APOLOGIES FROM NOAH & ALL OF US AT URBAN DIGS
MARKETS WENT TILT & SO DID WE (disk overload).
Lehman evaporated into market history yesterday. Frankly, they went out with a whimper rather than a bang. The analogy I used with my partner yesterday morning was that when Bear Stearns went down the Feds showed up with fire trucks and brought out the big hoses to put out the fire. They did this because Bear was a huge counterparty in the under-regulated over-the-counter derivatives market. The Feds did not know what might happen as a result of a major dealer and counterparty, not being able to make good on contracts that helped other folks hedge out their risk. In the Lehman case, the Feds pulled up in fire trucks, took to the trenches that had already been built around the firm in the aftermath of the Bear debacle, and pumped a bunch of water into the trenches to keep the fire from spreading, but they let it burn down to the ground.
This approach seemed to work and briefly re-injected fear of moral hazard into the market. This was proved out in spades by Merrill Lynch's jump into the arms of Bank of America, before their house caught fire. It wasn't until around 2 p.m. that the markets started to fall apart. The culprit was AIG who reportedly turned down an offer from a group of private equity firms for a capital injection. Brokerage firms are not very transparent in terms of their assets and liabilities, but insurance companies are the ultimate in black boxes in my opinion, and one with a big credit derivatives business fuggedaboutit!. According to CNBC, there is potential for a federal role in the bailout of AIG. There is reportedly going to be no private capital solution. That's how scary AIG's black box is. Word of this pushed the market briefly into positive territory after opening with a thud following yesterday's 500 point decline.
The feeling that dominoes are falling is pervasive. The risk of a systemic rash of failures is real. We are on the verge of an environment where investors and financial institutions pull money from debtors causing them to fail, with the connection to fundamentals becoming tenuous. But don't let me fail to mention....FUNDAMENTALS SUCK!
On the positive side the VIX has gone ballistic indicating the kind of acute fear, which usually is a peak in uncertainty and often sets up a rally. In this case the question is, does it set up a long-term buy?
I have been hopeful that the underlying real estate market issues would begin to benefit from easier comparable statistics and the second derivative (the rate of change of the rate of change) in residential real estate could at least start to turn positive. But the infernal feedback loop of institutional failures, layoffs, securities markdowns and real estate financial constriction has got the economy in a bear hug.
The realization of this is credit collapse is being reflected in money market spreads. 3 Month LIBOR OIS spreads widened to 116 basis points overnight. The treasury Dollar/Eurodollar spread blew out to 175 basis points, the widest spread since March.
Sometimes it's best to admit that you have no idea what to do and not to make big financial decisions. I am in that camp for now. I certainly would not be buying real estate in New York City until the smoke clears a bit.