Stocks Fall Sharply As The Dollar Slides And Mortgage Market Breaks Down

by Richard Gorton, The Resourceful Bear Blog | March 7, 2008

I. Introduction

The run on the US dollar continued today as the currency traders called both the Yen and the Euro higher, and the Mortgage Industry experienced a breakdown, this induced a sell off in the US stock markets. the Dollar fell to 72.94. Gold traded down 1% to close at $978. The gold ETF, GLD, traded down to close at 96.50.

II. Stocks Fell Sharply

All the major indices fell through long running consolidation triangles, the Dow 1.7%, the S&P 2.0%, and the Nasdaq fell 2.2% and the Russell 2000 3.3%.

Sectors falling the most were: Mortgage Reits 16.1%, Housing ITB 6.2%, Retail XRT 5.3%, High yielding equity PEY 4.0%, Real estate IYR, 4.6%, Banks KBE 4.2%, Reits RWR 4.0%, Capital market providers KCE 3.8%, Finance IYG 3.7%, Emerging markets EEM 3.4%, Consumer discretionary discretionary RCD 3.4% and BRICS BKF 3.2%.

The ProShares UltraShort ETFs exploded higher; for example, the UltraShort MSCI Emerging Mrkts ProShares, EEV, closed at 84.99 up 6.74%.

The EUR/JPY fell some from its recent high of 159 to 158.

III. The US Dollar Weaken Significantly

Statements by the ECB's Trichet, such as, "I see no rate cuts", propelled the euro to an all-time high against the dollar at $1.5372.

Non-resident Indians in Bahrain were last night urged to invest in gold, UK sterling or Euro to offset the losses they have suffered due to the weakening dollar.

IV. The Mortgage Industry Went Into Meltdown

Bloomberg is reporting that the mortgage markets are "utterly unhinged". Government sponsored Enterprises, GSEs, Fannie Mae, FNM fell 10% and Freddie Mac, FRE, fell 7%. The report from investment professionals in the field is that worries about defaults are now making lenders hesitant to extend credit, preventing the mortgage markets from functioning normally.

CNN is reporting that foreclosures hit an all-time high with over 900,000 borrowers are losing their homes, up 71% from a year ago, and a record number of home owners are behind on payments.

Merrill Lynch, MER, and Citigroup, C, both heavily intertwined with the mortgage industry fell 7 and 4.4% today.

Fidelity Mortgage Securities Mutual Fund FMGAX turned lower manifesting a massive bearish engulfing candlestick in its weekly trading chart.

Associated Press is reporting that lenders to Carlyle Capital Group Ltd have begun to liquidate securities held in its $22 Billion portfolio.

Thromburg Mortgage, TMA, fell 52%, after disclosed Wednesday evening that JPMorgan Chase & Co., JPM, issued a default notice after Thornburg failed to meet a $28 million margin call. That notice triggered cross-defaults on agreements Thornburg had with other lenders.

There is now a 'financial Chernobyl effect': equities used to secure repurchase agreements are typically very low, as low as three percent; this means that when the margin calls cannot be met, whole portfolios of assets are sold, if possible, at fire sale prices causing stock market sector meltdowns, especially in the financial, reits, real estate and banking sectors -- the ones I have been consistently recommending that one sell short.

The entire residential mortgage-backed securities investment industry fell awesomely lower yesterday: Paul J. Miller, Jr. of investment research firm, FBR, reports relating that the financial industry needs $1 trillion in permanent capital to help stabilize and improve the pricing of mortgage assets, but is unlikely to receive it.

V. Investment Application

A. The fall of the U.S. Dollar today coupled with the Mortgage Industry Breakdown that Bloomberg is reporting, and that trader Tim Knight in his article Oedipus Wrecks is reporting today, is a watershed financial and economic event of greater scope and impact beyond the October 8th, Citigroup subprime bust, as there is now a complete unwinding of highly leveraged investments whose underlying basis is illiquid.

Today's Mortgage Industry Breakdown is a 'systemic failure' of epic economic import: it is the equivalent of a person having a stroke, or the equivalent of that terrible Chernobyl disaster.

The Breakdown comes on the heels of the last three weeks of a municipal bond market breakdown where some 70% of the municipals are now failing to auction.

The Mortgage Industry Breakdown will result in a further run on the U.S. Dollar, a sell of US stocks across the board, an unwinding of carry trades of all sorts globally, including the Yen Carry trade, which was seen in the BRICS, BKF, falling 3.2% today.

The Government Sponsored Mortgage Enterprises, the GSEs, Freddie Mac, FRE, and Fannie Mae, FNM, simply will not have have enough capital, nor can they be capitalized enough to continue functioning, as they are today: this though has tremendous social impact beyond my ability to put into writing and I leave it to others.

While US Treasury Bonds currently have a AAA rating granted by the rating agencies, some forward thinking is required: given today's Breakdown, and the fall of the U.S. Dollar to $72.94, I conclude, that U.S. Treasuries are going to soon experience a massive loss of value; confirmation comes from numerous others such as Michael Pento writing in FinancialSense.com Treasuries vs. the CRB.

Today's Mortgage Industry Breakdown is the 'genesis event' of a North American Union, that is a continental state-corporate combine, where the nation's leaders are sovereign over the Continent's people and resources: the Breakdown will serve as the basis for a future 'continental response' of security and prosperity action, that is implicit in initiatives that have already been undertaken by the working groups, of the Security and Prosperity Partnership of North America, the SPP.

One can read about the principles of North American Governance on the SPP.Gov website.

B. I encourage that one invest one's investment wealth in gold; and that one buy gold with one's retirement wealth by investing in the gold ETF, GLD; and that one obtain margin credit

C. Gold may be taking a rest from immediate price increases. Gold should have risen higher today with the Yen and Euro but did not, possibly because oil is holding steay at $105; gold may fall towards its 50 day moving average before advancing up and over $1,000; chart of the gold EFT, GLD provided for your review.

Short Bio My investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

Contact Information

Richard Gorton 360-756-5431 | Bellingham, WA USA | Email | Website