Tuesday, August 14, 2007

I Think This Guy Is Going To Get Spanked

August 10, 2007

Dear Valued Client:

Panicky investors are continuing to make mountains out of molehills. Even though risky sub-prime mortgages are a small part of the total mortgage market, this "sub-prime mortgage market meltdown" is having a big impact - way too big an impact - on overall markets. As the Federal Reserve (the Fed) noted in their Monetary Policy Report to Congress on July 18, the riskiest mortgages - sub-prime variable rate mortgages - are about 9% of mortgages outstanding, and they have adelinquency rate that had risen to about 12%. Mind you, not a default rate of 12%, just 12% behind on payments. The delinquency rate on subprime fixed rate mortgages was steady at about 5%, while prime rate mortgage delinquency rate was steady at about 1%. Sorry to drag you through the numbers, but as I see it, it adds up to a molehill. And, suppose the numbers do double. The delinquency and default rates would still be below historical highs, so maybe we get foothills.

I look at this senseless, indiscriminate selling as a smallish problem relative to the great big, generally stable, credit market. True, some dumb and/or greedy mortgage lenders, hedge fund managers, hedge fund investors, and lenders to hedge funds are getting spanked for their actions, but that is what our financial systemis designed to do - discipline excessive risk taking. And some other parts of the credit market are less liquid, as traders mill around trying to figure out what the precisely right price for a bond should be. Meanwhile, the Fed is doing its job -injecting reserves into credit markets to hold the overnight bank lending rate at the target of 5.25%. They adjust reserves every day; they've just used bigger numbers the last couple of days.

To reiterate. I think economic and company fundamentals are strong. We just completed an excellent quarter for economic growth and company earnings and I am confident that the third quarter will show similar results. Company balance sheets are robust and interest rates remain low. Consequently, I am equally confident that this downdraft in the equity markets will pass. It is precisely this kind of market turmoil that makes the case for a well-diversified portfolio that avoids excessive risks associated with big bets on exotic, highly risky securities. As always, please call your financial advisor with any questions or concerns.

Sincerely, Lincoln Anderson
Managing Director, Chief Investment Officer, Chief Economist
Linsco/Private Ledger


mdawsz said...

Ghetto judo will punish this man.

Bill said...

Just about everything he said makes sense to me. I'd like to have him on my team (if I had a team).

We'll see who's right, the doomsayers or the bottomfishers, in time.

Woodshedder said...

Bill, I was thinking as I was reading it that you might like it.

What troubles me about it is that this guy, among other things, manages a Fund of Funds. I'm sure that the funds in his funds are holding GS, LEH, Merril, BSC, etc., and probably were holding CFC, AHM, and others. So his statement about avoiding excessive risks bothers me, unless he has liquidated funds holding financials.

I'm not seeing doomsday. I just think things continue to go lower until the financials and bankers come clean.

Brent said...

"I look at this senseless, indiscriminate selling as a smallish problem relative to the great big, generally stable, credit market."

Bill, if you think the above statement makes sense to you, jog on. I can assure you that the "big, generally stable, credit market" is not even close to be stable.. Watch the Fed go to work.

Brent said...