|
February 5, 2008
Rome Wasn’t Destroyed In A Day
Last Friday’s payrolls report produced the first drop in monthly jobs since August 2003. Yesterday the Fed’s Loan Officer Opinion Survey confirmed that banks continue to tighten lending standards on all products, not just those relating to subprime. Today a dramatic decline in the ISM service index firmly suggests that the service side of the service based U.S. economy is deep in recession. Not surprisingly, this onslaught of negative news has raised expectations that more Fed help is on the way:
“Following the ISM data, market odds that the Federal Reserve will again cut interest rates by another 50 basis points at its next meeting jumped to 100%, according to Action Economics.” MarketWatch
Also not surprisingly, S&P and Fitch warned today that more downgrades could be coming. These warnings have become commonplace since the subprime crisis kicked-off last August, but there is a renewed interest in any potential downgrades today because of the monoline threat. Put simply, the threat is that as/if monoline insurance companies are downgraded they will not only immediately cease to function, but they would hurt many other financial players. Touching in this topic today S&P noted:
“We believe that the specific, identifiable effect on banks [following bond insurer downgrades] may be significant and, in a few cases, could lead to downgrades”
Akin to the Enron debacle, the rating agencies have been delaying their downgrades based upon the expectation of new developments. However, whereas Enron’s downgrade was delayed because the company was looking to improve its financial position by being taken over, the downgrade of monoliners is being delayed because banks are trying to orchestrate a bailout for the group.
In other words, terrible economic news hurts so the Fed is trying to help, and the downgrades are much deserved but the rating agencies are willing to wait rather than send an already panicky marketplace into an even more severe panic.
Confused? Don’t be. Instead focus on the longer-term outlook, which is when the people stop believing the Fed can save the day and real signs of investor capitulation unfold, there will be ample opportunity to pick through the ruins. The VIX ticked higher today as stocks ticked lower. The process was very organized.
Despite calls for a terrific bear market rally, I firmly believe that the bear (which technically has not started yet unless you look at S&P futures) will last for a lot longer than most think...
 |
|
