Victory for Bears

With 125bp of rate cuts in 7 trading days, the Fed was able to lift only45 S&P points, and today the markets closed down. That's an important psychological defeat and everyone is going to hear about it when they watch the news tonight.

After today's Fed cut, 15 and 30 year mortgage rates are up. But, regardless of whether Fed cuts push mortgage rates up or down, the bigger issue is tighter lending standards. The real estate bubble was predicated on a near absence of lending standards. Unless those conditions come back, the only direction real estate prices are going is down.

The next (scheduled) Fed meeting (cut) isn't until March 18. That means 48 days without anything bullish to look forward to. (Except government intervention, but after three or four flops in a row, those are wearing thin.)

After a huge, insane rally, the mortgage and bond insurers are flopping again. Here's a great Bill Ackman interview re: MBIA on Bloomberg TV. The other great quote from Mr. Ackman is

"Does a company deserve your highest Triple A rating whose stock price has declined 90%, has cut its dividend, is scrambling to raise capital, completed a partial financing at 14% interest (now trading at a 20% yield one week later), has incurred losses massively in excess of its promised zero-loss expectations wiping out more than half of book value, with Berkshire Hathaway as a new competitor, having lost access to its only liquidity facility, and having concealed material information from the marketplace?"

The problem with these insurers is the correlated risks. The same event - a huge decrease in real estate prices - is going to cause unusually high numbers of simultaneous, unusually high claims. The risk that a $20T asset class decreases in value by say 20% is uninsurable.

I think there is currently no panic in the market and there never has been since the bubble started unwinding, in the sense that nothing has become systematically undervalued yet.

What have looked like "panics" in February, August, and last week have been prices beginning to approach reasonable levels only to have bull market conditioning cause people to buy the dips.

For example, I saw a spreadsheet of REO that a liquidating hard money lender was trying to pitch. It was being talked about at the "fire sale" price of 30 cents on the dollar. Except, none of the properties are worth that much.

However, when people are selling shares of weak financials, homebuilders, and insurers for under $1, I will view that as a fire sale price and cover my shorts.