Conservatorship: Markets Futures Reaction
For this historic announcement, here is the markets pre-open reaction via the futures:
DOW --> UP 225, or 2%
S&P --> UP 27.60, or 2.22%
NAZ --> UP 36, or 2.05%
GOLD --> UP $10
OIL --> UP $2.15, or 2%
*check futures here
*check gold here
Seems about right for this announcement as systemic risk is perceived to be removed, certainty added, confidence rises and stocks go up. I would also expect to see dollar weakness & commodity strength, spreads to significantly tighten, new money to come into mortgage market for short term, reversal in ABX's and CDX's, steeper yield curve, and a financials led equities rally. But beware the irrational stock market and their perceptions of confidence restoration on this big news!
Not sure about lending rates because in today's environment, appetite for jumbo loans will still be tight and there are so many fees built into the rate these days its hard to tell how much the end result will be for the individual borrower. So, lets keep it on the markets for now, and see what happens with lending rates.
It will be interesting to see how long all these micro rallies last on this specific announcement. How low will dollar go? How high will commodities come rally? How far will beaten down financials come back? How long will the general bounce last? How long will the general euphoria last? When does reality set back in? How many more firms will have to be bailed out?
Let us not forgot that the environment is such that Treasury had to step in and take action on the GSEs to prevent a systemic financial crisis; that they viewed to be inevitable. Who can we trust? How does this change rising unemployment? How does this change the strapped consumer? How does this change the continuing spread of defaults to higher quality debt classes? How does this stop home prices from going lower? How does this allow the strapped consumer to suddenly be able to pay their mortgages/rent and continue to spend? It likely doesn't. It simply prevents a very serious and catastrophic event from occurring, if nothing was done.
Troubling thing I see is a lack of destruction for the lowest two classes of the investment totem pole, the common shareholders and preferred holders AND the announced 10% annual portfolio reduction order starting in 2010; by that time who will be buying mortgages if its not these guys? Then again, why should we believe it!
Posted by lorenzonyc
Sun Sep 7th, 2008 07:50 PM
Only because this is the second website I have seen this comment, oil is rallying because of Hurricane Ike, not the GSE bailout (I would assume). Why would this announcement weaken the dollar? Seems with the favorable general reaction, it would strengthen the dollar.
Posted by Noah
Sun Sep 7th, 2008 07:57 PM
lorenzonyc - having the treasury/fed/fdic etc bail out the only two extremely overleveraged lying institutions participating in the mortgage market right now is good for the dollar?
We dont know what taxpayers will be on the hook for. We do know that these guys would have failed, caused systemic risk, and had a balance sheet way worse than the public was led on to believe.
This should have a negative effect on the dollar. But yes, the hurricanne is adding too. Prob the correction is playing a role too. And maybe short covering. Tons of variables.
All I know is that I own gold because I believe the govt will bail everyone out, print, and probably lower rates before raising them. Now Fannie/Freddie are in conservatorship and the treasury will take on more GSE MBS purchases. This cant be dollar supportive events. Lets see how it plays out. The dollar did rally big time over the past 4-5 weeks. Perhaps this event will change the trend.
Posted by brenda
Sun Sep 7th, 2008 08:56 PM
As I mentioned earlier, the dollar has been fairly low for a couple of years against some currencies, even when oil was much, much cheaper, interest rates were the not much higher (and money was much more readily available), and our economy was perceived to be much stronger. Our income is tied to the pound, so this is one thing I follow (without more than basic comprehension, I must confess, but still the dollar rally, except perhaps for a correction against the Euro, seems bizarre to me).
Posted by lorenzonyc
Sun Sep 7th, 2008 09:25 PM
This should be positive for the dollar because it removes one of the major systematic risks in the US. Everyone knew some derivative of this was coming, and now its behind us (in terms of getting the plan out there). So short part of the yield curve is dropping as people exit the flight to safety Treasury investment, we will see what happens with long part of the yield curve (although 10 Yr T is falling in price as people exit flight to safety here too). But by and large this should be positive for dollar as equity market rally indicates people are generally in favor of this (and short covering too of course). Don't think this changes the USD trajectory, think it reinforces it, although in the short term there will be noise from how much USD has run already.
On Brenda's post, the USD/oil correlation will break down over time, the tight correlation is a function of the 2008 bubble and the easy hedge fund play. Reason the dollar is rallying (only back to levels of a year or so ago, we haven't really unwound the big moves of the last several years) seems to be that GBP is in much worse shape (and Euro as ECB cannot cut rates given inflation over there).
Interesting to see next few days though and if this is a short term rally or durable in financials etc.
Posted by brenda
Sun Sep 7th, 2008 09:47 PM
I'm starting to get a bit pissed off about all these comments (not here, generally in the economic blogworld) regarding getting the housing market going again, and stopping the fall of housing prices.
Obviously the Treasury stepped in to prevent a massive failure that would have had massive international as well as national ramifications. As much as I DESPISE bailouts for the opportunistic Pimco's of the world (and the timing of his demand irritates so badly that I'm tempted to despise the whole bailout, although clearly it was necessary. I still despise the lies of the last few months, however), I do understand the reasons and it seems to be a plausible, if not entirely palatable, solution.
