Mortgage Migraine

A re-test of recent lows remains in progress for the U.S. stock market, and for the moment bears seem to be gaining control. The financial sector is still the main culprit. Citigroup, for instance, is revisiting share prices last seen almost ten years ago. Thornburg Mortgage (TMA) plunged -48%, yes, -48% today, after news emerged that it had failed to meet a $28 million margin call and is now in default on a variety of agreements. Bankruptcy seems inevitable for TMA, and it is worth noting that the company is not a “subprime” lender. Its customers were thought to be well-heeled and creditworthy. Apparently, this was not exactly true, and now people are wondering what other theoretically “safe” institutions might be in danger.

Crude oil moved north of $105 today as the U.S. dollar set yet another record low against the euro. Gold and silver backed off a bit but remain very strong. We would like to think that recent action in commodities is a final blow-off that will turn out to be the top. The problem is that such blow-outs tend to go much higher, and last much longer, than anyone thinks is possible. As long as the dollar keeps falling, natural resources will likely stay elevated. Given that the Fed shows every sign of driving rates to 2% or lower in the next few months, both gold and oil could move considerably higher. Our portfolios are positioned for this scenario and we have no further changes today.