This is a great interview with Finance Analyst "Babe" Meredith Whitney of Oppenheimer. She is hot and also smart although she is not a good stock picker. What she does have a pulse on are the banks and brokerage firms in writedown mode right now. She has great insight into the fundamental flaws many of these companies are going to struggle with for the next few years.
* One of the main points Meredith brings up in the interview is how all of the firms with exposure to the CDO SLIME which includes Phoney Mae and Fraudy Mac (Fanny Mae and Freddy Mac) are UNDERESTIMATING Peak to Trough Declines in the housing industry. * Case Shiller is estimating a 33% Peak to trough decline before the housing market bottoms and all the financial institutions including Phoney and Fraudy are estimating much LESS severe declines. Hmmmmm...who do you think is right? * During 2005-07 $2.5 trillion in mortgages were securitized. Since 2000 85% of liquidity came from securitizaton market. Fannie and Freddie can not replace that volume. * The result is Fewer owners and fewer homebuyers = Homeprices will continue to decline.
Wall Street is buzzing right now regarding the recent CDO "Fire Sale" by Merrill Lynch. The word is they got approximately 22 cents on the dollar for this toxic debt BUT they get it off their books.
Here is the info on the CDO sale: On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.
The trillion dollar question is will more Wall St. firms that are bleeding from this 'radioactive" debt follow suit? The next question is if they do are there going to be enough buyers or will desperation cause future CDO sales to go for less than what Merrill received?
I think the latter will be the case and Wall St. will have to give this debt away and wheel and deal in order to do it. These Wall St. firms are NOT in their normal power position and to put in bluntly Carma is a bitch. All these guys which include Merrill, UBS, BofA, Wachovia, Citigroup, etc are a bunch of "Playas" with attitudes. In other words if you have ever tried to do a deal with them they are usually the ones who are skinning the guy up on the other side of the deal and spitting them out. They normally played ball in this manner because they could and they had lots of power and cash.
Now after they bet "The House" (NO PUN INTENDED) or a large percentage of their business on the mortgage/housing markets they are getting blasted financially. They deserve it because they should understand risk management with regards to real estate and securities. In all reality they do not. How do I know? I worked for one of them as stock broker. I have seen how crappy many of their analysts are and how the firms operate. They operate under the premise of pure HYPOCRICY.
The fact is that the market is currently oversold and they all are going to get a little bounce here in the short term on their stock prices. Then when reality sets in again their stocks will get blasted again because we are only maybe halfway thru this credit debacle.
Happy Trading!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Real estate always goes up was the mantra we all heard for so long. Well that theory or false advertising has now been put to rest. This is why risk management is critical in your real estate investment decisions. Timing is everything and much more important than location, location, location.
Home Prices in 20 Major Cities: You're OK If... by Dr. Bill Conerly
The average experience in the 20 largest metropolitan areas is that July 2004 marks the dividing line between profit and loss.
If you bought a home in the following metropolitan areas, do you have a profit or a loss?
Phoenix: If you bought before January 2005 then you probably have a profit.
Los Angeles: If you bought before April 2004 then you probably have a profit.
San Diego: If you bought before September 2003 then you probably have a profit.
San Francisco: If you bought before March 2004 then you probably have a profit.
Denver: If you bought before May 2004 then you probably have a profit.
Washington D.C.: If you bought before September 2004 then you probably have a profit.
Miami: If you bought before September 2004 then you probably have a profit.
Tampa: If you bought before January 2005 then you probably have a profit.
Atlanta: If you bought before February 2005 then you probably have a profit.
Chicago: If you bought before January 2005 then you probably have a profit.
Boston: If you bought before February 2004 then you probably have a profit.
Detroit: If you bought before January 1999 then you probably have a profit.
Minneapolis: If you bought before April 2003 then you probably have a profit.
Charlotte: If you bought before April 2007 then you probably have a profit.
Las Vegas: If you bought before March 2004 then you probably have a profit.
New York: If you bought before March 2005 then you probably have a profit.
Cleveland: If you bought before May 2002 then you probably have a profit.
Portland: If you bought before May 2006 then you probably have a profit.
Dallas: If you bought before March 2006 then you probably have a profit.
Seattle: If you bought before June 2006 then you probably have a profit.
The average buyer who purchased a house after the months noted above has a loss.
