Thursday, November 29, 2007

Dogging the SIV Part 2

SIV Update

SIV holdings have fallen at least $75 billion since July to $320 billion, as the companies were unable to borrow. The net asset value of SIVs has fallen to 69.7 percent from 100 percent in July, according to Fitch Ratings. As I explained yesterday the banks like Citi that has $83 billion in SIV is caring the value at par. The bank has not taken down the value of these SIV, at least for now.

Home Equity in Trouble

Wells Fargo announced yesterday that they were taking a $1.4 billion write down on their home equity portfolio. To my knowledge, I know of no other bank that has reported problems with home equity. What is significant about this write down is that most home equity is help by the originating institution and not always securitized. A wave of write-offs in home equity will slow the economy. My guess with this $1.4 billion write down Wells Fargo will tighten its credit standards and it will make less home equity loans.

Home Price Fall Again

The consumer has been tapping their home equity in order to continue his lifestyle. With a 5.45 decline in the value of housing on a year over year basis reported yesterday by the National Association of Realtors the consumer will find they have less equity in their home. With less equity and higher standards, the consumer has less money to spend slowing consumer spending means a slower growth rate in the economy.

Unemployment and the Fed

We had a big jump in the number of new claims for unemployment benefits today and now the focus will turn to the November employment data, which will be reported on Friday the 7. The outcome of this report will likely have a significant impact on the Fed interest rate decision on December 11. Without the jobs, number the market sees over a 100% chance of the Fed cutting by 25 basis points. Some people point to the fact that today the 90 T-Bill rates is under 3% while the current Fed Funds Rate is 4.50% to show how far behind the Fed is on the rate curve. I suspect that unless we see an ugly number next Friday the Fed will only go 25 basis points and then another 25 in January

Equity Market

If the markets close on the upside, today I expect a bear squeeze tomorrow and the bears will have to start covering their short positions. Look for this market, not all at one time, to test the highs before the end of the year.

Dan Perkins

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