Who Got Bailed Out?

Good day… And a Terrific Tuesday to you! Well… Right off the starter’s blocks this morning I want to talk about something I mentioned yesterday. And that is… Did the Fed bail someone out with their discount rate cut on Friday? Well… According to a well-respected analyst at Punk, Ziegel & Co., Richard Bove, they did.

Yes, Mr. Bove, in a talk on Bloomberg radio yesterday, said that he believed the Fed had bailed out Countrywide, along with others with their discount rate cut. He went on to say that the Fed had panicked and that they had merely prolonged the problems.

Now… For a minute, stop… And think back to the recession that wasn’t just a few years ago. The Fed stepped in and cut interest rates to the bone, and kept the recession from cleaning out the excesses from the previous boom. This kept us from experiencing a deep recession, and some people might say, “Hey, that’s great!” Well… Unfortunately, in the end… It’s not! The longer you prolong something, the worse it becomes… Sort of like that little lie you told not to get in trouble. When it all comes back to you, the trouble is far worse than the original trouble you would have been in.

Well… I believe the Fed has done it again. They have stepped in and “fixed” the financial markets (that is…for now) when I don’t believe that’s what would help the markets the best. That’s it… I’ll get down from my soapbox now!

While I’m still yelling at the wall about this Fed move… I see that Capital One has shut down their Wholesale Mortgage Unit, reducing their profit forecast, and cutting 1,900 jobs. But don’t worry, those job losses won’t show up anywhere, as the BLS will probably just say that 1,900 jobs were created to offset these losses!

And… Thornburg Mortgage Inc., the jumbo-mortgage specialist that stopped taking loan applications last week because of a cash crunch, sold $20.5 billion of securities at a discount to pay down debt it couldn’t refinance.

The Santa Fe, New Mexico-based company will record a $930 million loss in the third quarter on the sale of the mortgage-backed bonds, resulting in a probable net loss for the year, President Larry Goldstone said in an interview.

OK… Enough! Let’s talk about the currencies! The currencies didn’t really move too much yesterday. Although the high yielding currencies were back en-vogue… I shake my head… This carry trade must be like a cat, and have 9 lives!

Leading indicators in the United States for July rose 0.4%. I did a quick history of this report’s data and found that the leading indicators for the year are down. But really, what we see is one month up 0.3%, next month down 0.3%, and so on. Looks like my friend John Mauldin’s “muddle through economy” continues.

But for how much longer? I’ve said it before, and I’ll say it again… I believe we’ll see a recession from all this mortgage meltdown that has led to liquidity problems and a credit crunch. But… U.S. treasury Secretary Henry Paulson still doesn’t see a problem with the mortgage meltdown… Hmmm.

Speaking of Paulson… He and his friend, Fed Chairman Bernanke are going to meet with Senator Dodd today to talk about “things”. Would love to be a fly on the wall for that one!

Well… I hope the people in the way of Hurricane Dean can remain safe… Speaking of Hurricane Dean, it certainly reminds everyone of the fact that it is Hurricane season, and that alone adds enough fear to the energy sector to keep things interesting. Energy is something we can NOT live without, so any interruption in supplies, can cause major moves in prices. This dependence is why we created the World Energy CD. There have been lots of things written by us (and others) regarding this CD, so I won’t go into details. If you have questions simply call the trade desk at 1-800-926-4922.

You know… One Big Central Bank that was missing from the roster of those providing liquidity was… Drum roll please… The Bank of England! About five years ago I created a basket CD called the “Prudent Central Bank CD” and it included the Bank of England and their currency the pound sterling (GBP). Seems like that was a “prudent” decision!

Anyway… After last week’s consolidation, pound sterling has come back strong. Still a hop, skip and a jump from the “2” level… But climbing nonetheless. And why not? A nice yield advantage over euros (EUR)… And recent data show that house prices, money supply, mortgage approvals and public finances all came out stronger than expected. Which leads me to believe that the Bank of England was in tune with this data and that kept them out of the liquidity providing game! So… Party on Wayne… Party on Garth!

Oh… Sure! Now that I’ve written glowingly about the Bank of England… I see a new report that says they loaned banks some money for the first time in a month. This is the normal operating procedure; I just didn’t want to get emails telling me I was all wet!

OK… German investor confidence as measured by the think tank ZEW fell more than expected this month. That makes sense doesn’t it? I mean the European Central Bank (ECB) has been raising interest rates for two years now (it seems), and then we had the liquidity mess with the ECB being the first to step to the plate and inject billions into the markets to ease the crunch.

But it hasn’t hurt the euro’s rebound from last week’s sell off… The single unit has gone back above the 1.35 handle. Good Show! I hope those of you looking for bargain basement prices in the euro were quick to buy at last week’s Blue Light Special! Attention euro shoppers, we have a Blue Light Special at the EverBank Currency Trading Desk! Now… Wouldn’t that have been a hoot!

This brings me around to talking about the ECB and their next rate hike, and as I told you last week, I was beginning to think it was now wishful thinking. I’m more concrete on that thought now, and believe the ECB will forego their scheduled rate hike next month. I do believe that we’ll still see the “strong vigilance” wording in their statement – but this month’s liquidity injection has driven a nail in the rate hike coffin.

I see where China has raised their official interest rates for the fourth time this year. The official borrowing rate was hiked 18 basis points or 0.18% (not even a quarter!) to 7.02, and the official deposit rate was hiked 27 basis points or 0.27% to 3.6%. The Bank of China is fighting inflation pressures the hard way. A stronger renminbi (CNY) along with these rate hikes would go a long way toward keeping inflation from running rampant. But… I’m sure they are aware of that!

It’s time to go to the Big Finish, and get my little buddy up for his first day of middle school!

Currencies today: A$ .8025, kiwi .6985, C$ .9425, euro 1.3515, sterling 1.9845, Swiss .8320, ISK 66.90 (has this currency really rebounded!) rand 7.3740, krone 5.92, SEK 6.9350, forint 193, zloty 2.8480, koruna 20.49, yen 114.40, baht 32.87, sing 1.5250, HKD 7.8110, INR 41, China 7.5940, pesos 11.10, Silver $11.82, and Gold… $666.10

That’s it for today… Boy! I sure know how to stir up a hornet’s nest, eh? My mother always accused me of being that type of person! I really didn’t know what she was talking about! HA! As I said above, Alex starts middle school today… Some long time readers will remember when he was born! Time flies, eh? My kidney surgeon/doctor told me I “looked healthy” yesterday when I visited him… That’s certainly good to hear! At least for me! So… Have a Terrific Tuesday!

Chuck Butler
August 21, 2007

The Daily Reckoning