777 Points, The Real Story, The Ultimate Short, Home Price Update and More!

  • Markets plunge… what to make of the Dow’s staggering 777-point crash
  • Dan Denning with the real “big story” from yesterday
  • “If there were ever an asset class to short,” it would be…
  • Fed pumps $845 billion into global markets… The 5 does its best to put the madness in perspective
  • The vine continues to rot… housing prices fall by record margin, again

  Here’s another one for your credit crisis scrapbook: The Dow fell 777 points yesterday — its worst single-day point decline in history.

It’s a shame you can’t go back in time to November 2005 and stop yourself from buying the Dow. Yesterday, all the index’s gains over the past three years have now been wiped out by this credit crisis.

The S&P 500 and the Nasdaq spazzed even more. Both indexes dropped about 9%.

  Here’s a first: The Wall Street plunge yesterday wiped out approximately $1.2 trillion in investor capital. That’s the U.S.’ first foray into trillion-plus one-day losses.

  But it could have been a whole lot worse. In percentage terms, none of yesterday’s big index declines compare with Black Monday or many days during the Great Depression. The Dow, for example, fell “only” 7%, which barely cracks the top 20 list of all-time Dow percentage declines. If (when?) the Dow falls 20%, or around 2,000 points, in one day… then we’d really be making history.

  We assume you know the story by now: Congress did what they do best… they overpromised and underdelivered. Various reps from both sides of the aisle had the world convinced this financial rescue was a “done deal”. Heh, not exactly.

But don’t worry, the House is taking off today and tomorrow. They deserve a Rosh Hashanah break, we think. After all, they did work through the ENTIRE weekend and cut into their scheduled vacations. (Gasp!)

  The London interbank offering rate (Libor) leapt up to 6.8% last night — a whopping 431 basis points after Congress failed to pass the bailout bill.

That means banks were charging almost a 7% premium to lend to each other overnight. That’s an all-time high by a healthy margin, and not exactly the optimum 2% target rate preferred by the Federal Reserve.

  “The big story is in the credit markets,” writes Dan Denning, “which are in as bad a shape as they’ve been since the credit crisis began. The credit markets are vital to the banking system, and the banking system is vital to anyone with deposits in the bank. This is how the credit crisis intersects with the real economy.

“The whole target of the Paulson plan was to relieve pressure on banks. That pressure is right back on, following the failure of the U.S. House to sign onto the deal. That pressure threatens to spill over into the commercial banking sector. We wonder what it will do to the confidence of people who have money in the bank and not a lot of a confidence in the financial system at the moment.

“This leaves us exactly where we’ve always had to be: the continued deleveraging of the global financial system. That means more asset write-downs, more bank failures and, sooner or later, a run on a few banks…”

  And as “investors” abandon their troubled shares and yank cash out of money market accounts, they’re putting their money in — of all places — U.S. Treasuries. Oy… it’s a mad world.

The yield on a 30-day Treasury note yesterday sank to a historic low 0.05%. Even longer-term paper has sunk way below practical rates of inflation. The U.S. government will pay you only 1.5% to borrow your dollars for one year. The 30-year bond yields only 4.1%.

Yet by the government’s own accounting methods, inflation is at 5.4% today.

If there ever were an asset class to short, it would have to be U.S. bonds right now. All this money being shoveled into the financial system, all the bailouts, the national debt, the trade deficit, the incredible lack of leadership, the credit crisis, the housing crisis, the bear market, the coming recession, the war in Iraq… and the U.S. can still get away with bond yields this low?

Not for long… no way. No how.

  The Federal Reserve quietly committed another $845 billion to the global credit crisis yesterday. That’s right: $845,000,000,000.00.
$620 billion goes to swap agreements with foreign central banks. The rest goes to TAFs… the Fed has tripled the limits on their three remaining 84-day loan auctions, to $75 billion a pop.
If you’ll allow us to put that in perspective… if the Fed had been created the day Christ was born and printed a million dollars for the credit crisis every day from then till now, it still wouldn’t have had enough to cover yesterday’s tab. They’d be about $100 billion short.