These conclusions are based on inspection of the S&P/Case Shiller Home Price Indices released on July 29, 2008, reflecting data through May. These conclusions reflect the average home, and there's substantial variation around the mean.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Since this is probably the last free quarterly Charleston Market Report I have been thinking hard about what to write about. I think the Fannie Mae and Freddie Mac issue is one of the most important issues with regards to real estate and the economy that we will see in a long time. I feel a better name for these two fat, bloated, irresponsible and stupid red headed step children that were created by the US Government should be Phony Mae and Fraudy Mac. No I can not take credit for these nicknames.
I ask all of you reading this commentary why the United States government rewards fraud and predatory lending in the form of bailouts when there are no profits and rather huge losses among these financial companies. Where was the outrage when these companies were banking significant profits since 2000? When the oil companies demonstrate significant profits our government wants to tax their gains and investigate. Can you say HYPOCRICY! Government needs to let the capital markets remain free and quit manipulating them!
Here is a snapshot of these two rug rats.
Phony Mae
Fraudy Mac
So I dedicate the following tune to you Fraudy Mae, Phony Mac and all of your enablers in Washington DC from this song that came out back in 1969. How convenient I play this video at the moment our fearless leaders in DC are passing the Housing Bailout Bill. Man, this band was psychic!
You must play while your read the article!
“Take a load off Fannie, take a load for free: Take a load off Fannie, and, and, and you can put the load right on me.”
That is exactly what the Demopublicans and Republicrats are doing right now. They take the load ie.bailout (it sounds like loan NOT load in the song) and put it right on you and me. How convenient. God bless America! The only reason the Housing Bailout Bill of 2008 gets passed is because of Fraudy Mae and Phony Mac. President Bush had to pull his veto threat on the bill because Congress attached the Phony and Fraudy Bailout to the Housing Bill. Bush and everyone else knows if these two go down it is depression and economic Armageddon.
Here is the truthful headline you will not see in the mainstream media:
Bush Caves: Will Sign Housing Bill That Won't Save Housing Market
Jonathan Kennedy | Jul 23, 08 8:53 AM Bush has dropped his threat to veto the $25 billion housing deal that is about to sail through Congress. The bill is probably just a drop in the bucket, but it's designed to ease the pressure on consumers and bolster struggling GSEs Fannie Mae (FNM) and Freddie Mac (FRE).
Key Features: * permits the government to buy shares in the two firms, * overhauls regulatory oversight, * allows the government to insure up to $300 billion in refinanced mortgages, * and extends existing credit lines.
The White House has threatened to veto the bill as a result of a $4 billion program to allow local governments to buy foreclosed properties, but Bush has now dropped his opposition (probably because he doesn't want the White House stormed by an angry mob). Source:www.clusterstock.com
Below are the highlights of Housing Bailout Bill written by Professor William Wheaton, Department of Economics, MIT. I want to give you a smart economist's view (I imagine he is smart if he teaches at MIT) since I am not an economist.The bill, passed on 7/24/08 by both houses of Congress, contains a number of provisions designed to help prevent housing foreclosures, encourage housing sales and, in general, stimulate the housing market. In most respects, its specific measures actually offer remarkably small incentives, with complicated features that most homeowners or potential homeowners will likely chose to forego. On the other hand, its bailout and preservation of Fannie and Freddie are likely to be of historic importance. Let's examine each feature in detail.
1.Loan restructuring. In this feature, homeowners whose mortgage payments have risen above 31% of their income can go to their lender and renegotiate their loan, lowering its magnitude to a reasonable range, given their current house value and income. In exchange for lower payments, however, the owner gives up at least 50% of the future appreciation in the house (at such time as it is sold). Given that the market is continuing to decline and that housing markets always mean-revert, the upside potential for a lender on this swap is actually quite attractive. Accountants will surely argue over how lenders can book the expected future appreciation, but at some point it will handsomely reward the lender for the current loan write-down.
My own view is that only owners who are deep underwater and who want desperately to stay in their current house will avail themselves of this swap feature. Notice also that it does not help owners with negative equity that are still able to afford their payments.
2. First-time buyer tax credit. On the surface, the ability to take a tax credit of up to $7500 for buying a home seems to be just the shot in the arm that sagging sales need. That's true until you read the fine print and note that the $7500 has to be repaid in 15 annual installments. In effect it's a no-interest loan for 15 years. When looked at this way, the feature saves the buyer at most just a few hundred dollars a year—the annual value of the forgone interest. This seems like a very small amount to influence the decision of anxious new buyers waiting on the market's sideline.
