Friday, August 17, 2007

Econorama

I've been watching economic developments and financial markets for over thirty years now (yikes!) and I'm certain I've never seen anything like the last two weeks.

As I noted before, 2003 and early 2004 were unprecedented investment times. Every asset class went up: gold, silver, oil, farm commodities, residential real estate, commercial real estate, stocks and bonds. Anything one invested in prospered. In the last two weeks, essentially the opposite has occurred - so much for the benefit of a diversified portfolio.

There are a number of root causes of this, but it mostly stems from the grinding deterioration of the U.S. housing market, which put large numbers of various kinds of mortgages upside down. In turn, we've learned that these mortgages were held by a wider range of investors than one would have guessed, and some of those investors had borrowed money to buy the mortgages...so the over leveraged home supported and over leveraged hedge fund.....generally, this should have worked its way out - but there was a buyers' strike for mortgages until buyers were confident any mortgage they were about to purchase was adequately secured and underwritten - so all of a sudden, high -quality, credit worthy home buyers couldn't find a mortgage.

This is creating a calamity. This morning on CNBC Allen Sinai, an economist who grew up in the legendary think tank Data Resources years ago, put the odds of a recession at 35% and rising. (http://www.leadingauthorities.com/17101/Allen_Sinai.htm ) In a most remarkable event - the Fed cut rates this a.m. - realizing that failure of the markets to underwrite mortgages means layoffs at home builders, bankruptcies of over-leveraged homeowners, spiraling job losses for real estate brokers, continuation of the wave of bankruptcies at mortgage brokers, cutbacks at banks, plant closings at factories that make plywood, bath tubs, showers, sinks, kitchen cabinets, roofing tiles, carpet, glass, hardwood flooring, lighting fixtures, insulation - well, just huge pieces of the economy.

We'll see if it is enough. The Fed needs to engineer the purchase of mortgages as well. While a number of private equity/leverage deals seem to be in trouble, the economy can plug along - after all, First Data is still processing, and Dollar General is still waiting on customers - just the ownership change hasn't been completed. And the private equity players are big boys and girls and can handle themselves just fine - in fact, have probably already figured out how to take advantage of the market turmoil.

Not too long ago I made two investment moves - playing a fibonacci series retracement on the NASDAQ QQQQ and buying the Canadian I-Shares (EWC). At the moment it looks like I played the Q's backwards - should have shorted - but EWC still looks decent (combo play on weak U.S. $ and commodities. I played the Q's despite my concern about U.S. economic weakness because all the technical factors I watch seemed to be positive. Next two weeks after today's rate cut should tell whether I'm going to stay on the losing side of that trade...

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