When it comes to the stabilization of housing prices, however, it sounds like some people are smoking crack. (I do realize this is all interrelated, but that doesn't irritate me less). Is there less inventory? Is there equal or greater ability to qualify for mortgages and/or pay for them? Has employment/incomes increased to make properties affordable? Has the rent/buy calculation moved solidly, or in most areas at all, into the buy column? BOTTOM line, should housing prices have doubled, in some instances tripled, when incomes remained relatively stagnant? And why in the hell would you think the decline in prices could/should cease now, other than to prolong the pain of those holding onto (barely) properties they can't afford. Color me cynical, but this is just an awful spin.
Posted by brenda
Sun Sep 7th, 2008 09:55 PM
Actually, Lorenzo, as I said my husband's pay is tied to the pound, and for the year ending april 30 the average was over $2.00/pound. That continued until August, and it was pretty much true before 4/30/07. Yes, the UK economy is tanking, but the US economy was ostensibly perceived as fine and had roughly the same fx rate with gb as it had after the US economy tanked. Until now.
Posted by Noah
Mon Sep 8th, 2008 07:52 AM
lorenzo - you were right! Dollar is up. I know it was down like 1% after the announcment vs euro, but this am its up. Commodities still up too though.
Interesting. I get the whole restoration of confidence bit, and such, and the prevention of a catastraphe, but everyone was lied to in regards to this, the state of the GSEs, and I just dont get how bailouts are good for anyone.
I wonder the reactoin in the dollar in 1 month, 3 months, 6 months, and 12 months.
Posted by Noah
Mon Sep 8th, 2008 08:04 AM
Brenda - excellent points. It does NOT change the fundamentals. It prevents a depression. We still have to go through the pain. Housing is still pressured, jobs are being shed, incomes are not growing, net worths are down, no more MEW, credit is still more expensive yet will likely ease a bit on this news, and the down cycle still has tons of pipeline pressure. The consumer will not magically benefit from this.
I am sick of the lies as well.
Posted by jeff
Mon Sep 8th, 2008 10:42 AM
The government is intervening to prevent a near-term financial system meltdown. They are certainly also trying try to boost housing affordability to help the housing market bottom. I don't think anyone knows where the housing bottom is, because housing constitutes so many markets. Are bank sold condo packages in Florida being blown out at 50% of construction cost (i.e. the land holds less than zero value) at a price that should be a bottom? Is the 10% correction in many markets enough. No one knows the answers to value questions on so many markets. Interventions generally don't work, but panics can cause collateral destruction that is above and beyond what is called for. So the government is walking a fine line between trying to prevent a panic (we know bank failures are still coming) and monetizing bad debt in such a way that it takes forever to get cleaned up RE Japan in the 90s. It's a tightrope act, but we better all hope they manage it.
Posted by jeff
Mon Sep 8th, 2008 10:43 AM
The government is intervening to prevent a near-term financial system meltdown. They are certainly also trying try to boost housing affordability to help the housing market bottom. I don't think anyone knows where the housing bottom is, because housing constitutes so many markets. Are bank sold condo packages in Florida being blown out at 50% of construction cost (i.e. the land holds less than zero value) at a price that should be a bottom? Is the 10% correction in many markets enough. No one knows the answers to value questions on so many markets. Interventions generally don't work, but panics can cause collateral destruction that is above and beyond what is called for. So the government is walking a fine line between trying to prevent a panic (we know bank failures are still coming) and monetizing bad debt in such a way that it takes forever to get cleaned up RE Japan in the 90s. It's a tightrope act, but we better all hope they manage it.
Posted by jeff
Mon Sep 8th, 2008 10:43 AM
The government is intervening to prevent a near-term financial system meltdown. They are certainly also trying try to boost housing affordability to help the housing market bottom. I don't think anyone knows where the housing bottom is, because housing constitutes so many markets. Are bank sold condo packages in Florida being blown out at 50% of construction cost (i.e. the land holds less than zero value) at a price that should be a bottom? Is the 10% correction in many markets enough. No one knows the answers to value questions on so many markets. Interventions generally don't work, but panics can cause collateral destruction that is above and beyond what is called for. So the government is walking a fine line between trying to prevent a panic (we know bank failures are still coming) and monetizing bad debt in such a way that it takes forever to get cleaned up RE Japan in the 90s. It's a tightrope act, but we better all hope they manage it.
Posted by brenda
Mon Sep 8th, 2008 11:48 AM
Okay, I just checked out Jim Jubak's analysis of the current dollar situation, and, as usual, he makes alot of sense. What I've been missing is that the traders apparently took perhaps an excessive amount of pleasure in the most recent GDP figures (which were suspect at best), and anticipated GDP has been revised upwards (wow, interesting). Which, of course, will be made increasingly difficult due to, you guessed it, the strengthening dollar.
Posted by jacksonroy
Tue Sep 9th, 2008 08:52 AM
The 'body economic' is hemorrhaging profusely. The circulatory financial system is performing perfectly. The problem is not the business heart or the real estate liver, both are functioning per specification. The 'systemic risk' (think stroke) is already here and if we don't stop the bleeding (think war) the 'body economic' (think America) will go into paralysis (think Draconian taxes) and eventually death (think death). :)
Posted by Noah
Thu Sep 11th, 2008 10:51 AM
jacksonroy - interesting analogy!