3. Expanded standard deduction for home owning. This is an interesting provision and actually might help stimulate home buying—but only for those owners who generally have very low income, little or no debt and few other deductions. The vast majority of owners opt to itemize and for them this provision has no impact.
4. Reduced fees for Reverse Mortgages. This interesting feature could have the undesirable side effect of actually reducing the availability or supply of reverse mortgages. Alternatively, it will just lead to increases in the implicit interest rate built into these loan-annuities. In any case, I do not see the reverse mortgage market as providing any immediate solution to the current housing market crisis. In the longer term, removing any obstacles in the reverse mortgage market might well help retiring Americans live off their housing equity—at least what is left of it.
5. Expanding Fannie and Freddie Loan limits. This again seems like a good provision of the legislation. (I disagree) It allows a larger number of loans to meet the definition of "conforming" and to access the assumed lower interest rates of such loan pools. Unfortunately it neglects how financial markets are likely to respond. Larger loans that are securitized into the conforming loan pool may well dilute the credit quality of the entire pool—if in fact they are more risky. Smart investors will easily be able to obtain data on (for example) average loan size and simply not pay as much for conforming pools with higher average loan size. Hence it might lower (a bit) rates for larger loans, but raise (a bit) rates for smaller loans.
6. Fannie and Freddie Rescue. This one feature is hugely important—at least at this time in the housing market. Let me say that there is some uncertainty in academic research over how much the expansion of GSE-backed securitization has actually lowered mortgage interest rates in the last three decades. There seems to be little doubt however that it has expanded the flow of credit to more households, and eased underwriting. In the long run, if Fannie and Freddie were to fade away it is likely that private markets would at least partially take their place, with the financial system perhaps reverting a bit to the structure it had prior to 1980. In the short run, however, a default by Freddie and Fannie would throw mortgage markets into temporary turmoil. This in turn could drive the already stressed housing market into a state of depression. (I agree 100%)
What the current housing market needs is more sales, more transactions and a return of liquidity with normal moving/mobility. This, coupled with continued low new construction, will reduce the inventory of unsold units and allow prices to stabilize and then recover. The mortgage market turmoil that would result from a Fannie and Freddie default would make mortgages more difficult to obtain, reduce sales further, expand the unsold inventory and drive prices ever more downward. (I agree. Prices must come down in most areas to affordable ranges before sales will return to normal. Appreciation over the past 5+ years was based on artificial demand created by the lending industry's creative financing. Now home prices are reverting back to the mean.) In times of financial crisis, governments around the world time and time again have used their central banks to provide liquidity and to help stabilize asset prices. I regard the F&F bailout as an extension of this policy. After housing market stability is achieved, we can all re-examine the question of whether and how the GSE might be better restructured. This is the one essential feature in a bill filled with many superfluous provisions. (The trillion dollar question is what is the solution? Only the shadow banking system knows! Reality is that there are no easy solutions to this mess.)
Mother of All Bailout Message
The trillion dollar bailout question is how did these bloated, crisis ridden, scandalous and inefficient pair of quasi government/public companies, that are so important to the global and domestic economy, produce such ridiculous losses and get bailed out?
Here are a couple of facts to chew on: * Phony Mae and Fraudy Mac have spent $200 million on lobbying and campaign contributions. * They have access to powerful lobbyists in Washington DC. * Fannie Mae acquired twice as many homes through foreclosure in the first quarter as it sold, regulatory filings show. * Unsold properties may weigh on the company's stock, which lost almost half its value since June 5, said Moshe Orenbuch, managing director of equity research at Credit Suisse Group AG in New York. * Late payments on the company's home loans, a harbinger of foreclosures, almost doubled in the past year. * Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own. Source:bloomberg.com
All I know is that there is no way that Phony and Fraudy get so large and mismanaged without the government’s help. The reality is that their combined liabilities are approximately $5 trillion, which is more than half the U.S. National Debt of $9 trillion. Can you say Holy Shizzle! I would imagine almost everyone in DC has had their hand in this cookie jar for years. Promote the growth of the housing industry via the mantra “Every American deserves a home” and earn some serious grease in the form of political contributions. That is how DC works. If I were lying than why in “The Big Guy in the Sky’s Name” would Congress propose FHA, Phony and Fraudy take on more risk during the worst housing recession since the Great Depression by proposing to do such things as increasing loan limits to $625,000? They want to do this in the segment of the housing industry which is the most overpriced with the most risk and most downside potential and then put their deflationary portfolios on the Fed’s balance sheet? It is sheer madness! The Fed should only accept safe assets not deflationary ones.
