Strategy

10/27/2008

STRATEGY We are finally seeing some signs of improvement
in the credit markets. Overnight Libor fell to 1.67% from 5.09% last
week. Overnight commercial paper rates fell to 1.05% from 3.50% last
week. Caveat Emptor- 1, 3 and 6 month Libor are still about 150
basis points higher than they should be reflecting the skittishness
and uncertainty over what the future brings us. Mortgage rates jumped
this past week. Just what we do not need. Until this uncertainty is
lessened or removed, the markets will continue to trade all over the
place.
COMMENTARY What are the issues that now need be
addressed as we move forward given that the fix is in for the financial
institutions? The US economy is not going to recovery quickly without
a recovery in housing. How do we accomplish this is the mill io n -
dollar question? We can begin by getting back to reality in terms of
underwriting standards. As long as the tightening continues, and we
see almost weekly another big lender tightening, we will prolong the
recovery. Obviously we never want to be where we were in say 2006
with the most insane(inane) lending that took place. We do however
expect that the complete reversal of lending s tandards from the Wild
West days to complete control freak days of today to find a balance
somewhere in between. It is human nature to go to extremes if cooler
heads do not prevail. We desperately need cooler heads to prevail
and the days of the tight wad need to be abandoned. The current
credit starvation is preventing long-term rates from coming down not
to mention our government’s huge borrowing needs. Now that the
government has control of the GSEs, they need to lead the pack and
start easing lending standards and others will follow suit and then
mortgage rates will come down.
The consumer has surprised us for so many years now that the
seeming change that we are experiencing in course is sending us
reeling. This may be the first time in perhaps 50 years that the
consumer is acting differently. We can no longer use our homes
as ATM machines. We are already so tapped out on our credit
cards. Where will money come from for the consumer to continue
spending? Another stimulus check? We certainly implore our
“geniuses” in Congress to learn from the recent past. The firs t
stimulus package was a one-up deal. We do not need to add to
our deficits with another one-up deal which will no t give the
consumer the shock treatment that our Congress seems to think
will work. Our senses are impaired and we are scared. The banks
are not the only one’s that are hoarding money. We do not hear
from a n yo n e we know that they are not tightening their belts
significantly regardless of their financial s ituation.
As for tax increases, they should be instituted in fat times, not
in times of severe dislocation. Yes, we understand that we cannot
continue to build on our deficits and that by raising taxes we can
help reduce them. Not now. We are too severely dislocated. We
are in a recession and making it harder for people and
businesses with increased taxes will only prolong this recession.
What is really needed is for our government to seriously downsize.
Lead by example has ne ver been more important. The budget
needs to be chopped everywhere. We need to create jobs. Instead
of s loshing money around for a one-up deal with another useless
consumer s timulus package, we should take that money to invest
in the rebuilding of our infrastructure which will create jobs and
thus create real productivity. The old ways do not work in this new
world we find ourselves in.
The week ahead does not bring us any s ignificant economic
data. Monday’s September leading indicators report is already old
news. Friday’s September existing home sales report is expected
to be unchanged from August. The markets are very jittery and until
we have some notion of what all the bad debt amounts to,
whenever that will be, we expect they will remain very volatile. We
also expect that Libor rates across the board will ease further.