To say that the last week in the US markets was extraordinary seems so lame. But we cannot think of a simpler and more succinct word to describe it.
What a week it was!
- Monday brought the bankruptcy of Lehman Brothers, the fourth largest Investment Bank and the arranged marriage between Merrill Lynch, the symbol for America’s Bull Market, and Bank of America;
- On Tuesday, the Fed extended a lifeline to AIG, the largest insurance company in the world, in exchange for about 80% of the company’s ownership;
- On Wednesday, a huge money market fund announced that its investors would lose money because the fund was forced to lower its net asset value per share from $1 to 97 cents.
- On Thursday, bear raids on the remaining 2 independent investment banks reached their crescendo. By Thursday afternoon, the markets began to panic and the Treasury came to the rescue with plans for a massive bailout package similar to the Resolution Trust Company model of the early 1990s.
- On Friday, the Securities and Exchange Commission announced a temporary ban on short sellers. The Dow Jones Industrial Average responded with the largest two-day gain in six years.
CNBC’s CDS Team of Charlie Gasparino, David Faber and Steve Liesman (creating an acronym and being alphabetically correct) did a sensational job of reaching out to their sources, finding out what was going on and bringing it quickly and sensibly to us viewers. As viewers, we are grateful. This timely access to pertinent information delivered without pretense or bias is why we watch CNBC.
CNBC Anchors also did a good job in bringing relevant experts to share their insight and opinion with us viewers. In our opinion, the most significant interview of the week was delivered by Maria Bartiromo.
The crisis in housing is at the heart of the turmoil in US financial markets. The unprecedented and seemingly unstoppable decline in US house prices has resulted in steadily declining prices for mortgages and mortgage securities. In turn, this decline in mortgage prices has devastated the balance sheets of companies that were considered financial giants. That is why the US Treasury proposed the creation of a massive fund that will buy such bad securities from Banks in an effort to clean up the balance sheets of Banks to enable the Banks to start lending to businesses and homeowners.
In our opinion, the most prophetic commentator on this topic has been Larry Fink, the incredibly astute Chairman of the Investment Management Firm Blackrock. After its bailout of Bear Stearns, the Federal Reserve asked Blackrock to manage the portfolio the Fed acquired from Bear Stearns.
Maria Bartiromo had interviewed Larry Fink on October 4, 2007. We were fortunate to have listened to this prophetic interview at that time. It was helpful to our sanity and our portfolio. We would ask you to view this interview but, CNBC Management, in their infinite wisdom, has restricted access to this interview to its CNBC Plus customers.
Maria interviewed Larry Fink on Tuesday, September 16. We regard this interview to be the most significant interview of this tumultuous week. Here are some excerpts of what Larry Fink told Maria Bartiromo about the deleveraging process that is going on:
- “now we are in the deflation point…speed with which deleveraging is happening ..it is coming in waves..”
- “we can’t lose sight though ..that the fundamentals of the mortgage market are beginning to improve..”
- “Fannie Mae and Freddie Mac mortgages have come down from 6.25% to the buyer to 5.25%…”
- “and if we see lower interest rates, we may even see a 4% 30-year mortgage rate” (emphasis ours)
- “this is the fundamental that will allow the market to re-balance itself…”
We had written earlier that “a 30-year fixed rate mortgage near or below 5% will lead to a long term revival of US housing.” (see our article “Jim Cramer on Ben Bernanke – Fair in August 2007 and Unfair in August 2008” – August 2, 2008 – https://cinemarasik.com/2008/08/01/jim-cramer-on-ben-bernanke—fair-in-august-2007-and-unfair-in-august-2008.aspx
Mr. Larry Fink has gone much farther than us. He has projected a 30-year mortgage rate of 4%, again 4%. Remember, this forecast comes from simply the BEST Credit Manager in the world, Larry Fink, Chairman of Blackrock. (You can see the interview at http://www.cnbc.com/id/15840232?video=858246212&play=1)
Where else would we have access to Mr. Larry Fink except at a network like CNBC and from an anchor like Maria Bartiromo. Thank you Maria Bartiromo.
Having praised her doing the interview, we now have to ask why Maria ignored this interview during the rest of the week. Is it because Maria did not understand what Mr. Fink told her or is it because Mr. Fink’s comments go against her core convictions? We think it is the latter. Maria simply hates the idea of lower treasury rates. She thinks lower rates imply the end of “Global Liquidity – Global Growth”, her religious mantra,
Earlier, we wrote about the deeply held bias of CNBC Anchors against long US Treasuries (- see our article “Are CNBC Anchors on a Mission against USTreasuries – A Viewer’s Perspectives” – August 23 – https://cinemarasik.com/2008/08/19/are-cnbc-anchors-on-a-mission-against-us-treasuries–a-viewers-perpsectives.aspx)
Long Duration US Treasuries have performed superbly since our article. Had it been any other asset class, CNBC Anchors would have trumpeted the breakout. But CNBC Anchors continue to either ignore or demean this asset class.
For example, on Friday, September 19, Michelle Caruso Cabrera ecstatically exclaimed to Rick Santelli “Today, the treasuries are getting crushed” to which the wise Rick Santelli retorted ” they are really not getting crushed, they are getting back to the levels of 2 days ago”.
Erin Burnett has taken the lead from Maria Bartiromo as the main spokesperson of the Anti-Treasuries Crusade. She was positively gleeful when she asked Bill Gross about the inflation implications of the Treasury’s RTC-type plan. But, Bill Gross politely shot her down with his retort “Inflation is at least 2-3 years away”. These days, it is hard to tell whether Erin Burnett is more Anti-Sarah-Palin or more Anti-US-Treasuries.
CNBC anchors are selected for their persuasiveness and likability. They are fun to watch. It is their likability that makes us viewers susceptible to their investment biases that are often tuned to the interests of their advertisers. We practice “safe” CNBC watching by being vigilant against CNBC Anchor Bias and Hype.
Getting back to Larry Fink, if the 30-Year Mortgage rate drops to 4%, then the 30-Year Treasury Yield would have to drop to around 3% from its current level of 4.40%. This would mean a rise of about 40% in the price of the 30-Year Treasury Zero-Coupon Strip.
Dylan Ratigan and the “Fast Money” Team – any interest in this trade? Or does your sponsor Charles Schwab prefer that you stick to higher-commission stock trades?
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