You can read about it, among other places, here
http://blogs.reuters.com/james-pethokoukis/2010/08/05/an-august-surprise-from-obama/
Boy, I wish I was an American with 10 underwater homes mortgaged to the tilt under my name. Wouldn’t it be just wonderful to get the prudent crowd who worked hard, and saved, and paid off stuff they bought to pay for my follies, and end up owning what I should not have been allowed to buy in the first place?
We know some men of past have dealt with debt crisis in such ways
http://divusjulius.wordpress.com/2010/05/14/globaldebtcaesar/
So, why not these men of our times?
But a few questions come to my mind when I get past my wishes for a free ride and do a bit more serious thinking
What percentage of houses in the US is mortgaged? Out of that, what percentage is underwater? Out of that, what percentage is delinquent?
In short, what percentage of voters will get a free ride on what they owe if the rumor comes to be? Because, you see, if that portion is less than those who end up being shafted for having been either prudent and debt free or responsible payers of their debt obligations, the prudent/responsible bunch may just take their anger (or astonishment) to the ballot boxes. Such a move may turn out to be a political misstep, especially close to the elections. If more voters get the free ride, then, maybe they can shaft the others with the cost and enjoy the votes of the delinquent majority? I am not sure about the numbers but I think that might be a deciding factor for any entity in power to take decisions of such scope and magnitude.
In the end, all tax payers will be hit one way or the other, but, if debt’s gonna be forgiven, or reduced, the less responsible bunch may end up with some equity that they might not have deserved in the first place -- does that mean that in America borrowing will equate to owning without paying?
If it were to happen, wouldn’t the involved cast of characters try to keep it under wraps until the moment of the announcement to get the very bang of the year, if not decade or century? I mean, stuff like the Goldman-SEC saga are kept secret until the ripe moment (like option expiration day) but something supposedly as big as this is leaked piecemeal for all to decide what to do next?
Well, who knows?
So, if it comes to pass, what would be the effect of that on the stock market? Hard to say, but it would entail an assumption of a lot more debt onto the public balance sheet and it may cause a nice spike up in the equity market which is private, at least, for a start. But since the rumor has been graciously leaked out, one may wonder how much of the recent rally is based on baking the possibility of such bailout into the price of the market.
Will something like that have any effect on the home prices? I mean, OK, a bunch of losers get a free ride on their losses, what then? Will it not eventually flood the market with houses that cannot be sold at the moment because they are underwater or over-mortgaged or whatever?
How much will it cost? 500-600-700 or more billions? And where exactly will the money come from? Will that not adversely affect future US attempts at financing via Treasury auctions?
Any many more question, of course.
None of this has any bearing on my day-to-day course of action in the market. This is my weekly chart
For more detailed explanation of my ongoing thoughts and analysis, you can refer to previous posts, but quickly, my charts have a positive posture, and I have some levels of exit, and I play my charts and that’s about that.-----------------------------------------------------------------
A friend sent me a link about a discussion by Terry Laundry, in which he talked about the ARMS index
http://ttheory.typepad.com/files/ttoaudio20100808parta-1.mp3
Bottom line of it is that Terry believes that the recent series of high ARMS readings is a sign of distribution. If you remember, in the last post I said:
“Summation Index is positive. That, in conjunction with neutral McClellan Oscillators, the series of above one readings from Arms Index, and the bounce today provides a good setup for a rally. Bulls can ram it through to a higher high and turn up the heat on the bears. Let’s see how they do early in the week.”
I think it’s more a question of time frame. I still believe that the activity of the last week may have set the stage for a positive action shorter term in coming hours and days. That series of high ARMS may very well have been a shakeout of weak hands in an ongoing uptrend. Longer term, it becomes a question of how far the index can go. Terry believes that index will peter out towards the end of august. If you remember, I said:
“None of what happened today changes my view that bulls looked weak-kneed and hesitant around the high of June. It sort of seems to me that they need a batch of trapped shorts to engineer bounces and rallies.”
I think, I am more or less seeing it the way Terry is seeing it towards the mid to longer term of this uptrend in terms of lack of umph in the recent activities of the index. As for THE TOP at the end of August or so, I am not biased one way or the other. That's not how I play the market.
Bulls need to show something more bullish to me, but, regardless of who is right and who is not, it’s about two things
1. Do I want to be on the side of the ongoing trend, against it, or on the sideline?
2. If I am involved, do I have my exit criteria and risk management parameters mapped out or not?
The rest becomes opinions, either learned and astute like Terry’s (Yes, I have very high opinion of him and have learned a great deal from his musings) or less credible like you can readily obtain from bubble-heads of all shapes and sizes on many, and many bubble-outlets.
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This coming week brings to us yet another FED matinee. Many are arguing a QE2 is all but a certainty. Even if so, other than FED, and maybe some FED confidants, no one knows the timing, or the structure. Or maybe the bailout of Main Street (as preposterous as it may sound) the way they are about to go about it?
If many are expecting a QE2 one way or the other, I wonder how much of such expectation is already priced in.
I wonder about a few other things as well.
Will it be as effective as QE1? QE1 transferred some debt from private to public, QE2 is going to transfer debt from whom to whom exactly? It’s all an act of borrowing and shuffling but from whom and how?
Of course, if debt is declared void (default if you please) or forgiven (on behalf of the tax-paying public), then there may not be a need for shuffling.
If there is money to be printed, will most of it go to the equity market? Because if there is not much economic prospect to warrant the risk taken in the stock market, money may go elsewhere, at least in the early stages of any QE2, some asset(s) will do well, they may or may not include the US stock market
There seems to be a general agreement on the point that the FED can generate a bull market (in the broader sense of the equity market) by injecting money that they create out of nowhere.
Well, FED can inject because, as Bernanke has said, they have printers in the building, but can they dictate the direction of the flow of their injected money? It may go anywhere -- I mean, anywhere – the US market, US Bond spread, Foreign bonds, Gold, under the mattress, anywhere -- unless they establish rules and regulations to prevent the money from going to places they do not like.
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Looking at a multi-rate chart of US rates, I see an interesting development
Seems like a widening of spread between 10 and 30-year
This may indicate that market expects the closer end of the yield curve to come down even more than it has -- if it keeps like that, it can create spread opportunities along those yield levels and may suck away liquidity from riskier prospects.
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TED looks benign
There seems to be no immediate concern about excess levels of risk and that may give us more time to nurse whatever position we have a bit higher, but that aside, I am still as strong a proponent of multiple levels of exit as I have been, I let the market take me out if it wishes so.
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Despite all the easing efforts and all the inflation-hyperinflation noise bandied about, there seems to have been a real difficulty for the FED to get it seriously up
M1 Multiplier has been trending up, but it is below 1. Amazing given the amount of money depicted by this chart
Notice the peak that coincides with the end of QE1. That was about the time I started asking the most pertinent question: Where is the Money?
That’s also about the time I started discussing multiple levels of exits, and market took me out nicely.
It’s all chronicled in the back posts of the blog
Now I am going ask another question. If they print money, where will it go?
The rest, as you sure know, is hoopla.
Enjoy the Rest of Your Weekend!
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