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Wednesday, August 29, 2007

Bear Raid


Equity indices dropped surprisingly easily yesterday…

U.S. MBA's Mortgage Applications Index Decreased 4% Last Week: “Mortgage applications in the U.S. declined to a four-week low as the rate on one-year adjustable loans jumped by the most ever.

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan fell 4 percent last week to 615.2 from 641.1. The group's purchase and refinancing gauges each decreased for a second week.”

I don’t particularly like this Index because I believe it is almost useless. Marginal borrowers scrambling to find last minute financing will apply for multiple mortgages because they will get turned down several times. This index overstates mortgage applications. The Bulltards (my new favourite term for a certain breed of market participants that was coined by Tim Knight of The Slope of Hope) parade high mortgage applications as a ‘bullish’ sign for housing and the economy without understanding why rising mortgage applications may actually be a sign of WEAKNESS.

“Banks may be jacking up short-term rates to dissuade buyers from choosing riskier mortgages as defaults on subprime loans climb. The housing slump will worsen as banks restrict credit availability and falling real-estate prices prevent owners from tapping home equity for extra spending money, economists said.”

Yeah, that’s right. The banks don’t necessarily want your risky business right now. They have to look inwards and tend to their wounds first… and that might actually take quite a while.

Cheyne May Liquidate Commercial Paper Unit on Losses (Update1): “Cheyne Capital Management Ltd., whose Queen's Walk mortgage bond fund reported losses in June, may be forced to sell assets backing a $6 billion commercial paper program after a global credit market rout.

The Cheyne Finance LLC fund has been selling investments and has enough cash to repay commercial paper due through November, London-based hedge fund company Cheyne Capital Management said in a statement. Standard & Poor's cut Cheyne Finance's ratings yesterday, citing the deteriorating market value of its assets.”

The commercial paper market is still locked up. Forced liquidations will therefore continue.

““We will see more names fall by the wayside,” said Tom Jenkins, an analyst at Royal Bank of Scotland Group Plc in London. “The sales will look increasingly distressed.””

Fed Put Inflation Skepticism Above Credit Concern (Update5): “Federal Reserve officials put aside concerns about the rising cost of credit at their Aug. 7 meeting because they weren't convinced a slowdown in inflation would last, minutes of the gathering said.”

I brought it up in yesterday’s post, pre-market: Bernanke is NOT Greenspan. We’ve had a regime change. This regime now has the wisdom NOT to repeat the mistakes made by Greenspan and must still establish its inflation fighting credibility. Therefore, they will not cut to bail out the FINANCIAL MARKETS, even in an election year. They will cut to bail out the ECONOMY. We are nowhere close to that point… yet…

China to `Actively' Take Measures to Curb Inflation (Update2): “China's deputy central bank governor Su Ning said the authority will “actively” take measures later this year to stabilize inflation after prices climbed.

“The People's Bank of China has been closely monitoring current rising inflation,” Su told reporters at a press conference in Beijing today. “So far the measures we've taken to curb price increases have shown some effect.””

With inflation at a 10 year high, and the public pouring everything they own into equities, this is still too little to late. Judging by the price action of Chinese equities, I would say it is almost safe to argue that the economy has already overheated. The blow off top is pending... if we haven’t had it already (See charts: FXI).

China Urges Companies to Avoid Speculation on Stocks (Update3): “China's securities regulator is urging companies to rely less on gains from the stock market after a rally in the benchmark index this year increased the share of corporate profits coming from equity investments.

About 12 percent of earnings were derived from share market windfalls in the first quarter and the ratio may be surging, Qi Bin, head of research at the China Securities Regulatory Commission, said in an interview in Beijing.”

Why does this sound familiar? Oh yeah. Right. The Tech Bubble. Dotbomb A bought shares in Dotbomb B. Both marked to market as equities raged and reported the profits. Bulltards said, “Lookit those rock solid earnings. This stock is cheap.” Those that noticed that these ‘earnings’ weren’t sustainable quietly filed out the side door.

Same shit. Different pile.