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09
Jan
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[Updated: Sat, Jan 10, 2009]
As you may recall, mid-November’s sell-off was caused by a combination of spiking spreads on commercial real estate credit instruments and panic at Citi. Markit CMBX-NA-AAA 5 Index (tracks the spreads on AAA rated commercial real estate bonds) has spiked to above 600 bps from low 400s. This Index stood at in the 200s as recently as early October. At Nov panic highs, the index was above 800.
This may be a too early to call them storm clouds. Then again, last time it took only about a week for this index to jump from 300s to above 800 and the market unraveled in a precipitous way Nov 5-Nov 21. These are highest rated MB securities. Lower rated are faring much worse. You should pay attention to this development.
[Updated Jan 10]: There is an excellent article on commercial real estate at Seeking Alpha: CMBS Delinquencies Rise: Should the Government Step In?
Banks are Weak
The breaking news after market closed today is that Citi is in talks with Morgan Stanley to have a “brokerage joint venture.” The Fast Money regulars and Charlie Gas on CNBC think that the Feds put a “gun” to Vikram’s head and are forcing him to do this deal. Forced selling the profitable unit to the competitor is a clear indication of Citi’s financial strength. The talk is that Citi needs to do this deal to raise capital. Hello, didn’t the Feds just gave them $40 bil and are back-stopping Citi to the tune of $300b?
The three largest banks – JP Morgan, Citi and Wells Fargo lost 4.5, 5.7 and 2.3% today. While other most banks traded weak today, Morgan was up and GS held its recent break-out support. Charts of bank indices are looking very bearish.
Treasuries and Stocks
Losing over 2 million jobs in a single year doesn’t scare you to be long in this market (which still floats a lot of junk on any given day), I don’t know what will. This week the trasuries got sold off, which is normally a good sign for stocks but concurrently stocks also acted weak.
I know that the inauguration is right around the corner. I know that the Obama administration is going to act quickly in passing a stimulus package. But so does everybody. It is very possible that Obama bounce may already have come and gone with the Santa rally.
Now that market reacted to the jobs numbers to the down side, it appears that the sentiment has changed. Bulls can no longer push this higher without some correction. If you are a bull, this time you may wake-up to realizing that the storm clowds turned into a Category 5 Hurricane.
You will be searching for a needle in a haystack, if you think you can find a bull out there. It is almost out of fashion.
January 10th, 2009 at 9:39 am
Mav,
Mohan is right.
If you know the bull website, you will see there are a lot of them. Right now, you are in bear camp. If the market goes up, it means at least somebody is buying.
And some people are waiting at SPY=89 to buy stocks. Idan used to be very bearish, and last week, he actually wanted to buy at SPY=90.
With CITI group right in the middle of the stage, I would not consider any long.
SPY could go under 87 again if CITI is in trouble. Watchout XLF all the time. If it broke 11.46, where is the next stop?
January 10th, 2009 at 10:12 am
Mav,
Market is not a game with set time limits. Bulls win some bears win some – depending on the time window. But, fundamentals favor one over the other in certain time windows. I believe now they favor bear case. Also, bulls vs. bears is not a debate like left vs. right, nor do you need to give equal time for both.
At the risk of sounding defensive – I am not a permabear. I made the most money as a bull in the bear market of 2000-2003 by buying beaten down out of favor stocks. I will do the same this time also, but the time is not right, yet.
if you have been following my intraday comments, you would know that while I am bearish on overall market, I have been saying some of the beaten down stocks are forming a base and could rally – the likes of CBG, DDR, GGP. Ironically, these are commercial real estate plays and am very bearish on the sector. GGP is almost sure to file for bankruptcy. But I am bullish on the stock.
That said, what I say may not be what you want to hear, but that is how I see it. If you are bullish and want to hear what you want to hear, just tune to CNBC..
January 10th, 2009 at 11:02 am
I am not bull, I am not a bear. I am mav
January 10th, 2009 at 11:45 am
Good one!
January 10th, 2009 at 12:50 pm
I truly believe Mav is Mav. For if Mav was not Mav, he would go by another name, like Madona or Batman or something like that.
January 10th, 2009 at 8:12 pm
or perhaps “a rose”
The market is always right and way out front. Any benefit the “stimulus” of the Obama admin. could have is already baked in. We have another big leg down coming…commercial real estate? The real employment numbers? personal credit defaults? Massive bankruptcy? All of the above?
Welcome to the new FDR
There have been indications that Congress will revamp the Tarp program to make it less favorable to the banks. Does anyone think the weakness in financials is related to this ? I’m also getting the feeling the euphoria over a new administration is beginning to wear off before it even gets started.
THE CHINA FACTOR:
I think that it is critical for us to come to grips that China will not buy as much debt in the future.
Not only has their source of revenue dramatically decreased, but they also need the money more than ever at home. In addition, for Obama’s plan to work, we must ‘buy American’ more than ever and that will decrease the Chinese bond thirst even further. China will continue to buy debt, but it will decrease just when we need it the most. I challenge anyone to dispute this. It will happen and be front page news.
So! What should you do to plan for it?
http://www.iht.com/articles/2009/01/07/business/yuan.php
January 10th, 2009 at 8:29 pm
japan’s appetite for treasuries should also wane….
what happens to a stock (company) when it floats a bond issue and it goes bad…cost of capital is up…blood in the water for the shorts….it becomes a pariah.
U.S. treasuries will go up generating a push up to all debt rates…worse though it will lead to the final realization that we as a country are bankrupt (not technically because we have our own printing press…and it will run as last resort to keep things going in the face of political suicide to not “do something”) i fear we will lose reserve currency status and panic from the dollar will ensue…
my thought is to buy american stocks of companies that produce commodities priced on the world market…commodities of essentials such as coal oil food etc. I would be skittish of companies with to much overseas holdings as trade wars will likely happen as a crisis response…nationalizations will occur. Gold, some, but remember it was confiscated in depression…the gov’t will do WHATEVER it takes to quell any potential uprisings…have some actual money in your wallet, silver dollars, etc…………..i fear it could get much worse (after all the abyss…is an unfathomable place…black swan events will occur) before it gets better…but a nation spoiled on debt could rise a new and restored…albeit with a standard of living far more comparable to our trade partners.
January 10th, 2009 at 8:35 pm
buy the above mentioned on the huge dips…hopefully just after you’ve successfully unloaded your short positions.
i think it will be sooner than we think…no one is every truly ready for the black swan….or they’d be grey swans.