There is a reason the Federal Reserve and Treasury Dept. are now backing our dollars with junk paper from Phony and Fraudy. The reason that this dysfunctional fraternity of politicians and Wall Street financiers are pushing the bailout is that countries such as Japan, China and Russia hold a large portion of the Phony and Fraudy toxic debt. China clearly got bamboozled by the Wall Street shucksters and holds more Fraudy and Phony toxic debt than anyone in the world according to the NY Times Chart below. What is ironic is that China is supposedly a communist country and currently is acting more democratic than the United States which is supposed to be democratic and is acting more communist or socialist.
What do you think happens if we piss these three countries off along with some others and let Phony and Fraudy fail? I bet they would start selling Treasuries like it is going out of style because they would lose faith in the US AAA credit rating and be a little upset about their investment in Phony and Fraudy. This scenario would cause bond prices to collapse which would mean interest rates would skyrocket. The housing and banking industry needs this to play out like they need more writedowns and inventory right now. Paulson, The Treasury Secretary looks scared to death right now and he should be. It's economic warfare going on right now and we are losing the battle.
So there you go. Phony Mae and Fraudy Mac have huge implications on the future direction of home prices and the economy regardless of what our fearless try to do. So much damage is already done. Since they were not proactive enough to fix it earlier they are all now boxed in without a reasonalble solution accept put the government in more debt and delay Judgement Day by borrowing time and of course more money. The result is that this is not a great banking environment when you have loans on your books that are highly leveraged assets which are losing value all over this country. When you add in the fact that the average American is tapped out and in debt, rates are going up, credit is less available and more expensive due to higher risk and home prices are still overpriced in many markets then we have some serious issues to deal with in Bailout Nation. How could I forget that the next president, Obama or McCain, are very weak on the economy. Just great huh?
One issue of concern is the national real inventory numbers that we actually know about. There are 18.6 million vacant homes in the U.S.--a staggeringly large number. Here is the Census report: CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP * There were an estimated 129.4 million housing units in the United States in the first quarter 2008. Approximately 110.8 million housing units were occupied: 75.1 million by owners and 35.7 million by renters. * Of the 2.1 million increase in total housing units, 1.1 million were occupied and 1.0 million were vacant units. Of the 1.0 million additional vacant units from last year, only 20.5 percent were for rent or for sale. * The number of total vacant housing units, 18.6 million, was higher than the estimated number in first quarter 2007. Of these vacant housing units, 13.9 million were for year-round use and 4.7 million were for seasonal use. Approximately 4.1 million of the year-round vacant units were for rent, 2.3 million were for sale only, and the remaining 7.5 million units were vacant for a variety of other reasons. *There are a number of interesting facts presented here. Only 4.7 million of the vacant dwellings were "seasonal," i.e. second-homes/cabins; 14 million homes are available right now for occupancy. * A million new units sit empty, and only 20% are for sale. We can presume the builders/developers/lenders are hanging on to the other 800,000 empty new homes, hoping and praying that some miraculous turn-around in the housing market will enable them to sell a million vacant homes in the near future. * Even as the "downturn" worsens, over a million new dwellings will be constructed and added to the inventory this year. So let's just round up and say there are (or soon will be) 20 million vacant residences in the U.S. With an average household size of about 2.5 people, we have room for 50 million more citizens without building a single additional home. If we subtract the 5 million vacation homes, that leaves 15 million vacant dwellings Source:oftowinds.com
The unfortunate consequence of the "Lending Bubble" is it creates tremendous opportunity in the REO, short sales and the foreclosure market at the expense of financially troubled homeowners. Some of the top real estate agents, with regards to volume, in Charleston are selling some sort of distressed property right now. The Charleston foreclosure market is growing and let's all hope it does not become as large as certain parts of California and Florida. I do not feel it will but I am worried about how much bigger it grows because there is a "shadow inventory" in Charleston that does not show up in the MLS stats. It takes a great deal of research to dig up the homes/condos not listed, under construction and are proposed construction. It is a very scary number in certain areas depending on the segment of the market you are dealing with. I am very concerned about the $500,000+ market because of the inventory and high jumbo loan rates. I am just not sure how many buyers can truly afford these homes by using normal fixed mortgage products in an inflationary and stricter lending environment. Time will tell.
