Busch: Good Things Come in Threes?

The big news overnight was the floating of a trial balloon by the Japanese government to buy shares in firms as part of a scheme to supply liquidity to the corporate sector.

An official from the Ministry of Economy, Trade, and Industry or METI said that, " We're not specifying any sectors. Our ministry looks at manufacturers and companies in the service sector, but firms that are in the scheme aren't limited to the sectors that our ministry oversees,"he added.

This reminds me of what the authorities in Hong Kong did during the 1997 Asian financial crisis.

The Hong Kong Monetary authority made two very aggressive and unusual moves. One, they created a currency board arrangement to defend the Hong Kong dollar. Two, they intervened simultaneously in the foreign exchange, stock, stock futures, and interbank markets. According to the Dallas Federal Reserve, "In August 1998, at the height of the currency turmoil, it purchased $15 billion worth of local blue-chip stocks." This is why we should keep a close eye on this new Japanese program to see if it can morph from a piecemeal program into something larger.

Next up, yesterday's 6.5% increase in existing home sales for December. This was a shocker as the credit crisis had only begun to stabilize and most expected sales to have declined by 2%. Single-family sales rose 7.0% and condos rose 2.1%. More importantly, the inventory of unsold homes dropped significantly to 9.3 months from 11.2 months in November. The increase in mortgage applications in Q4 should mean that sales should remain buoyant into Q1.

A normalization of inventories would take us down to 5.5-6 mths of supply and we should see foreclosures decline as well.


As I and many others have pointed out, there is a dramatic under building or decrease in supply to the housing market. With housing starts running at 600k per year and family formations running at 1.2 million per year, the demand is going from new homes to existing homes and foreclosures. This is the critical leading indicator for home prices......and for all the owners of the derivatives on these homes commonly known as mortgages. My guess is that should this trend of sales persist, we should see home prices bottom in Q2. This is extremely good news for the financial industry and their struggle with toxic assets.

(Yes, S&P CS home price index dropped 18.18% for November, but this was the absolute worst point in the credit crisis. Prices should continue to drop but at lower marginal rates as inventories decline.)

Speaking of clearing, the US commercial paper market has rebounded from the crushing lows experienced during the fall when the amount outstanding dropped about 18%. This was mainly due to the Lehman bankruptcy and the breaking of the buck by the Primary Reserve fund. The CP market has since rebounded to $1.688 trillion from the Federal Reserves CP program that was started at the end of October. This 90 day backstop vehicle has been buying debt from companies and now owns around 20% of the market.

Now, the real test looms. According to Bloomberg, $245 billion of the 90 day CP that was sold to Federal Reserve starting in October will mature this week and next. As much as 20-30% of this debt may now be bought by investors instead of the government. This would indicate that the credit markets are beginning to heal and function normally. Clearly, the 900 lb gorillas in this action will be the money market funds and their willingness to increase risk by taking down commercial paper instead of US Treasury securities.

The implication would be for a return to risk of buying equities, selling US dollars, and selling US Treasuries.

Whether its Japan considering buying shares or indications of a healing US housing market or the "Roll-Over" of commercial paper, these are all pointing in the right direction.



Andrew Busch

Andrew B. Busch here