Archives: 2007 September

The US Commerce Department estimated Thursday that sales of new homes plunge 8.3% in August to a seasonally adjusted annual rate of 795,000, the slowest sales pace since June 2000.

In addition, the new home sales housing report stated that the median sales price of new homes was down 7.5% in the past year, the biggest drop in 37 years. Clearly the US housing market is in a world of trouble.

The worse is probably yet to come. About 2,500,000 subprime mortgages are going to be reset from now until next August. Many borrowers are going to be faced with disastrous increases in monthly payments as interest rates on their mortgages are adjusted sharply higher.

Many borrowers don’t even realize that most mortgage reset rates are based on the LIBOR rate, not the US discount rate, federal funds, or prime rate. LIBOR is a more volatile rate and has recently sharply increased as additional risk premium is build into the rate due to market uncertainly.

Given conditions as they are today the reset interest rates could be more than ten percent. This will be a major blow to anyone faced with mortgage payments that may well double from initial levels.

Wall Street found a good friend in Ben Bernanke and the FOMC as they oped to bail out hedge funds, investment funds, Wall Street brokers, and stock investors at the expense of the American Dollar and prudent savers.

The 50 basis point rate cut in the Federal Funds and Discount rate was quite enough to send stocks soaring, at least for now. The Dow Jones Industrial averages were up over 300 points on September 18th, the date of the rate announcement, and closed the week at 13,820.19.

The Fed has given a clear signal that it will provide all of the liquidity that the US financial system requires to stay afloat. The stock market received new legs from the sea of liquidity. However, there is a price to pay.

The rate reductions signaled to the foreign exchange markets that the Federal Reserve bank is willing to see the weak US Dollar trend continue and to accelerate. A rapid uncontrolled descent of the Dollar may have in fact been kicked off by the Fed’s rate decision. A collapse of the Dollar from here is not a good thing for the US or world economy.

The release of the US unemployment data for August was a major surprise to all of the “expert analysts” and economics who had guessed at a consensus plus 100,000 figure. The experts were not looking so smart when the actual figure was announced at 8:30 AM on September 7th at minus 4000.

Unoh, maybe the sub prime mortgage housing loan debacle has some drag on the economy after all. With home foreclosures reaching record levels should anyone be suprised? I think not, but you can not trust the so called experts and talking heads, many whom are on the take and will talk about all the great buys out there all the way down. 

The US Dollar and stock market got clobbered on the news. The stock market was under pressure all session and finished down 249.97 points on the Dow. The all important USD/YEN foreign exchange rate sold off from about 115.40 prior to the data release to a bone jarring 113.35 at about 5:00 PM New York time.

The unwinding of the carry trade is underway with a vengeance. This trouble is not over by a long shot. You should immediately fire any financial advisor or stock broker who tells you not to worry. The real trouble is just about to get underway.

If you are a stock market investor beware the month of October. Two of the most dreadful stock market crashes of all time occurred in the otherwise beautiful Fall month.

The Crash of October 1987 occurred on October 19, 1987. The amount the market declined from peak to bottom was 508.32 points, 22.6%, or $500 billion lost in one day. This was the largest one-day percentage drop in history.

The Great Depression Crash was actually spread out over October 21, 24 and 29, 1929. The amount the market declined from peak to bottom was more than 40%. The market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.

While of course, the crashes of past years have no direct linkage to the markets of today this October looks to have crash potential. The recent panic caused by the unwinding of Yen carry trade positions could well flare up again in October as a large amount of ARMs are scheduled to be reset.

Since the need to unwind carry trades began with problems in sub prime loan mortgage housing markets the renewed attention to this market that the resets will bring has the potential to start another round of unwinding with disastrous results to equity markets.