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Monday, September 24, 2007

The 11th Hour

It is the 11th hour in so many ways…

General Motors Faces Auto Union Strike Deadline Today (Update6): “The United Auto Workers, in pay talks with General Motors Corp., set a strike deadline for 11 a.m. New York time today, the 10th day since its current contract with the largest U.S. automaker was originally due to expire.

“General Motors has failed to recognize and appreciate what our membership has contributed during the past four years,'' UAW President Ron Gettelfinger said in a statement. “In this current round of bargaining, we did everything possible to negotiate a new contract.””

Negotiations are still ongoing right into the deadline. It is likely that a compromise will be reached and the UAW is just acting tough. This way, when the results are announced they can say they fought hard right to the end. Both the UAW and GM know that the future of the company is at stake here. For real this time.

Dollar Falls to Record Low Against Euro as U.S. Growth Falters: “The dollar fell to a record low against the euro and declined versus the yen on speculation economic reports will show U.S. growth is losing momentum, adding to pressure on the Federal Reserve to cut interest rates again.”

Housing and Consumer Confidence reports will be out this week. With each report it becomes more and more difficult to justify holding anything dollar related other than commodities.

Fed's Rate Reduction May Give Little Relief to U.S. Homeowners: “Americans may be disappointed that the Federal Reserve's interest rate cut won't translate into lower monthly mortgage payments and a revival of the housing market.

“Mortgage rates won't stimulate demand,” said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. “The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages.”

Duh. Sometimes it just takes a really really long time for the obvious to sink in. The housing crash was caused by OVERPRICED HOUSING, NOT MORTGAGES. In my post The Bond Vigilantes Are Back I argue that its going to be far more complicated. The rate cuts are actually causing mortgage prices to RISE.

“Investors concerned about inflation following the Fed's half-point interest rate cut have driven up the yield of 10-year Treasury notes by 23 basis points, or 0.23 of a percentage point, to 4.7 percent. The increase has dashed hopes that lower home-loan costs might entice more Americans to overcome their fear of falling prices and buy homes.”

The Fed had a simple choice: INFLATE or DO NOTHING. Had the Fed done nothing the housing market and therefore the economy as a whole would have CORRECTED by falling into a MANAGEABLE and DESERVED recession. Instead the Fed chose to cut rates and add liquidity. In other words: INFLATE the entire system. The ultimate results will still be a recession. Only now the recession may have been postponed, possibly for years, and when it does hit it will be neither MANAGEABLE nor MILD.

Brown May Hurt Investors to Damp Northern Rock Anger (Update1): “Prime Minister Gordon Brown's government, which insured the deposits of Northern Rock Plc customers to stop a run on the bank, seems willing to sacrifice its investors and executives to lawmakers looking for someone to blame.

While Chancellor of the Exchequer Alistair Darling guaranteed U.K. savers with accounts at the bank will lose no money, his backing doesn't extend to new accounts. That makes it difficult for the Newcastle-based mortgage lender to remain independent; its shares fell by a third since Darling's decision on Sept. 17.”

Grinding blindly through the mess… all the while just ensuring that the next mess will be much bigger.

Banks Reduce Backlog of Unsold Debt to $370 Billion (Update2): “Banks reduced the backlog of unsold corporate debt by 2 percent in the past two weeks to $370 billion as investor demand for leveraged loans and bonds improved, Bank of America Corp. analysts said.”

Pimping a 2% reduction in the debt backlog of $370 billion as ‘progress’ smacks of desperation. This is hardly a sign that the debt markets are moving again. There must be good deals in this massive pile somewhere and they will get done.

KKR, Goldman Walk Away From $8 Billion Harman Buyout (Update3): “Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. abandoned their $8 billion takeover of Harman International Industries Inc., maker of Infinity and JBL audio equipment, citing a decline in the firm's performance.”

Another EXPENSIVE cancellation for everybody. The breakup fees is $225 million and investors got dinged for $27.25 as Harman plummeted to $85.

Suddenly a Good Bear Is Hard to Find as Stocks Rise on Fed Ease: “The Federal Reserve has driven most stock market bears into hibernation.

From UBS AG to Deutsche Bank AG and Citigroup Inc., Wall Street strategists are the most bullish they've been since 2000 after the U.S. housing slump erased $5.6 trillion from global equity markets and prompted the Fed to cut interest rates.”

Let me emphasize: Wall Street strategists are the MOST BULLISH they’ve been since 2000. Scrolling through the last few months of headlines this just sounds INSANE. But the market can stay irrational far longer than you can stay solvent. It really is the 11th hour. We are either in 1998 or 2000 again.