I wouldn't count on it.....

“The investment grade corporate bond market HAS GROUND TO A HALT, making it difficult for companies to access capital and hard for investors to find a place to put their money to work. ...

The problems in the primary market could, if they persist, throw a wrench in the workings of corporate America, making it tougher for companies to finance, among other things, investments, buyouts and equity buybacks... For July, corporate bond issuance was down 77 per cent from June.” (“Corporate Bond Market has come to a Standstill”, Wall Street Journal)


Still, President Dumbo assures us that, “There’s enough liquidity in the system to allow markets to correct” and that “the U.S. economy remains the envy of the world.”

Err, correction; “WAS the envy of the world.”

The easy money is drying up, the big mergers are slowing down and the hand-wringing in the front office has just begun. Next question: How low can the stock market go?

At present valuations; stocks are vastly overpriced reflecting the inflationary pressures from our recycled $800 billion current account deficit and the loony expansion of the money supply at the Federal Reserve.(now running at a whopping 13 per cent ) Presently, the stock market is hanging on by its fingernails. One little gust of wind—like a few more collapsing hedge funds — and the market will go somersaulting through deep-space.

The ISI Group’s Andy Laperriere put it like this: “It’s worse than the most pessimistic assumptions”. In these kinds of financial corrections, it pays to expect more surprises.” (WSJ Aug 6, 2007)

Still, even though the subprime contagion has spread to all loan-categories, the glut of homes continues to increase, and the mortgage industry is flat-lining on the emergency room floor; there is room for optimism. Consider the comforting comments of Secretary of Treasury Henry Paulson:

   "I don't think it (the subprime mess) poses any threat to the overall economy... .In an economy as diverse and healthy as this, losses may occur in a number of institutions, but that overall this is contained and we have a healthy economy."


“Contained”?!? This is “contained”?

Newsweek’s Daniel Gross had this reaction to Paulson’s remarks:

   “If the containment policy of the Cold War worked as well as this subprime-mess containment policy, we'd all be speaking Russian and living on collective farms”.


Gross is right — we’ve only begun to see the spillover from the housing fiasco. There’s plenty more carnage in the pipeline. Paulson needs to stop “blowing smoke” and tell the truth.

“A SELF-REINFORCING NEGATIVE CYCLE”

Economy.com's head honcho, Mark Zandi, gave the best overview of what lies ahead in the near term as credit becomes scarcer:

   "There is a substantial risk that the mortgage market will devolve into a self-reinforcing negative cycle. Mounting credit problems could beget more restrictive underwriting standards, which would weigh heavily on the fragile housing market as potential borrowers become unable to obtain credit, and existing borrowers facing large payment resets are unable to refinance. Foreclosures would mount, leading to weaker house prices, falling homeowners' equity and even more substantial credit problems. The cycle repeats with more intensity and the mortgage market corrections unravel into a crash."


The “Great Unwinding” appears to be taking place already and can be expected to accelerate as inflationary pressures increase and the price of oil — which has gained 20 per cent in the last 3 months — continues its upward trek. There are other concerns, too, besides the slump in housing sales and falling stock market. The downstream effects of tight credit will hurt retail sales and employment. We can anticipate a decline in both areas in the next two quarters. Auto makers have already reported the weakest sales in 9 years. There’s also been a steady erosion of investor confidence and a plunge in consumer spending from 3.7 per cent to 1.3 per cent . Credit card debt continues to soar, but that’s only because the poor American consumer is strapped and has no where else to turn. He has no savings and his wages have stagnated. What choice does he have except to use the plastic?

Some market analysts believe that the credit storm will pass without inflicting too much damage. Don’t bet on it. The big picture is pretty grim. Trading in mortgage-backed securities (MBSs) has slowed to a trickle while the appetite for corporate bonds has nearly disappeared. No one really knows how many trillions of dollars will be lost in funky mortgage-related CDOs. But one thing is certain; the blow-ups in the hedge fund industry will continue through the autumn and early winter. These are End Times for the fund managers; they’d better make their ablutions and kiss their kids goodbye.



-- Modified on 8/13/2007 5:52:34 AM