Monday, August 27, 2007

Blue Monday

The markets opened on a lower note and were pushed further into the red by another in a continuing series of bad reports from the housing sector, today's detailing a further decline in existing home sales and lower prices for existing homes.

The actual numbers have now become somewhat irrelevant.
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Anybody with a pulse knows that the housing market has been fractured, though nobody really wants to admit to how badly it is broken and how serious the effect will be on the general economy.

Allow me to be the bearer of bad news. As bad as you think it might be, multiply that by 3 and you may come close. The coming recession will likely be the deepest and longest of the post-war era. Banks, mortgage finance companies, Wall Street brokerage houses, private equity managers the Federal Reserve and various elements of the federal government have unwittingly colluded in producing a near-catastrophic financial environment rivaled only by the crash of 1929 and the ensuing Great Depression.

Dow -56.74, 13,322.13; NASDAQ -15.44, 2,561.25; S&P -12.58, 1,466.79; NYSE Composite-78.11, 9,528.93

I cannot state with any more urgency than to say that the American banking and credit markets are in a liquidity crisis unmatched by anything most people under the age of 80 can remember.

A few points to ponder:

  • The US equity (stock) markets were so close to a complete crash at various points over the previous three weeks that not only our own central bank - the Federal Reserve - had to intervene, but so too did the Bank of Japan and the European Central Bank.

  • Countywide Financial (CFC), the nation's largest mortgage issuer, faced a liquidity crisis so severe that they were within days of declaring insolvency. Only by tapping a monstrous $11.5 billion line of credit and receiving interim funding of $2 billion from the Bank of America were they able to stave off complete catastrophe.

  • Wells Fargo (WFC) had a two-day outage of their online banking and ATM machine network which the company blames on a "computer glitch." The real cause for this shutdown or closure of their banking operations may never be known.

  • Citigroup and Bank of America, last week, requested and received an exemption from the Federal Reserve, allowing them to loan more money to their brokerage affiliates which were bleeding cash from bad mortgage loans and a meltdown in derivative positions.

  • The price of gold sank $22 in one day as nervous financiers sold the metal in order to raise cash.

  • The Federal Reserve lowered the discount rate - the rate at which member banks can borrow - 50 basis points, from 5.75% to 5.25% and also extended the repayment period from one day to 30 days. That window of liquidity opportunity will begin to close within 3 more weeks. At that point, Fed banks will be forced into a position of having either to borrow more or shut down some operations.

  • A number of financial institutions - mostly hedge funds and mortgage financing interests - have already been shuttered due to a failure to meet ongoing obligations.

All the while, Congress and the president have been on vacation. There has been only cursory lip service paid to the situation, though anyone who understands finances, and especially debt, knows that the condition of the US economy is grave.

Volume on the NASDAQ today was 1,285,962,361 shares, the lowest figure of the year. Traders are actually afraid to commit to this market. We are approaching a condition of inertia and illiquid markets which could shut down much of the world economy.

Declining issues outdid advancers by a better-than 2-1 margin. There were 130 new lows to 109 new highs, numbers that reflect the serious shortage of both buyers and sellers in the market.

Oil futures continue to be completely detached from reality, gaining 88 cents to close at $71.97, a price that cannot be justified or supported at any juncture in the supply chain. Regular gas has been declining over recent weeks, an unprecedented event during the usually-busy summer driving season. The decline in gasoline prices is an indicator of the general welfare of the US economy. People are driving less - much less in some cases - reducing demand on a current oversupply.

Gold and silver declined by marginal amounts again as the commodity markets continue their slow price disintegration.

There are crossed signals coming from all manner of sources - economic, political, military - that the world is on the verge of a major upheaval event. If recent history - the past 200 years - is any kind of guide, our world, as we know it, is about to be shredded by a combination of various forces of oligarchies, secret societies, ill-conceived government actions and tyrants.

If you are not yet afraid, you should at least be concerned. If you are afraid, your fear has good reason to manifest itself.

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