G. Bush and Obama step in the subprime and hold the market

Will President Bush be able to cover the market with his umbrella?

George W. Bush is expected to propose multiple initiatives to bail out troubled homeowners in a statement today. The president will outline reforms that will help keep subprime and struggling borrowers in their homes -- and keep Fannie Mae in business.No one really knows how he will pull this off. Least of all, him. But you can bet your last yuan the proposal will be audacious and its funding will come at your expense… capital for refinanced, bailout-rate loans doesn’t grow on trees. But it does get printed in dollars. Looks like Bill Gross is going to get what he wanted.

Not to miss an opportunity on the campaign trail, Barack Obama proposed yesterday that "unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low-income borrowers" ought to be fined and the proceeds should be used to bail out borrowers on the verge of foreclosure.Where were these jackasses when the market was in full swing and house prices were going up? No doubt giving speeches about how vibrant the American economy was… and lauding our ability to deliver the American Dream to anyone who wanted it. Probably buying property themselves somewhere, too.

We will see another run of correction on the way

History tells us it's usually foolhardy to doubt the power of the Fed to bail out financial markets, once the Fed starts a cycle of lowering interest rates. But the Fed is not all-powerful. The subprime/credit crisis is probably causing a lot of collateral damage in the multitrillion-dollar over-the-counter derivatives market. It's not like the Fed can immediately wipe the slate clean on every bad derivative trade made by hedge funds and banks. Much of the damage has already been done, no matter how the Fed responds. So this Fed easing cycle may be very different from prior ones.

It's also the case that the discount rate is more symbolic than effective in today's complex credit markets. The heart of today's credit market lies beyond the realm of old-fashioned banks…and therefore, beyond the realm of Fed rate cuts. Much of the credit risk that everyone's so worried about remains hidden on hedge fund balance sheets, transferred there via highly sophisticated derivative markets.

Downplaying the significance of Friday's rate announcement, veteran trader Dennis Gartman describes a dour future for the mortgage market:

"The decision to cut the discount rate and to open up collateral to mortgages and the like 'is not a shot of adrenaline to the economy, but is instead a shot of penicillin.' That is, the Fed is not moving to expand economic activity; it has moved to stem the spreading of contagion. If anyone actually believes that the nation's financial intermediaries are going to go out and suddenly become expansive once again, extending more mortgages at anything other than onerous terms, they are sadly and badly mistaken [emphasis added]. Having once been burned, the nation's banks et al. shall be like Mark Twain's cat that having once sat upon a very hot stove shall not sit upon any stove again, for they shall all look hot to him. The Fed's action on Friday has done nothing other than to quell the fever. The patient is far, far…very far…from being healthy. The Fed has not staved off recession; it has simply made the recession that is now upon us less likely to devolve into something much worse…and for that alone, the Fed is to be lauded!"

Perhaps the Fed should be lauded because its announcement temporarily restored market confidence, but the mortgage crisis is far from over. As Gartman correctly observes, the Fed's recent maneuvers may help the nation's mortgage lenders to avoid disaster, but the days of EZ credit are dead and gone. And now that banks will be much stingier, homeowners will not be able to refinance their upwardly re-setting ARMs and homebuyers will not be able to qualify for attractive mortgages. Even in the best of circumstances, therefore, banks will be issuing far fewer mortgages than they did during the Halcyon days of 2005 and 2006.

Unfortunately, banks that do not make loans do not make money. Many Wall Street analysts have been slow to recognize this fact, and are still expecting decent earnings from most banks. They are dreaming. At the same moment that banks will be making fewer loans, they will also be setting aside reserves to cover the bad loans they made in the past. So earnings will be squeezed from both ends at once.

What does rally mean?

he Dow Jones Industrial Average is up 0.18% for the month of August...Just another ho-hum month.

Let's just ignore the fact that the Dow tumbled nearly 1,200 points between August 8th and August 16th – that happened BEFORE the Federal Reserve waved its magic wand and made everything better.

The wand that the Fed waved was a half-percent reduction in short-term interest rates. The stock market responded immediately with a robust rally...and the magic continued yesterday, as the Dow added another 145 points.

But the Fed's magic is not all that magical. Like a warm cup of cocoa on a cold winter day, it makes you feel better. But when trying to cure serious economic maladies, rate cuts and warm cocoa provide identical efficacy.

The nation's bankrupt mortgage-holders aren't any less bankrupt today than they were before the Fed reduced shortterm interest rates. And the nation's almost-bankrupt
mortgage-lenders aren't any less almost-bankrupt. But the Fed's magic makes everyone feel better; it makes them believe that everything's going to be okay. And so share prices go up...for a while.

Looks like Jim Cramer’s tantrum paid off after all

On CNBC on Aug. 3, Cramer pleaded like a grounded teenager missing the prom for Ben Bernanke to stop being an academic and open the “discount window.”

This morning, that’s just what the Fed did.

The Federal Reserve chose to cut its discount rate down to 5.75%. The “discount rate” is the rate the Fed charges “qualified” lenders (banks and stable corporations) for temporary loans. The move shows that, despite Fed Governor William Poole’s statements to the contrary, the Fed isn’t going to sit by and let investors in subprime garbage get what’s coming to them.

The U.S. market reacted by skyrocketing over 2% within the first five minutes of trading.

There is no need to explain the market

Recently I was reading a novel talking about the time history in which there is a sentence saying " History could repeat only people who know it will follow". Well, I am not a historian , also not a person to make any prediction. Making a prediction is as difficult as finding the historical reason, if not worse. Today if we look back, you won't be surprised that all of us got extremely excited when market soared above 14000 followed by a sell off. Now market has reached about 12900 at the close, have we reached the bottom? But if we check about the indicator, VIX, a well known one to monitor the market sentiment, suggests there will be more room to go for market hasn't got into deep panic yet. So for us long, it is still a time to hold on. We will know the market bottom once it comes and i believe it won't be too long. The better thing you need to do is to make intelligible bets over stocks who have solid fundamental.

Market looks for stabilization

After market closes with a last miniute sell off, we have seen the panic selling triggered. Good or Bad, it is not important. From the market breathe, We still haven't seen any sign that market has been stabilized even both indexs are close to 100 MA. Several rally attempt could happen agains however, for short term traders, sell at rally attempt still outperform buy at any dip at current state.

For investors, set back and wait for chance , don't do too much. The only rally we could see is that 2 level of panic selling. That is what I am waiting for.

Good luck!