Chris Lau - Seeking Alpha

Monday, August 18, 2008

The Simple Problem of Spiraling Tight Credit Conditions

The tight credit condition in the U.S. is akin to a consumer with a decent credit report asking for a loan. The consumer is more than likely to pay off his loan, but some unknown credit market equation, banks won't lend to him (I'll use him for simplicity) because they are afraid he and all others will default on their loan.

Herein lies the simple problem: The U.S. Federal Reserve lowered rates so low to improve liquidity and to loosen credits, but it is not reaching the consumer. The bank had to go as far as to stand behind the loads provided by Fannie Mae and Freddie Mac. Today, the market woke up to the realization that if the government steps in to take over these companies, shareholders would end up with nothing.

At least we now know where who will be holding the bag for some of those losses.

Technical charts are useless at this point for both companies when a company's future is in doubt. Will these two headliner stocks have to get bailed out, leaving shareholders with nothing? As usual, do your homework in September. Keep an eye on foreclosure rates, monthly resale prices, and new construction. My guess is that these numbers will be worse in August than it was for July. The downward spiral will simply lead to continued credit tightness in the U.S.

I lied. The one useful indicator in the chart below is that the stock closed below previous lows, a very bearish signal.

The same holds true for Fannie Mae.

The ongoing weakness in the U.S. is worrisome to me. It will invariable impact all other global economies (Globalization: if one major player falls, everyone else will fall with it, eventually). This will eventually hit Canada more significantly. A close review of monthly export figures will need to be made.
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