  Even so, all eyes are on the Capitol. If Congress doesn’t act soon, we’re facing “the biggest financial meltdown in American history,” Warren Buffett warned this morning, ironically echoing the sentiments of the Bush administration.

In the meantime, the Oracle has been buying up assets left and right as the market falls. Today, we learn Berkshire Hathaway’s MidAmerican Energy has purchased 10% of BYD, a Chinese electric car and battery manufacturer.

  Meanwhile, the “troubled assets” that Hank Paulson and Nancy Pelosi are so eager for the “taxpayers” to buy are getting more worthless as every minute passes. Take the latest from S&P/Case-Shiller. Their home price index continued to swoon:

The latest reading of the home price index showed continued record declines for home prices in July. Both the 10- and 20-city measures boasted record declines, of 17.5% and 16.3%, respectively.

And we hasten to note that the S&P/Case-Shiller HPI measures the percentage change based on one year ago. Measured against their highs, the 10- and 20-city home price composites are over 20% down. Seven metro areas have fallen in excess of 20%.

Of the 20 markets the study monitors, not one registers a positive return over the last 12 months.

“There are signs of a slowdown in the rate of decline across the metro areas,” says Standard & Poor’s David Blitzer, “but no evidence of a bottom.”

  Gold got a nice pop in yesterday’s session, but is back down to normal levels today. Just like all of last week, you can get an ounce for less than $900 this morning… about $880, in fact.

  Commodities in general, however, had their worst day in more than 50 years yesterday. The CRB Index fell 5.9%, not much compared to market indexes around the world, but still its worst day since 1956.

The traditional “flight to commodities” play was clearly not in effect during the turmoil yesterday. Commodities (and commodity stocks) were hit harder than most, in fact. It would seem that their huge runup earlier this year gives investors reason to sell them just as far down now that the market is circling the bowl.

  Oil set a record of its own yesterday. By plunging $10, oil scored its biggest one-day dollar decline in the history of trading on the New York Mercantile Exchange.

  “The person who wrote in about the price of the foreclosed assets going up over time,” writes a reader responding to yesterday’s inbox , “has forgotten about at least one important item.

“Who is going to maintain these assets (buildings) in a meaningful way? I am not talking about just making sure that the paperwork is filed in a place where the next administration can find it. I’m talking about the physical maintenance — you know, water and roof leaks or keeping the vandals and thieves from destroying whatever was foreclosed on. Or how about cleaning up after the foreclosure, replacing broken windows, etc?

“As a homeowner, I know the upkeep on just the home I live in can at times be a handful, and I am here every day to keep up with it. Who do you think would end up paying for the new government agency that would have to be created to over see the occasional drive-by check of the new government assets, and the poorly done repairs to the properties that are complained about the most? Think about the street maintenance and other infrastructure maintenance in your city and state, and tell me that it will be done well and inexpensively.

“After a few years of this kind of ‘maintenance,’ more than a few of these ‘assets’ will end up being bulldozed, also at taxpayer expense, and, of course, for our own good. If you think the $700 billion price tag for the purchase was expensive, wait till you see what it’ll cost the taxpayers to own it.”

  “There is a chance for the beleaguered taxpayers to make billions on this deal,” insists another reader, “that we can use to reduce our horrendous ‘Bush debt.’

“I represented developers who bought assets from the government from the savings and loan failures in the late ’80’s and early ’90’s. They made killings, because the bureaucrats who sold those assets knew nothing about real estate, and most of the assets of these failed S&Ls were development properties.

“So the key is to hire top-flight mortgage loan officers to run the program — not the Paulson types, but the midlevel loan specialists who run the best of the local and regional banks (the ones that stuck to old-fashioned lending practices). The point is that the panic that exists in the mortgage market today, and existed during the S&L crisis 20 years ago, creates a BUYING opportunity. Since we have to stem the panic, let’s do it in a way we come out ahead.”

The 5: We’ll reserve judgment until we see the next abominable piece of pork to reach the floor of the House on Thursday.


Addison Wiggin
The 5 Min. Forecast


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