Currency Market Predicts Bailout Is the End of the Credit and Housing Crunch

Last Friday, September 5th, the dollar was up almost half a percent against the Euro and most other currencies despite a spectacularly horrible jobs report, but it seems to be overshadowed by Freddie (FRE) and Fannie (FNM) in traders’ mind. In one of my previous posts I had talked about the dominance of the currency markets over the equity and commodity markets in predicting the future market trends and overall state of the economy. I had reasoned that this relative power is due to the fact that currency markets are larger than the other two by a huge margin and therefore are not easily manipulated.

Another interesting event that took place last Friday was that the banks bottomed around 11 am and rose through the remainder of the trading day, taking the whole market up with them. Now I am not one of those whiners who constantly complains about insider trading and how the Wall Street manipulates and robs the ordinary investor. However, given the sequence of events last Friday, it is not hard to imagine that a whole lot of people knew about the GSE rescue package before we, the ordinary folks, got the news after the closing bell.

My interpretation of the rise in the dollar despite the jobs report, which is pretty much indisputably the best indicator of the health of the economy, is that housing is going to bounce back in a big way and will pull the economy with it. The last time I argued here on SA that the housing would be back, I got many comments that this time it was different and that the economy was in one of the worst periods in decades. However, I think that kind of view is very usual during downturns, as it was usual during the peak of the market people were arguing it was different this time with emerging markets.

Getting back to housing, I must say that the official data is not showing much improvement; however, I agree with the comments made by Toll Brothers (TOL) CEO, Robert Toll. There is a lot of demand on the sidelines, just waiting to get a house as soon as the prices stabilize. At this point you must realize the general public gets its information and advice on whether to get back into housing mainly from the media, not the official housing data.

Now that the government has shown its resolve in not letting the mortgage market collapse, it is a matter of days before the mass media turns the headlines from “No bottom in housing” to “Now is the best time to buy a house in 30 years”. Once that demand on the sidelines relinquishes itself on the housing market, the housing sector and in turn the general economy will bounce back in an unexpected way. You might want to be long the homebuilders like TOL, Pulte Homes (PHM), DR Horton (DHI), KB Home (KBH) and Centex (CTX) before it’s too late. Of those I would be bet on TOL to be the strongest as it has one of the strongest balance sheets among its competitors.

So far my argument seems to be more like a hunch, rather than solid fundamental analysis. However my aim is to tie it back to the rise in the dollar argument. You must acknowledge that the guys in that huge market are rarely wrong and most of them are “in the know” about the state of the economy much more than we are as ordinary investors. The dollar rose an extraordinary 8% in about two weeks culminating in the rescue of housing GSEs. Now that kind of a move in the exchange parity means investors are trillions of dollars long the USD. I don’t think guys with that much power and intelligence would risk that kind of money if they weren’t sure about this bailout package being the end of the credit crunch.

I want to make one last point about the rise in financials last Friday. I think the sector is giving a head-fake. As a general rule of thumb financials are not early cyclical, housing is. I plan to write more in depth about the state of the financials on another post. However, for the purpose of this article, let me say that the bailout package solves the problems of the housing market pretty much but it won’t be the cure for the problems of the financial industry, which are the result of exotic investments.

When the market opens on Monday, there’s a possibility that there might be a feeding frenzy on financials as the sector is still heavily shorted and there are a lot of traders totally lost out there just following the herd. I myself am long JP Morgan (JPM) but if it reaches the 44-45 range I will most definitely get out. My advice is that you should close your long positions in financials if the sector gets to a point where it takes JPM to the 44-45 range (or the equivalent moves in other stocks in the sector). If you don’t have a position, don’t get into one. Financials don’t have much going for them in the long run and they are not out of the woods yet.

If this market is going to go up, the housing stocks will be the momentum trade. The rates are low, there a lot of demand on the sidelines and the government made it plain clear that it will not let the mortgage market collapse on itself.

Disclosure: Author is long TOL, JPM.

Comments

[Nikola:]

Wishful thinking.

The dollar didn't "rise" against the Euro. The Euro FELL against the dollar, as the financial crises finally started showing in European economies (GDP growth & inflation in power houses like Germany, France, Italy, UK).

