BUSH'S
BAILOUT PLAN
It's ugly, but it's all we have.
by Anthony
M. Cherniawski
The Practical Investor, LLC
December 15, 2007
The Dow Jones Industrial Averages soared 175 points on the day that the Bush Administration announced its housing bailout plan. Wall Street was wrong. It wasn�t something to cheer about. The major argument against the bailout plan is that it keeps free market forces from clearing out all the toxic sludge built up in our housing and banking system. It is argued that the bailout will certainly prolong the pain and could exacerbate the housing and mortgage mess over the long haul.
But it’s all we have. The bailout plan will not help the the sellers of the estimated 2.5 million homes that are not occupied by the owners of the properties � none of which are eligible for the Treasury debt relief plan. Those homes will remain vacant or possibly be sold at much lower prices. The debt relief is aimed at homeowners with FICO credit scores of 660 or below and are still current on their mortgages to �freeze� their interest rate for an additional five years.
The outcry is that the investors in these subprime mortgages will suffer the loss of the additional return they were expecting at the time of reset. The problem with this argument is that we can already see that, without the bailout, they would likely get nothing. This argument has its parallel in bankruptcy law. If a debtor is insolvent, it is better to liquidate the remaining assets under Chapter 7. On the other hand, if the debtor is still solvent and able to make payments, a restructuring under Chapter 11 will provide relief to the debtor and often provides a better value to the creditors. The cost of bringing a foreclosed home back into the market is estimate to be in excess of $50,000, along with the lower price it might bring in a constrained buyers� market. So investors in mortgages would get some relief from this plan as well as stabilize the market for subprime debt.
Another argument against the current plan is that it doesn't help those with higher FICO scores who were suckered into buying a subprime mortgage when they would have been better off owning a house with a conventional mortgage. And those that are insolvent aren't being helped at all. According to them, the plan does too little rather than too much to extend the coverage and scope of the debt relief. But the alternative of doing nothing is far worse.
By easing debt servicing requirements to those who can afford to pay the plan not only reduces the number of homes potentially doomed to foreclosure, but also gives investors some value rather than facing the aftermath of massive defaults. And, so far, it involves no taxpayer money. The days of Bedford Falls where Jimmy Stewart (George Bailey) and the Bailey Brothers Building & Loan offering mortgages to new homeowners is over, if it even existed at all. (Take the time to see �It's a Wonderful Life.�) Wall Street took the home mortgage business to a new level of speculative lending and dishonest selling that has to end. It's too bad that it had to sting a lot of innocent folks in the process.
Apocalypse now?
Of all the times of the year to have a major market setback, this is not considered to be one of them. The seasonality model which avers that you buy in November and sell in May may not apply this year. Market veteran Harry Schultz isn't buying it, either. Shultz's latest letter is absolutely apocalyptic, "A financial tsunami is upon us," he says, caused by lax credit and complications introduced by Wall Street's derivatives craze. He may be right.
Treasury Bonds are also taking a hit.
Today
the Department of Labor announces that the Consumer
Price Index rose .6% last month. The unfortunate story behind this
announcement is that military pay and social security increases have
already been set for 2008. The timing of this is a little more than
suspect. Why am I so suspicious? The higher inflation rate is a direct
consequence of all the liquidity in the economy from lower interest
rates, which encourage more borrowing and less saving. I also means that
fixed obligations are paid with cheaper dollars. Not a good outlook
for bonds.
Gold not holding $800.
LONDON,
Dec 14 (Reuters) � �Spot
gold slipped to a one-week low in late European trade on Friday
after the dollar extended gains on data showing U.S. consumer prices for
November came in higher than expected.�
Say it ain�t so! According to the experts, gold should be rallying at the news of higher inflation. It looks weak to me.
There goes the neighborhood. Japan is declining too.
(Japanese)
Investors also found few reasons to buy after the central bank's latest
survey showed
business confidence fell in the fourth quarter on worry about rising
costs, their impact on profits, and further fallout from the subprime
loan crisis.
Before the open, the Bank of Japan revealed the results of its Tankan Survey, which reports on business confidence. The survey reports that business confidence fell for the first time in three quarters.
Are Chinese being driven to drink?
SHANGHAI,
China � �Chinese stocks rose Friday, led by strong gains in
liquor makers who are expected to benefit from higher food prices. A
rebound in property developers also helped buoy the market.�
�Or could it be that more Chinese are drinking after the 18% sell-off the Shanghai Composite has seen since mid-October? Oh, those animal spirits
The U.S. Dollar is gaining respect.
Even
before the Consumer Price Report was released, the market was expecting
a higher than average CPI. The thinking on Wall Street is that, with
higher inflation, the Federal Reserve doesn't have the leeway it needs
to cut interest rates. Inflation is a big worry overseas, too. This is
keeping the European banks vigilant about their interest rates as well.
But if the economies across the globe are slowing down, the U.S. Dollar
is still the safest haven.
Greenspan says, �Housing bubble caused by inflation expectations.�
Alan
�I didn't do it!� Greenspan has an article in Wednesday�s Wall
Street Journal that comes awfully close to admission of the
truth�but he flubbed his chance. Instead, he blames it on the old saw,
�inflation expectations.� He denies that the lowering of short-term
interest rates and the introduction of teaser rates based on them would
have made any meaningful difference in the outcome. The problem is, some
pretty respectable
thinkers closely follow Alan�s remarks. In this case, his remarks
don't fly.
Expectations of lower gasoline prices?
The
Energy Information�s Weekly
Report says, �Expectations about growth in global demand have been
lowered by most analysts over the last few months. Concerns here in the
United States about the housing market and tightening credit conditions
have led some economists to worry about the possibility of a recession
on the horizon. Concern about the U.S. housing market has been one of
the factors the Federal Reserve has cited for lowering the Federal Funds
interest rate. With strong global demand one of the key factors driving
oil prices higher over the last few years, any significant lessening in
demand growth could put downward pressure on oil prices.�
Prepared for peak heating.
The
peak
heating season has begun and with it some additional pressure on
natural gas pricing. A Nor�easter over the New England states will
certainly increase usage, but the supplies are in place. Meanwhile,
ExxonMobil is planning a huge floating liquefied
natural gas terminal off the coast of New Jersey that will service
the New York area, one of the largest markets for natural gas in the
world.
No More Bubbles to Bail out the Housing Bubble By Bill Fleckenstein , a contrarian that thinks as I do.
The negatives keep growing, this time unchecked. The stock market, the real estate market and the economy will get in sync on the downside -- it’s just a matter of when.
Beam me up, Scotty.
There are still no signs of intelligence on Wall Street. Kevin Duffy has a good article, too.
© 2007
Anthony Cherniawski
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Anthony M. Cherniawski
President and CIO
The Practical Investor, LLC,
State Registered Investment Advisor
Mason, MI USA
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