"Maybe you don't like your job, maybe you didn't get enough sleep, well nobody likes their job, and nobody got enough sleep... Maybe you just had the worst day of your life, but you know, there's no escape, there's no excuse, so just suck up and be nice. "
Ani Difranco

For everyone who has been struggling to understand why the market (especially homebuilders and financials) rallied lately below is my skeptical capitalist opinion for what its worth... Remember, it's not wise to fight the Fed, regardless of what your opinion of the job Ben and Co could be doing- for example I think that they are behaving irresponsibly, but that doesn't mean I should be holding all cash!

Four main observations:

1. AAA ABX Indices which track the value of residential securities have recovered to the levels not seen since January, which is in itself an astounding fact... I am a little surprised about the scale of this recovery and think that a lot of it could be explained by the short covering rally and the improved liquidity driven by Fed's acceptance of some of the highly rated securities as collateral. Let's leave the discussion of whether the fact that only AAA and AA rated staff recovered, and that the securities rated below A have not really budged much, for a different discussion. But too me there are many signs out there that make it pretty clear that this rude Fed intervention (read inflation) is THE driver of this artificial market recovery and thus we are destined to pay for it in the future...

source: markit.com

2. I am also tracking various housing related web sites and data with an intent of trying to predict how far are we from the bottom in nominal prices... From what I am seeing so far- price declines have accelerated, but at a certain level- which seems to be related to the roughly the nominal prices at the actual level of sales in the second half of 2004 - buyers are willing to step in. I don't want to overload you with all the data and facts that support my conclusion but that's what I am seeing and hearing so far. Thus, I personally, expect prices to stabilize at level of around early 2004 (which is only 5-10% below most asking prices today) and stay flat for a while

source: Zillow- one of representative homes I tracked for 2 years...

3. Spreads on the commercial securities have also tightened dramatically (good for prices). Improvements again are concentrated in the higher rated tranches and point to substantial smaller risk of further write downs... What's more, there could be even some gains that banks will be able to recognize in the next few quarters if gains continue. Again, I think these gains might be temporary but would explain why banks are bouncing back...

source: Markit

4. Here is another opinion- commodities have topped out for the foreseeable future. I personally sold out even from my O&G servicing plays on Monday and now think that the correction is going to be extremely painful with many retail investors being too late to the game as usual- lot's of pain is yet to come on that front- including the super "hot" fertilizer stocks like MOS and POT

source: bloomberg

All-in-all, if I had to summarize the current situation- I would call it a "Fed" induced "artificial" rally with painful paybacks coming later this year. For now, buy tech, healthcare, industrials and sit and enjoy this temporary "green" color on your monitors :)

P.S. But if you are a retiree on fixed income or someone who has a lot of money in money market funds- you have a right to be really pissed off at the job the Fed is doing as your money is simply being INFLATED AWAY

Stay safe and cheers, Vad
Skepticalcapitalist@gmail.com