Tuesday, August 28, 2007

S&P Down 34; Dow Down 280; Wilshire Down 343

Another 2% day for the markets - down 2%, that is and across the board.

I wasn't paying attention yesterday, but an options pro on the street warned me this morning of what he called a "dispraportionate" rise in the VIX and VIXN yesterday relative to declines on Monday. Yes, fear remains as folks wrap up their summer holidays.

If you thought a "conduit" was a pipe that wires are run through, YOU ARE INDEED CORRECT, SIR (in my best Ed McMahon voice addressing Johnny Carson). However, in the financial markets "conduits" are typically bank-owned credit investment vehicles, or funds, which hold asset-backed securities that are bundled into packages and backed by short-term debt from the commercial paper (CP) market. With yields up in the CP market and people viewing conduits as used TP there's been paralysis in this vital part of the credit market, which begets paralysis elsewhere.

The problems in the CP world clearly demonstrate that the discount rate cut is a non starter.

Today we found out that State Street (STT) reportedly has a $20 bln exposure to conduits. It begs the question that if a seemingly venerable citizen of the financial world has this kind of exposure, who else is up to their eyeballs? This is sort of like Senator Craig of Idaho. Nice suit and tie, American flag on the lapel, but then it's revealed that he was busted for a "brokeback" bathroom stunt.

Housing numbers look weak... no surprise: Drop In Home Prices Shows Signs of Worsening. In that piece that I did for CNBC.com, I had the chance to chat with Gary Shilling, I think one of the most keyed in people to understanding what's going on, The outlook for the housing industry looks dreadful. Anyone looking for opportunities to buy by the end of this year, or even early next year will be early, way early.

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