There are very good deals out there if you look. I would highly recommend that if you come across a good deal in this market that you are certain is priced correctly to pull the trigger. I say this because I feel we are exiting what has been a 20 year cycle of low interest rates and we all know the impact interest rates have on the price and financing of homes. I plan on addressing and monitoring this in future issues.
I will conclude with a special index put together by Mike Morgan who works in Hurricane Housing Central in the sunny state of Florida.
(F x 4)/ H + I(3) = Not a Happy Ending There are four "Fs" including fraud, fantasy, fiction and foreclosure. The first three are the foundation for the fourth "F." Enough said. We take this and divide by H + I, which represents Hype and Incompetence. Okay, so you don’t need a discussion about the four "F’s" or the Hype. But let me share a bit about just how severe the "I" factor is of total, absolute, and beyond any belief . . . Incompetence
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
The numbers just came out today and they are brutal for the housing industry. Here are the highlights:
* For the second straight month, all 20 MSAs posted annual declines, nine of which are posting record lows and 10 are in double digit declines. * Both the 10 city and 20 city composite are reporting low annual declines. * 10 City Composite posted a new low of -16.9%. (OUCH!) * 20 City Composite recorded a record low of -15.8% (OUCH AGAIN!) * The areas that used to have the biggest gains now have the biggest declines. * The worst performers in May are Miami and Las Vegas. * Charlotte and Dallas show the smallest declines. (I wonder how the layoffs by Wachovia will effect the Charlotte market in the coming months. Certainly it will not help in a positive manner.)
So if you have been a bottom caller you stand corrected in a major way! Let nature take its course as home prices are reverting to the mean after years of artificial appreciation due to the "Lending Bubble."
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Statement before the US House of Representatives on HR 3221 July 24, 2008
Madam Speaker,
For several years, followers of the Austrian school of economics have warned that unless Congress moved to end the implicit government guarantee of Fannie Mae and Freddie Mac, and took other steps to disengage the US Government from the housing market, America would face a crisis in housing. This crisis would force Congress to choose between authorizing a taxpayer bailout of Fannie and Freddie, and other measures increasing government’s involvement in housing, or restoring a free-market in housing by ending government support for Fannie and Freddie and repealing all laws that interfere in housing. The bursting of the housing bubble, and the recent near-collapse in investor support for Fannie and Freddie has proven my fellow Austrians correct. Unfortunately, but not surprisingly, instead of ending the prior interventions in the housing market that are responsible for the current crisis, Congress is increasing the level of government intervention in the housing market. This is the equivalent of giving a drug addict another fix, which will only make the necessary withdrawal more painful.
The provision giving the Treasury Secretary a blank check to purchase Fannie and Freddie stock not only makes the implicit government guarantee of Fannie and Freddie explicit, it represents another unconstitutional delegation of Congress’ Constitutional authority to control the allocation of taxpayer dollars. While the Treasury Secretary has to file a report with Congress, the lack of any effective standards for the expenditure of funds makes it impossible for Congress to perform effective oversight on Treasury’s expenditures.
HR 3221 also takes another troubling step toward the creation of surveillance state by creating a Nationwide Mortgage Licensing System and Registry. This federal database will contain personal information about anyone wishing to work as a "loan originator." "Loan originator" is defined broadly as anyone who "takes a residential loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain." According to some analysts, this definition is so broad as to cover part-time clerks and real estate agents who receive even minimal compensation from "originators." Additionally, this database forced on industry will be funded by fees paid to the federal banking agencies, yet another costly burden to the American taxpayers.
Among the information that will be collected from loan originators for inclusion in the federal database are fingerprints. Madam Speaker, giving the federal government the power to force Americans who wish to work in real estate to submit their fingerprints to a federal database opens the door to numerous abuses of privacy and civil liberties and establishes a dangerous precedent. Fingerprint databases and background checks have been no deterrent to espionage and fraud among governmental agencies, and will likewise fail to prevent fraud in the real estate market. I am amazed to see some members who are usually outspoken advocates of civil liberties and defenders of the Fourth Amendment support this new threat to privacy.
Finally, HR 3221 increases the federal debt limit by $800 billion. We are told that CBO has scored this bill at a cost of $25 billion, but this debt limit increase belies that. The Federal Reserve has already propped up the housing and financial markets to the tune of over $300 billion, and this raising of the debt limit indicates that the cost of this newest bailout will likely be even more costly. I am dismayed that my colleagues have not learned the lessons of the Patriot Act and Sarbanes-Oxley. Massive bills passed in knee-jerk reaction to crisis events will always be poorly written, burdensome and expensive to taxpayers, and destructive of liberty.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
The stock market has seen a ton of volatility in the recent weeks. Check out this most recent cover of Business Week below. This may be a contrarian indicator.
