Shane MacGowan, the ever-inebriated bard of the visionary Irish-English band The Pogues, may have set the mood best for St. Paddy's, 2008, in the song "If I Should Fall from Grace with God":
If I should fall from grace with God
Where no doctor can relieve me
If I'm buried 'neath the sod
But the angels won't receive me
Let me go, boys
Let me go, boys
Let me go down in the mud
Where the rivers all run dry
We're in sub-prime purgatory, folks. It's a place where a soul's fate is uncertain if he holds anything but gold, spotless credit still won't get you a mortgage, and $2 a share will buy you one of the world's largest investment banks.
Bear Stearns is Dead... Everyone Else is Gasping
By Monday morning in the Far East, news of the mercy killing of the Bear Stearns Companies (NYSE:BSM) had already hit the worldwide wire. In fact, Fed Chair Ben Bernanke and his executors timed their bail-out to positively affect this week's earliest market action by shaping most of the deal's details over the weekend.
In case you missed it, here are the key features of this weekend's landmark move:
The Federal Reserve (i.e. the American taxpayer) will assume $30 billion in collateral debt that Bear Stearns had put up against its bad sub-prime bets.
JPMorgan Chase (NYSE:JPM) is purchasing Bear Stearns with a Fed-backed share swap that values Bear at $236 million.
The Fed is now offering its discount rate, normally only available to strictly-regulated big banks, to securities dealers like Bear.
President Bush and Fed head Bernanke have both officially cleared the deal, which is nothing more than an attempt to restructure risk for a market that now has no risk tolerance whatsoever.
Traders in Asia's major markets didn't oblige us with a positive reaction to the Bear bailout. They reacted far more emphatically to Friday's Wall Street bloodbath than they did to the latest of the Fed's scattershot attempts to revive our credit confidence.
Monday morning was Tokyo and Hong Kong traders' first chance to act on New York's Friday dive of more than 2%, and Asian markets almost never turn a new week to the upside after a dismal Dow close on Friday.
Hong Kong's Hang Seng benchmark index dropped by 5.18%, Tokyo's Nikkei 225 slumped by 3.71%, and India's Bombay Stock Exchange took it on the chin with a more than 6% plunge.
In spite of heady talk of foreign economies "decoupling" and being able to buffer themselves against a U.S. recession, sub-prime is an American-born problem that will continue to poison outside stock markets.
Weak Dollar, More Writedowns Recalibrate Risk
Early last week, Bear Stearns CEO Alan Schwartz told CNBC that his bank had no liquidity crisis. On Friday, Schwartz finally copped to not being able to settle its accounts. By Sunday, his company had toppled entirely.
A gang of investment banks including Lehman Brothers, Goldman Sachs, and JPMorgan are all set to announce earnings this week, with Bear Stearns having pulled its earnings call after its sale confirmation.
With every recent rally floating ever-so-gently on hot air from the mouths of executives like Schwartz, the market is completely rethinking what quality means.
The heightening aversion to risk is even contaminating traditional havens. I just watched U.S. Treasury bonds plummet in early Asian trading before floating back up by New York's open.
Consider that when the dot-com bubble burst just around eight years ago, the U.S. Dollar Index as traded in Chicago was above 115. Today, the same measure of the dollar's international muster is at 72.
The dwindling greenback makes any dollar-based safe harbor much less attractive than it was during the Y2K slide, and another looming Fed cut means we're going to have our legs knocked out from under us again.
But there is a calm in this storm...
Rydex Japanese Yen ETF Will Rally Despite Tokyo's Own Limbo
This week is important to Japan's political economy, because a dispute among Japan's top parties has delayed the confirmation of a new central bank governor. The head of the Bank of Japan, like Bernanke, is one of the captains of the world economy, and the incoming BoJ chief must balance his fears of a rising yen hurting Japanese exports with the knowledge that the entire world is turning to Japan's low-yields as shelter from the sub-prime storm.
Despite having the world's number-two economy in size, Japan has endured nearly 20 years of treading water, barely avoiding a recession with key interest rates below 1% (which in turn has made the yen a low-yielding point of retreat).
That's why I'm adopting an approach that is heavy on short-term international trades, in order to maximize news-based movements not only in stock prices but also currency trading.
The Japanese yen is trading at its highest levels in more than a decade, up more than 10% against the U.S. dollar from where it was during my research trip to Tokyo in November 2007.
That means that the Rydex CurrencyShares Japanese Yen Trust ETF (NYSE:FXY) is also riding high, having gained more than 25% relative to the Dow in the past six months.
Japan knows how to keep its head above water, and I expect that the central bank will allow the yen to weaken a further 5% to 10% before April 1. FXY will get a commensurate kick upward, making it an excellent upside play in this frumpy market.
Sláinte,
Sam Hopkins
This economy is analogous to the predicament of the German sub in "Das Boot" stuck on the bottom way past its depth and the frantic efforts of its captain and crew to surface. Lets hope we can all sing "Its a Long Way to Tiparary" soon.