The Shakespeare Festival is still going strong in Ashland Oregon, but I often wonder what “The Bard” would write about the comedy of errors going on in Washington DC. Ben Bernanke made his second appearance today to talk to the “Apple Dumpling Gang” about the state of our economy. In one day, Ben’s vision of the economy has gone from “doom and gloom” to “hey, things aren’t all that bad”. Maybe he needs some Prozac ? If not Big Ben, then the markets do for sure. Yesterday was a “down day”, and today…..well the Dow is up over 200 points.
Think about it this way, the intrinsic value of the companies that make up the Dow can’t have changed that much in a 24 hour period. If a company is worth a billion dollars, it doesn’t all of a sudden lose 5% or $50,000,000 in value in 24 hours. Did their products lose that much in value? Did their real estate holdings drop that much in one day? Of course not. But watching the markets, you would think that they did. So, what’s my point? The market is scared and is just as likely to believe that the sky is falling (from Big Ben’s testimony yesterday) as it is to believe that everything is all rainbows and prancing unicorns (based on Ben’s testimony today).
We talked about it yesterday, but the impact of the new FinReg (Financial Regulations) placed on the Ratings Agencies has already begun to show up. If you recall, now that Ratings Agencies can be held liable for inaccurate or misleading information, newly issued debt will no longer include their “official” ratings. In short, the three major ratings agencies no longer feel comfortable rating issuances if they can be sued if they “miss” on a bond rating. Another way to look at this is to compare it to car shopping. It’s sort of (in a very simplistic way) like saying that if I take advice from Consumer Reports on a particular car, and if that car turns out to be a lemon, then I can sue Consumer Reports? Well, that’s silly. Shouldn’t I test drive the car first? Shouldn’t I look under the hood? Shouldn’t I have my mechanic look at the car? Well, large investment banks that buy these bonds have skyscrapers full of analysts, attorneys, and traders that review these transactions………but now the ratings agencies are liable. Don’t get me wrong, I think that (in many cases) the ratings agencies missed the mark on quite a few bond issues over the last few years, but that doesn’t mean that we don’t want them doing their jobs……………and the new FinReg is causing them to step out of the market to protect themselves.
Case in point, last night Ford Motor Company pulled back a financing deal because they could not get a printed rating on the debt offering. Rumor has it, that there are a number of other bond offerings that are being scuttled because of this. We will continue to follow the fallout from this part of the new FinReg. We will also begin to see how this impacts mortgage financing. No matter what happens, it will be interesting to say the least.
Since “they” say that a picture is worth a thousand words, I recommend that you check out this article (especially the graphs) from The Big Picture – it speaks volumes. Now, remember, recoveries and recessions never happen in straight lines, so trend-lines could tell the whole story or be completely useless. In this case, I think the trend lines tell a very cautionary tale. Many of the traders that I know have “gone to cash” as they are very concerned that we are not done with an overall decline.
Which brings us to the biggest surprise of the day – we are going to agree with Bernanke. He said yesterday that the economy is “Unusually Uncertain”. At this point, hindsight needs glasses to see well and foresight is running into walls left and right. With government intervention doing a number on our financial reports, we can barely see our proverbial hands in front of our faces. Next up to bat is the Unemployment Extension bill which, politics aside, will make it even harder to see the trend, since at this point a jobless recovery is about as likely as BP making a good public relations move.
The next few months will see a slight decline in housing numbers, but I personally believe that we will see a slight upturn in the fall and then another drop during the December-February months. Also, keep an eye on consumer savings rates. A big increase will signal a scared consumer and project less movement of housing inventory. A drop will indicate a more comfortable consumer and a possible increase in housing activity.
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Geoff Boyd – PrimeLending – Clackamas, OR