CDS Market
Stocks fell as the pundits thought the financial sector performance looks rather bleak. When the market sees a glimpse of the truth, it reacts correctly. Bonds fell in interest rates. Oil and gasoline rose a little, gold fell, and the dollar gains a little ground.
In the news today…..
AIG, the world’s largest insurance company announced its 2nd Quarter loss of $5.56B (now we’re talking about a lot of money there. Why was it only $5.56B?? You see they had to write off $25B in Credit Default Swaps (CDS) plus $15B in other losing investments. That adds up to $40B. A CDS is an insurance policy that pays when the writer of a bond defaults in paying. AIG wrote those CDS’s on mortgage securities, so they are caught up in the melee of the meltdown. And as housing values continues to fall, they (and a lot of their friends) will have to continue writing down their portfolio value. Conclusion – AIG is struggling. When the biggest insurer sneezes, the rest of the industry must have a cold. It might be time to question the stability of your insurers. I wonder if any of them will fail. It could happen, but I don’t think so.
I’ve raised the spectre of a problem with the CDS market in the past, and Warren Buffett said the CDS market will survive okay in the US. I certainly wouldn’t bet against Warren, so let’s just keep our fingers crossed that this Trillion Dollar market doesn’t catch a cold.
The statistics on the mortgage market shows that mortgages written in 2007 are far likelier to default than mortgages written in 2006. What can we conclude from this??? Well, first of all, it is logical, as people buying a house in 2007 would have paid a higher price than if they had bought it in 2006, so the house price meltdown has caught them more than the 2006 purchasers. Basic conclusion – watch out – there is still no bottom in sight for the housing market. Remember, I’m saying the bottom will not be reached any sooner than 2010 – and prices will continue falling this year and all of 2009.
Jobless claims came in at 455,000 last week – the highest number in the last 6 years. This is a fairly good indicator that the economy is getting worse, not better.
Here are today’s numbers:
Dow Jones 30 Industrial – 11,431 (down 225 points)
10 Year Treasury Bond – 3.94% (down $0.11)
Euro – $1.5323
Gold – $878 (down $5)
Oil – $120.22 (up $1.44)
Gasoline – $3.00 (up $0.05)