX Index which is a proxy for the world of Collateralized Debt Obligations (CDO’s) has deteriorated 18 to 35% across all tranches in recent weeks, not a pretty picture by any means. None of this is lost on the management of some of the largest SIV’s or Structured Investment Vehicles where SIV’s closely linked with three of this country's largest banks, JP Morgan Chase, Bank of America and Citigroup, need to find $100 billion in fresh investment capital to roll over debts coming due in the next six to nine months. Of course, the large banks are looking to create the SIV Superfund, in an effort to keep these liabilities off balance sheet. Yet the recent disclosures from Merrill Lynch which under-estimated its CDO losses by several billion dollars (4.5 billion original to 7.90 billion final), tell us just how vague and opaque the pricing is on the paper of these CDO and SIV holdings.

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In the end, the rapidly escalating downhill slide of the US Dollar may very well be the straw which breaks the proverbial camel's back. In its efforts to save the US Housing sector, and mitigate a building US Recession, neither one of which is likely to be effective, the US Fed has told the rest of the world that the Dollar is their problem -- to be sure, a message resonating loudly in the board rooms of Daimler Benz, Toyota and Hyundai. As the Dollar continues its steady path lower, the ongoing signs of Stagflation become overwhelming even in daily life within the US. Sure, for many who pay no attention to the prices paid, the skyrocketing movement of food prices may not be clearly evident. Yet, it is prices across a broad front of consumer products which are moving up at a real world rate often in excess of a 10% annualized rate of change. With Crude Oil and Heating Oil at new all time highs and winter approaching, we are sure to see gasoline prices surge come the spring of next year. Perhaps $5, $7 or $10 per gallon gasoline will finally grab hold of the public's attention, as the mainstream lack of questioning on the CPI data beggars the mind. How, How, How can reported energy costs be up 5% year to date when Crude Oil, Heating Oil and Gasoline prices are all up 40% YTD? Some pretty fancy math to achieve that end result, which at the end of the day simply puts untenable strain of the budgets for the Middle Class. Of course, a key verdict on this note might come from the market with a major break below long time support on Wal-Mart Stores at $42.

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