Nope,
You're reading it correctly. I pulled the following off
http://market-ticker.denninger.net he posted it two days ago. He's a bit passionate on this subject.
Tuesday, February 12, 2008
Wow! Buffett To The Rescue! NOT!
Uh, no, actually.
Buffett's announcement of his offer to "take" (for a price) the muni portfolio off the monolines hands was responsible for a huge spike - +200 on the Dow - this morning.
You have to sit in awe at the
utter stupidity of traders in this market who would bid up all but one of the Dow 30 on this news.
Why?
Because Buffett just stuck his knife in the back of the monolines, hit the aorta, and then gave the knife a couple of REALLY good twists!
How 'ya figure? Simple, really:
- Insuring municipal bonds is the only part of the monoline business that makes money.
- All the insurance premium is paid on origination - there is no recurring cash flow. To "take" this liability the monolines would have to pay Buffett - money they cannot afford.
- This would also establish Buffett as having a clean and large book of said business, which would basically guarantee he'd get all the future issues. This would instantly and fatally cut off the monolines recurring cash flow.
- The CDOs, CLOs and other trash on their balance sheet would continue to bleed them out, but not they'd have no offsetting revenue.
Bang.
One of the monolines has already said "no". Well duh. They will all say "no", but it no longer matters.
The fact that the offer is out there means that now the ratings agencies can downgrade with impunity,
because all that the ratings agencies and governments care about is that the muni business survives. Without that the towns and states get raped, which is unacceptable - but with that gone only those who took the inappropriate risk are going to eat it.
This isn't good news folks - its
bad news. Very, very bad news.
Mark my words - the downgrades will now come within days. There is no longer any political pressure to
NOT downgrade these issuers, because in a bankruptcy Buffett simply steps in and takes the muni business.
He's already offered to do it; there is no longer any reasonable fear that these bonds will end up being hung out to dry.
Those of you who are cheerleading this move and buying stock today - you made a serious mistake.
It never ceases to amaze me how foolish people can be. Like the futures spike this morning on GM's earnings announcement - their entire "net profit" came from a
one time, and unanticipated, tax benefit. This of course wasn't in the estimates, and if you back it out GM lost nearly $3/share -
way beyond analyst estimates.
There are a
lot of people who think "this Bear Market is basically over."
Oh really?
You expect me to believe that we can have a five-year long credit orgy predicated on intentional mispricing of risk and outright fraud in credit origination, over $6 trillion in consumer funds MEWed out on fictitious home value increases, and when this fraud is discovered and collapses the damage is limited to 10% off all-time highs in the stock indices over two months and then we're off to the races again to make new highs - when the move from the previous bottom, where this all began,
was a near-doubling in the S&P 500 and more than a doubling in the Nasdaq?
Corporate profits will all be ok through this? We've "troughed" and are headed higher?
Lending will return to normal, even though we've yet to see anywhere near all of the defaults run through the system and the losses recognized?
Multiple expansion, all of which was fueled by that fraudulent credit creation expressed in an orgy of leveraged buyouts will be back,
even though there is more than $150 billion worth of the previous credit orgy's LBO debt still stuck on bank balance sheets that nobody wants?
Can I have some of whatever you're smoking please?
Let us remember that back in the 2000-03 Bear Market,
which was caused by a credit bubble in Tech Stocks less than half the size of this one, there were market crooners calling "its over" several times from the spring of 2000 all the way to what proved to be the actual bottom in 2003.
In each and every case, except for of course the last one, they were not only wrong but your account would have suffered catastrophic damage had you bought into any of their previous calls.
Indeed, there is no better way to lose
ALLof your money in the market than to sell on a decline, buy
on a rebound when the crooners tell you that the bad times are over, and then sell once again
when that "rebound" turns out to be a false hope and turns down on you once again.
This was a critical mistake that people made time and time again during the 2000-2003 Bear Market,
and the crooners on CNBS and elsewhere were doing the exact same thing - calling false bottoms - then that they are doing now.
Don't be suckered.
Oh, and the
EFF today? Anemic. Below target. This despite a (small) drain in
the slosh. Go back and read the earlier entry from today if you don't understand why this is important.
Bluntly -
commercial credit demand continues to collapse because there is simply no more good collateral available to be posted by people who otherwise might want to borrow.
This is what a deflationary credit collapse looks like, whether the stock market recognizes it right here and now or not.
