Wednesday, March 31, 2010

An Old Quarter Ends and a New Begins - Even More Questions

The end of a ridiculous quarter (I think many would agree with this even if bullish). Market has been on a non stop move higher for over a month. Dominating quarter for assets especially for junk. No slow down on the upside even once they passed the moon. Incredibly, there are even more questions for the market than when January 1st started. You had no resolution of the Greek issue. The Greek bonds continue to sell off and the loaded gun on the table looks more like a pea shooter. You have more questions with the Euro and the viability of the continent over the next decade. Now you have major potential problems with U.S government interest rates. A large rise in rates would kill any hope (there really isn't any currently anyway) for a housing recovery and send everything lower. This chart I saw earlier today is really interesting. It is from a technical perspective.

From a fundamental perspective I think you could see rates rise and scare the living daylights out of investors but it seems hard for me to believe in the short term (next 6 to 12 months) the 10 year is headed above 5 or even 7%. Longer term, watch out. Increase risk is being added to the system and the U.S. has backstopped it. In the last few days J&J, Lowes, and P&G debt traded tighter than U.S. government debt!!!! That is incredible and unheard of until recently. The swap spread going negative may be technical and noise or truly warning of financial apocalypse.

That is at the federal level. At the state level it is even more mind boggling. Schools going to 4 days a week, getting shut down, sheriff cars getting reposed (you read that right), prisons refusing prisoners because they are not getting paid by the state.

You have new records for Fannie Mae and Freddie Mac delinquencies. New records in CMBS delinquencies. The numbers are really staggering. Fannie Mae serious delinquencies are now at 5.52% in January. That is borrowers over 90 days behind!! Think about that. That is the best of the best mortgage paper. Extrapolate that to the banks. And somehow someone like Zions bank is up 70% year to date?? TREPP estimates that 7.61% of CMBS is 30 days delinquent. 7.61% and commercial real estate is trailing and just now really starting to move higher. This is already a record. Estimates by Real Point is this number will hit 11 to 12% by the end of the year.

We are setting up for true financial Armageddon, it is just a matter of when not if.

To the trading world not sure what is going to happen with the new quarter. You could easily see new money coming to the market driving up the market to a new high tomorrow. The payroll number is going to be reported on Friday when the market is closed. New high today or Monday and than roll over? Definitely possible. April promises to bring more questions and more tests. The inventory build should be coming to an end.

For those bulls out there who want to point to "good" economic numbers, several points. 1) They are not really that good. If the world was perfect they are pointing to a slow U shape recovery and are just slogging along. 2) As anemic as these number are they still only possible because of the government continues to transfer money into the system. 3) They really don't matter because what I have described above dwarfs any good news these numbers may be perceived to carry. Maybe not today but tomorrow. And that is the problem. The market doesn't care about tomorrow. It only cares about today and where the next drink will come from.

The second quarter may be another great quarter or there may be a crash. Just like one misplaced snowflake eventually causes the avalanche it is going to be one data point that on its own won't really matter, but combined with the pressure built over months and months is going to start the topple of the entire system.

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