This was supposed to be my summer vacation, with the idea that a week could go by without the whole investment world coming to the brink of a market crash due to the breakdown in the credit markets. But at a time when traders usually take time off, the markets have everyone on edge as otherwise-solid positions are taking a beating.
To that point, I haven't moved more than 10 feet away from a trading screen these past few days because of the current environment. And until we see the market find a genuine bottom, vacation time for me and most every other asset manager who cares will be on hold.
That said, I want to take this opportunity to give you my take on the markets and, more specifically, on what we own.
Today, the Fed lowered the discount rate at which it makes loans to banks by a half-point (from 6.25% to 5.75%), sparking a rally that has provided some much-needed follow-through momentum after yesterday's late-day reversal that erased a 343-point loss on the Dow (DJI).
The big banking names such as Bank of America (BAC), Wells Fargo (WFC), Citigroup (C) and Bank of New York (BK) were positive all day yesterday, even at the session's low point. When sellers couldn't break the big banks down any further, short-covering commenced in the last hour of trading, and the rate cut is causing many of these stocks to continue climbing today.
In cutting the discount rate, as well as pumping an additional $6 billion in reserves into the system, the Fed is sending a loud signal to the financial marketplace that it stands ready to provide the necessary liquidity to prevent further erosion of the credit markets.
This also means that it stands prepared to cut the discount rate further, if called for. The action today shows that the Fed is not asleep at the wheel and is doing its job of shoring up confidence in the credit markets -- and this is coming not a moment too soon.
Now the Fed has voiced its proactive stance in shoring up the credit markets, the idea of capitulating is not an option. Had Thornburg Mortgage (TMA) gone under, then further significant losses would have followed. To translate this to our 25% Cash Machine portfolio, I'm encouraged by the current activity and want to stay the course so that we can recover our losses and see what kind of gains are in store.
For the past two days, Thornburg Mortgage CEO Larry Goldstone has been on CNBC, providing insight as to how seized-up the credit markets have become. His commentary shed much light on how the problems accelerated so rapidly in the past two weeks. It was only on the July 20 TMA conference call that he was guiding his 2007 outlook higher, and the stock was trading at $25.
Since that rosy conference call, the stock crashed to $7.50 and has rebounded to $14-plus while the company has to postpone its quarterly dividend by a month. Thornburg is the Mercedes-Benz of the mortgage industry, and the collapse of the stock took place in the span of a week.
All trust was lost during the past week thanks to speculation that Countrywide Financial (CFC) was on the verge of failure, and this fear and feeling of betrayal simply fed on itself until today.
At the moment, I feel relieved to know that the people who can do something about repairing the damage (the Fed governors) have rolled up their sleeves and are getting down to the business of leading the financial markets out of this mess. This is especially true now that the credit crisis has affected markets outside the United States. Asia was down big last night, as well as Europe, before today's Fed action.
Our portfolio is getting a nice bump higher today, but I'll be perfectly frank here -- the selling incurred among our holdings was very damaging in the short term. Long term, I believe that the market and what we own will recover.
The specialty REITs are another matter. I expect a big rebound in this sector, but I don't know whether the worst is over, nor can we truly predict the rate of the healing process needed to catapult the sector back into high gear. That data will come in the next few weeks as the Fed massages the credit markets back to health, and it won't happen overnight.
If we can get back two-thirds of our losses in this sector, I may recommend punching out if the REITs we own do, in fact, rally back that much. That decision will be predicated on whether the housing and mortgage markets find a pulse as the Fed acts to infuse some oxygen into these busted sectors. Today, as investors, we got the first signs of the rescue mission that focused squarely on the banks. Maybe that's why they turned up yesterday.
I'll be the first one to say that we are miles away from being out of the woods. Much could still go wrong, and we need to check our financial mettle at the door every day. But with the Fed now thankfully on board to address the credit crunch, there is reason to believe that we saw the lows for the market earlier this week.
Two weeks ago, I recommended riding this terrible storm out. Last week I said the same thing. Today, I am still saying to hang in there. We finally got some good news that matters, and it's news that the market is taking to heart. Whether the bulls can build off this two-day reversal, however, is anyone's guess.
Sentiment has once again turned on a dime, and we have to trust that the Federal Reserve, the U.S. Treasury and the U.S. banking system will work in a constructive and prudent manner to stabilize the credit markets so that qualified homebuyers can get financed. Look for news of normalized operations to come out of the commercial-paper markets, and we will see this one-day rally build on itself.
In terms of acting on today's (currently positive) session, I would heed last week's advice and wait through the weekend before jumping back in to any new purchases. If there is good footing under this market, we aren't going to miss much by waiting another couple of days and finding out what Monday brings.
We're going to get a lot more volatility, and paying up on a Friday after the week we just went through may not be the wise move.
At this time, I recommend holding what you have, sitting tight through the weekend and seeing whether more of the headline risk comes out of the market. There is still plenty of fear out there, and another bombshell like that of Countrywide Financial could negate today's gains in a matter of minutes. That said, I think we can wait a couple days.
What would really keep the fire lit next week is if the Fed stays involved early and often, and if it doesn't let today's rate cut sit as its only near-term move. Another half-point cut on the discount rate, with more reserves being added to the system, would put another cornerstone under the fragile stock market.
A cut in the Fed Funds rate at the next Federal Open Market Committee meeting would also serve as a big boost to investor confidence, and it might even kick-start the housing market. Now that would get the bulls running again!
Bryan Perry
Editor The 25% Cash Machine