You won't ever hear that the LBO boom is over or that the depreciation in housing is reaching levels not seen since the Great Depression from the Fed, or any government official for that matter.
Telling the truth might be seen as irresponsible, sending markets tumbling across the world. So, the Fed has been carefully spoonfeeding us the truth by transitioning from telling us that the subprime / housing issue was contained to finally acknowledging that the subprime and housing issue has deteriorated and is worse than expected. So Bernanke told us last week. Yesterday, the sugar coating was removed as PIMCO's Bill Gross and Countrywide Financial CEO Angelo Mozilo told us how they really feel.
From Bill Gross:
Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole - Nathan's Famous Coney Island style - are having a serious bout of indigestion.
That growing lack of confidence - more so than the defaults of two Bear Stearns hedge funds and the threat of more to come - has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: absolutely nothing is moving.
The tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market.
No longer therefore will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks. The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half's time as has occurred in the high yield market.
Bill Gross' entire August outlook is a good read, check it out.
. . . and from Mr. Doom, Countrywide CEO:
During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result. Due to these adverse conditions, the Company incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans.
Perhaps we can no longer call this just a subprime issue!
We are experiencing home price depreciation almost like never before, with the exception of the Great Depression.
Did he say the Great Depression? Perhaps a poor choice of words that may have spooked the markets a bit more than need be, but you get the idea . . . the housing market isn't recovering anytime soon.
Yesterday's remarks certainly instilled some fear in the minds of traders, but it really isn't anything all that new. It's just that after shrugging off bad news after bad news (which is what happens in a bull run), the bulls finally relinquished and yesterday, for whatever reason, the news mattered.
The selling was significant enough to create a change of character in this market, possibly creating a market of opportunity sellers rather than a market of dip buyers as we've seen over the past several months. That remains to be seen. It's important to realize that while technically this market has some problems, all indices retain key.
The S&P took out the 50 day moving average and dropped a hair below its upward trend line and the Russell 2000 is already fast approaching its 200 day moving average. Both the Dow and Nasdaq have a bit further to go before testing key support levels. The area around Nasdaq 2620 and Dow 13600 will certainly be watched closely.