Posted on 01/22/2008 4:18:54 PM PST by TigerLikesRooster
Ping!
I may be wrong but I thought I could detect the Plunge Protection Team at work on the markets today.
I do not really see how cutting rates will help bond insurers.
In any case, if one insurer loses its AAA rating, municipalities can just use another one, such as Warren Buffet’s startup.
Those that lose their AAA ratings may still be able to pay claims, but can’t write new business. If a bond issuer failed, they would only be liable for the interest until the maturity date of the bond.
It will NOT help.
Thanks for the ping.
“Ambac crisis” seems to be the party line today, there was a clown on CNBC even before the market opened, earnestly peddling that theory.
I wrote earlier that that’s BS — they didn’t know it was a crisis until the very day that Fitch downgraded them from the completely imaginary “AAA” rating?
PPT was definitely on the job today. Every time stuff needed a little boost to get through a trendline or a magic number (e.g. DJII 12000), a big volume and price spike appeared out of nowhere.
Until somebody leaked Apple’s earnings report just before the closing bell, that is! That’s the only thing that can explain that 100+ point DJII drop in like 15 minutes that close to the close. Apple is now down 25 points in after-hours trading and Nasdaq-100 futures are down 2+%.
So tomorrow could start out on a sour note again.
That's my take. It was a problem but not a huge problem.
The reason the Fed cut rates is the world markets voted on W's stimulus plan and said it stunk.
Bond insurance, which some may have never heard of before, sounds like something that would trigger the Fed to change the rate.
About a month. Then, some other game will be played to stretch this out as long as possible. Not only are these bond insurers not AAA - they are bankrupt.
There was a good WSJ on this last week.
If I recall, the bond insurance market is not very regulated at all, and was likened to a bunch of people making side bets on fights.
The current worry is that some of the folks writing policies on bonds issued by the companies don’t have the assets to cover the bets. If a large number of companies go under, the value of the assets used to underwrite the bond insurance goes down as well, calling into question whether they can pay.
On top of that, as companies ratings go down, the policies themselves go up in value, and are TRADED. The tighter a company’s circling the drain, the higher the value of the bond insurance policy on a company. The holder of the bond can sell it to somebody else.
Insider trading? Why not? You can hold a bond, or an option on a bond, and no stock, and profit on either the health or death of a company.
Anyway, its complex, and not a lot is known about it, and there are trillions of dollars involved.
I’m wondering about the relationship between the instability with bond insurers and the bond market in general. Bond funds, like Vanguard’s VBMXF (an intermediate term bond fund) have risen noticeably in the past month. It’s made up of about 10% government bonds and the rest are “high quality” commercial bonds. I’m wondering why this fund hasn’t dropped in value. Any thoughts?
Perhaps it’s due to money pulled out of the stock market going into safer investments......
I would guess that the corporate bonds are bonds issued directly by the various companies in a bond issue, e.g. a Ford Motor Company 30-year bond of let’s say 4%.
The stuff that is killing Ambac et al are “derivative” bonds, a/k/a CDO’s or CMO’s: a big bunch of dodgy mortgages that magically become AAA-rated when you have a hundred of them averaged out.
Conventional bonds like what your fund is talking about are going up in price as interest rates go down. I do not offer an opinion as to whether this will continue!
this was sarcasm by the way
“I may be wrong but I thought I could detect the Plunge Protection Team at work on the markets today.”
Yeah, a panic open despite the cut announcement pre-open. Great playing of market psychology.
I don’t take myself seriously on short-term overall market direction but I think this is at the very least a short-term market bottom, there was enough panic to possibly make it one. Of course that is just this week....
“this was sarcasm by the way”
Well, it may accurately describe what the visible process of bundling some of the tranches resulted in.
It's like the emperor's new clothes, combined with the knowledge that the emperor will have a fatal heart attack if he finds out he's been naked.
We have to break the news to him NOW...but gently.
Cheers!
When bailing my 401k out of the S&P500 last summer, I looked at the one offering my 401k plan has in the “high grade corporate bond” category. It was 60% invested in “mortgage related securities”. No thanks. My nest egg is safe in what is essentially a cash fund (US Government debt only). But it really scares me that a large percentage of people in this country wouldn’t even know how to find out what a mutual fund actually holds before putting a big chunk of their retirement savings in it. “High Grade Corporate Bond” sounds so conservative and safe, but it’s often a bald-faced lie.
That may be what’s killing Ambac now, but those same piles of pseudo-AAA bonds were formerly the driving force behind Ambac’s high-flying stock price and pseudo-AAA rating. As I said on another thread last week, I’d give more credence to Britney Spears’ opinion on the credit-worthiness of a bond issue, than to one of these scammy ratings from the rating agencies’. Since Britney doesn’t have a clue what a bond is or what creditworthiness is, if you showed her a list of ratings and offered her some drugs for picking one, she’d just take a wild guess and at least have a chance of getting it right. The rating agencies know exactly what they’re doing and give the wrong answers on purpose.
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