Notes on the Lehman Brothers Fallout

Excerpt from The Economist:

Even if markets can be stabilized this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come.

Indeed, most analysts think that the deleveraging still has far to go. Some question how much has taken place. Bianco Research notes that while the credit positions of the 20 largest banks have fallen by $300 billion, to $1.3 trillion, since the Fed started its special lending facilities, the same amount has been financed by the Fed itself through these windows. In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. As spectacular as this weekend was, more drama is on the way.

Full Article: http://www.economist.com/finance/displayStory.cfm?story_id=12231236&source=features_box1

Analysis:

• WaMu and AIG might be next to file for bankruptcy
  
• Look for the U.S. Federal reserve to lower interest rates
• Monitor for weakness in the US dollar rally: a weaker US dollar is bullish for commodities and most especially, gold.

Note that the VIX (Volatility Index) closed at 31.7. This indicates the market is reaching a capitulation phase.

Canadian Real Estate Not Immune to U.S. Housing Weakness

According to CREA:

• Sales of previously owned Canadian homes fell 3.4 percent in August from July
  
• Year-over-year, resales were down 19.3 percent
• Average house prices fell 5.1 percent from the year before to C$316,052 ($296,160)
• number of new listings in the country's major markets fell 5.3 percent on a seasonally adjusted basis, to 47,657 units

Price weakness was greatest in Vancouver. In Toronto, prices actually rose very slightly in August.
Full Article.

Analysis:
Home buyers need to continue to monitor the health of the Canadian job market. With the commodities/resources sector now declining very rapidly over the past month, the risks are higher that job losses will increase for Canada. Therefore, the Western part of Canada (Alberta, Calgary, Vancouver) will be hit harder than the other provinces first.

The housing market weakness in the U.S. is due predominantly to tight credit market conditions, and the banking failure fallout of FRE, FMN, LEH, and soon AIG and WaMu.