That's a big difference in perspective. That's like saying "dollar rose vs the Zimbabwean dollar, so we are at the bottom of the housing correction."

Compare the dollar to a stronger currency, like the Chinese Yuan: finance.yahoo.com/curr...

Barely any difference. Stopped falling. But the dollar may yet rise against the CNY too, as the Chinese economy numbers are not out yet. China will be hit too.

What is happening is that the chaos in the US is spreading around the world like a disease. When Americans stop buying, it hurts everybody. But just because others are showing symptoms doesn't mean anything significant has happened to Patient Zero.

Whether the bailout will succeed to persuade Americans to get out to the Mall and start shopping remains to be seen.

And I really don't know where you see the housing "demand on the sidelines"? You talking about all the subprimers who got foreclosed and now want a new chance? I hope they don't get one..... we're where we are because of them.

2008 Sep 08 05:13 AM

[Nikola:]

I like this disease metaphor. Let me restate what I think you are saying.

You are saying that because another bird flu patient now also has fever, the original patient is gonna get only better from here on.

2008 Sep 08 05:21 AM

[Kelly Liebe...:]

"You must acknowledge that the guys in that huge market are rarely wrong and most of them are “in the know” about the state of the economy much more than we are as ordinary investors. "

How wrong you are!!! How many missed the mortgage mess in the first place?

Ridiculous! Bailouts do not save us!!! Not when the US is broke!!! It costs the tax payers 200-300 BILLION DOLLARS!!! We are broke!! That's why we weren't paying our mortgages... Get it????

DOMINO EFFECT!!!! Just wait. Bernanke said failure would destroy the global economy. Get it??? Just wait... it just stalls the inevitable.... Bernanke is a FOOL!!!!
Print more money to pay for it...and our money won't be worth anything!
Fools think that because the market might go up that it means it's a sign business likes Bernanke's decision and in the long run it digs us farther into our grave.

2008 Sep 08 09:08 AM

[South Bay:]

The reason the 'demand for housing' is on the sideline is simple.
Joe Sixpack can not qualify for a fully amortized loan payment - he never could. You can not give him a 100% loan - he does not have the money skill set to handle home ownership.

2008 Sep 08 09:43 AM

[San Diego L...:]

You make some good points, but I think you are a year or two early for a housing bottom.

You noted "There is a lot of demand on the sidelines" quoted from Toll CEO, but the real demand on the sidelines is NOT to buy, but to SELL!
For another take on this "demand" from a San Diego Realtor, one must read "San Diego Real Estate Pent-Up Demand .. It’s Real & About To Kick-In," this blog post was published on 7-14-08 on:
www.brokerforyou.com/b.../

2008 Sep 08 10:24 AM

[2houndz:]

Nope, I'm not trading these bets with your money. But more importantly, your points of logic can't even be connected. Why, after 6,121 calls for a housing bottom, and Cramer saying it will happen 250-something days from now at 2:30 in the afternoon, would you throw your call into the ring today using questionable logic? This is the kind of writing that makes people question your agenda.

And another thing for SF Attorney - who the heck signs on to an anonymous blogsite under the name "Attorney"? Geez, my worst nightmare - to be stuck on a 5 hour flight between one guy who identifies himself as an attorney in the first 30 seconds, and another guy who sells insurance. Unless it is relevant to your post, nobody cares.

2008 Sep 08 10:57 PM

[Did U Think...:]

I don't even have to read the contents of your post to know we are not near the end of anything. All I have to do is listen to Greenspan's 3 part interview with Maria Bartiromo today. He points out that he is surprised the economy is holding up so well and he is waiting for housing to bottom and until it does there will be no stopping the deflationary crash.

After that we can look for serious inflation the likes of which nobody has seen in their adult lifetimes.

2008 Sep 09 10:22 PM

[relmor:]

Sorry, which bail out is the end?
The Bear Stearns?
Fannie Mae? Freddie Mac?
Every bank still on Wall Street?
Every large bank?
AIG?
Let me know which bail out you meant. Or did you mean the ones coming later?
Let me know ok, cause theres been a lot of them.

2008 Sep 17 02:36 AM