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Petty Morning Quarterback: Bank of America, Home Depot, the Caged and Cornered FOMC


The FOMC continues to reach into its bag of tricks in an effort to reenergize risk-taking behavior.

It's all right if you love me
It's all right if you don't
I'm not afraid of you runnin' away
Honey, I get the feelin' you won't
(Tom Petty)

Good morning and welcome back to the flickering pack. Following a weekend that witnessed Tom Petty sing sweet beats in the summer heat, we power up our weekly pup to bring August in for a soft landing. Tired traders circled this stretch long ago for sans screens fam time and the thin ranks won't help the choppy pops and gulpy drops.

I scribed a vibe late Friday that summed up the state of affairs and my current mindset. There is a bear case, in the form of the 800-lb gorilla that is the credit crunch, and there is a bull case, as herd from the large and lurking global central bank elephants in the room. Both are fierce, both are moody and both warrant respect as we edge into football season.

We'll chew through the trading dew real-time on The Buzz, as we do each day, so I wanted use this morning's column to touch on a few topics. I do so with our collective time constraints in mind and with the understanding that the Minyanville mission is to provoke (rather than shape) thought.

More on the Bank America/Countrywide alliance.

First things first, I encourage all Minyans to read Gretchen Morgenson's New York Times article on Countrywide lending practices. While we were "all over" this deal," wondering aloud why the terms were so "egregious" when the deal was announced - and watched as the stock slid steadily lower without much media fare - the above article is a well-chronicled account of some pretty disturbing events.

I must also offer thy faithful a humble mea culpa. While I lauded CFC CEO Angelo Mozilo last week for being "forthright" in his public disclosure of "how bad it was" months ago, my praise was misplaced in the context of time. He's was selling stock-along with a slew over overly risky mortgages-for a long time before he shifted his public persona. My bad on that, Minyans, and I'm man enough to admit that I erred.

Finally, talking over weekend with some colleagues, I spoke of how Bank of America has become a pseudo consumer proxy. Between their massive digestion of MBNA and this latest slab of Countrywide, their exposure to the little guy (both real estate and credit cards) is substantial.

Particularly if the credit card crunch becomes tomorrow's headline today.

Home Depot Tries to Fix Itself

The private equity firms that agreed to buy Home Depot's supply unit a few months ago (remember when bankers had pep in their step?) slashed the price of the deal to $8.5 billion, an 18% reduction to what had been agreed to earlier, after the banks financing the deal balked on the terms.

The stock is trading higher in early Monday trade (chatter was that the deal would fall apart entirely) and it remains on our radar as a sentiment proxy. Remember, the re-emergence of deals getting done would be a boon to the collective sentiment on the Sreet.

The Caged and Cornered Animal!

The FOMC continues to reach into its bag of tricks in an effort to reenergize risk-taking behavior. They understand that in a finance-based, derivative-laden global economy, the consumer needs to consume and borrowers need to borrow in order to keep the wheels of capitalism greased.

To do this, they dug deep and called favors-Mr. Practical touched on this dynamic on numerous occasions (here, here, here and here)-and changed the rules of engagement on the fly.

Discount Window? No problem, we'll lower the rate and call the biggest banks in the world to make sure they show support in the form of $500 droplets.

Collateral? Hey, we've got it covered cookie, just give us riskier assets in lieu of pristine treasuries.

Fed Funds Rate? "Fire in the hole" and they're not afraid to use it if asset class prices don't act the way we want.

And Finally…

Free Markets?
Nosiree, Bob. As Mr. Practical so aptly wrote last week on the Buzz, "This is what I call the socialization of markets (some call it nationalization) with the Fed making decisions on credit, taking those decisions away from investors that have made their own decision. This is what some of us call 'moral hazard'."

True dat and fair nuff although, in and of itself, this isn't a reason to short stocks. In fact, it might be a reason that we don't, at least until The Credit Card is rejected by investors.

Random Thoughts…

  • I continue to believe that we'll see more of the "transfer of wealth" dynamic as and petrol-nations scoop up (dollar-denominated) stateside assets in the form of equities, companies and real estate.

  • Speaking of which, the Shanghai Composite finished at its fourth straight record close, up 9.7% in the past five trading sessions; up nearly 91% year-to-date and a rather stunning 214.7% gain from a year ago.

  • Put your money where your mouth is? Sure! CEO's and other insiders at financial firms, such as Wachovia and American Express, bought more shares in their respective companies in August than during any other month since 1995.

  • While it's a slow week, we still need to watch our trading radar, particularly with FOMC minutes set to tick tomorrow afternoon.

  • Good luck Minyans---let's hit it hard and jingle into Labor Day!


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