Extreme Volatility in Equity Markets: A Harbinger to Sea Changes

Without appropriate checks and balances over the credit system, one’s assets are always in danger. In normal times, we can deal with that. But these are not normal times; we the people have been deceived by persons and organizations we have always trusted—our bankers. Nothing like this has ever happened before, and now the people are ready to revolt. The market senses it.

Is this not a lesson to hard-working Americans that bankers need to revert to being bankers, wealth managers to being wealth managers, and brokers to being brokers?

Conflict of interest is the source of our discontent, and, as we increasingly observe, the cause of market volatility. Yes, even those in control are losing it as they get torn between their different masters.

Extreme volatility in equity markets is usually a harbinger to what are called sea changes. Sea change; now that’s an interesting expression originating from Shakespeare's The Tempest, meaning a substantial -- but bewildering – transformation.

 

ARIEL [sings]:
Full fathom five thy father lies;
Of his bones are coral made;
Those are pearls that were his eyes:
Nothing of him that doth fade
But doth suffer a sea-change
Into something rich and strange.

 

The market is incomprehensible to some of us at the best of times, but these days it’s fair to say that most of us don’t get it. All we can do is day trade while we await the market’s revolution, whatever form that may take.

I feel that traders suspect that Humongous Bank & Broker is a ghost – dead but still moving, hoping for a taxpayer bailout of such massive proportions that would break the economy and possibly the spirit of America. What else are we to believe when we watch Fannie Mae (FNM) and Freddie Mac (FRE) plunge -93% and -96% over the past year, buying up bad mortgages from HB&B?

According to their website, “Fannie Mae is "the country's second largest corporation, in terms of assets, and the nation's largest source of financing for home mortgages. We are one of the largest financial services corporations in the world." "Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. By doing so, we ultimately help homeowners and renters get lower housing costs and better access to home financing."

Last week alone, FNM dropped -37% and FRE -52%! At this point, neither has access to capital markets to raise additional debt or equity capital. America is in crisis!

The people are just waiting for the US Congress to present a solution and to state the cost. The appropriate response will come from independent traders.

I have already called it a revolution in the making. Two years ago, I gave you the reason – I called it Paulson’s Pride, after the person I later started calling Mr. Moral Hazard, Henry Paulson, US Treasury Secretary.

 

Bill Cara: Saturday Report, 10/13/2007 6:45 AM ET
The past 15 months or so has been a period I refer to as Paulson's Pride. I suspect that over the next fifteen months or so, Henry Paulson will not be held ...

Bill Cara: Cara’s Daily Commentary, Wed., July 4, 2007, 8:18 AM
That is what Paulson's Pride is all about. Power and theft...

 

I have been hearing stories that Paulson might be the designated solution in that he would take control of a new Fannie-Freddie Corp. A double wrong does not make a right.

What a way to start a revolution!

Comments

[gabe borens...:]

Another article that should have been written in the early 2007.
The seeds of the FRE and FNM crisis revert to 2006 or earlier .
The mentioned agencies were providing the necessary liquidity via the same market mechanics for quite some time ,however the risks facing the agencies have changed by the 2006 .The rating agencies have failed to spot them .By mid 2006 some 20% of all the homes sold were financed by the subprime loans.Repackaged ,these loans were rated AAA.I have been issuing warning about the potential risks to the housing market and to the investors because of relatively high percentage sold new homes was finaced via subprime funding.
Warning was totally ignored and the shares of the both agencies headed for the new high.
Funny thing happened in that past new uptrend,I have noticed a substantial insider selling iin the home builders segment of the stock market. Once again I have issued a warning which was ignored.
Finally on September 18 ,2007 during the Brian Sullivan TV interview(Bloomberg TV),my parting words were that the subprime related issues are ahead of us. Few weeks later ,the market had seen the light.
By now all of the problems have been identified.
The Congress ,the Treasury .the FED and the Administration are addressing the issues in a unprecedented cooperation.
Additional time is needed to cohesively address the new issues as they come up.
The record shorts in the shares of the both agencies make the job more difficult as the shorts appear to distort the magnitude of the risks and the issues.
The point is ,that the issues and the risks facing both agencies were always there but the focus on these risks was not there as everyone was making money.
Now that the focus is aimed at the issues ,the problems will be resolved.
Objectively speaking ,both agencies have sufficient reserves on hand to face reasonably defined risks.
The market bears of course are disseminating unrealistic Armageddon scenarios which would require additional capital.
As the market and the economy consolidate in
the period ahead ,I am sure that the investors will see the value in FRE and FNM.
These agencies are here to stay and have done a very viable job.
Today ,they are responsible for some 80% of the mortgage related activities.
The rescue plan?.I don't think that wiping out the share holders is the answer.It would send the wrong signal to the stock market.
In the long run such an action would vastly limit an accessto the equity funding by corporate America as we know today.
We should objectively evaluate all of the rumors and bear in mind that the record open short interest in shares of the both agencies is responsible for the current panic and the paranoia.

2008 Aug 25 07:39 AM

[cyclops:]

Yeah, right!

2008 Aug 25 09:22 AM

[Kelly Liebe...:]

I am a little tired of the bailouts for all of the evil-doers as Bush himself likes to call them. The reckoning is already here and there will be no hiding from this one.
Disclosure: Long Gold and Silver and good luck to everyone that thinks the Federal Government can continue to scr*w and then rescue, scr*w and then rescue indefinately.....

2008 Aug 25 09:33 AM

[Roowns:]

I don't know much about Fannie and "Granny" but my guess is that if those both collapse the crises might be over. If those two can't finance their loses throw market capital or assets, someone will have to step in at a moment, maybe before the collapse, and buy them.
Now I don't know who's got enough capital to support their loses over next years. Second I'm sure those people will wait for the last moment and buy them for nothing.
Anyway, what I'll know is this will be the biggest news of the next decade for sure.

2008 Aug 25 10:29 AM

[carey_jim:]

In the old days people used to say that banks only loan money to people who don't need it.
That was a way of saying that bankers are extremely cautious people.
When banks start loaning money to people who actually need money, well, watch out.
In the recent past, banks did this unusual thing.

Watch out.

Now if banks could only get back to normal and only loan money to people who don't need it, we could return to normalcy.

Where are the regulators when we need them?

2008 Aug 25 12:09 PM

[Kelly Liebe...:]

The regulators are in on the deal! Are you kidding? Who do you think is regulating the cooked books?

2008 Aug 25 12:11 PM