It appears we are starting to see some major changes and they are positive ones! From a technical perspective I am seeing some offensive trend changes occuring in the stock market. There is no way to tell if this is a dead cat bounce that will last only a few months or a long term play which is why it is important to monitor the market each day.
What is clear is that many of the stocks related to the commodities sector are seeing a pullback. This is evident with many stocks related to the oil sector. The appreciation this past year in oil has been very strong so it would be normal to see some other sectors take a leadership role. It will be interesting to watch which sectors become the new leaders in the market as we move forward and it appears many of the commodity related ones are in pullback mode. The longterm trend for commodities is still bullish but these pullbacks are natural occurences within the various cycles of markets.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
The word on the street is that the boys and girls in DC are going to now become the primary lender and bail Fan and Fred out.
Dear Subscribers,
I usually do not send out emails outside of the scheduled date unless there is very important news to discuss. Due to the high number of subscribers whose livelihoods depend on the real estate industry I felt it necessary to discuss the current situation regarding Fannie Mae and Freddie Mac.
In the May 2008 Charleston Market Report I wrote the following:
Fannie Mae - The Next Shoe To Drop? Effective June 1, 2008 Fannie Mae will roll out their new underwriting guidelines and they are going to be difficult for originators and borrowers to deal with because Fannie is getting stricter with their lending standards due to the recent lending implosion. Fannie also has had its leverage guidelines increased by OFHEO in a weakening economy. With home prices declining around the country and a quasi government agency that is poorly managed being given the green light to increase its leverage is a very dangerous sequence of events. When you combine the Fannie Mae's recent Q1 2008 earnings and take a peak at the big picture you may have the making of another "Anatomy of A Collapse." Let us all hope and pray this collapse does not occur because then the real estate market would really get messed up. I foresee the nationalization of Fannie and Freddie in the future via another government bailout.
Fannie Mae does not use foreclosed properties in its price index. Thus, FNM significantly understates home price declines.
From Kevin Depew at Minyanville.com: "The fine print at the bottom of the slide is important because it speaks to the use of the case-Shiller index versus Fannie Mae's own index upon which their price projections are based. According to Fannie Mae, because the Case-Shiller index is value-weighted, it places greater weight on higher cost metropolitan areas. Fair enough.
Using the Case-Shiller index methodology, Fannie Mae says its projections would move from a 7-9% home price decline for 2008 to 10-13%, and from 15-19% peak-to-trough to 20-25%. There's just one catch with those projections increases. They strip out the impact of foreclosure sales.
As Fannie Mae observes, "Foreclosure sales tend to depress the S&P/Case Shiller index relative to the Fannie Mae index."
Below is the most recent stock chart on FNM:
Here are the recent Fannie Mae highlights: *May 6: FannieMae Q1 net loss $2.19 billion; expects worse for next year. Cuts dividend, raises $6bn capital. Shareholder equity now below 0--> regulator said it will loosen restrictions on Fannie Mae's capital once the company has raised the $6 billion. FreddieMac reports May 14. *OFHEO Annual Report, April 15: FannieMae and FreddieMac "remain a significant supervisory concern." OFHEO director Lockhart in March: companies may need $10 billion each. *March 24: Federal Home Loan Banks allowed to increase purchase of Fannie&Freddie guaranteed MBS by $150bn *March 19: F&F regulator cuts the companies' surplus capital requirement to 20% from 30% to help expand their combined $1.5 trillion in mortgage investments and revive the home-loan market. Initiative is expected to provide up to $200 billion of immediate liquidity to the mortgage-backed securities market--> together with lifting of cap limits (see below) this should allow the GSEs to purchase or guarantee about $2 trillion in mortgages this year. *Shenn: The regulator to Fannie Mae and Freddie Mac removes limits on their combined $1.5 trillion mortgage portfolios, despite $3.55bn loss at FannieMae, $2.45bn loss at FreddieMac (with more losses expected.) Agencies hold or guarantee about $4.9 trillion in home-mortgage debt. *Interest rate on new prime mortgages is based on 30year Agency-backed MBS minus 1-year Treasury bill--> spread widened to 22year high in March on credit concerns. Source:http://www.rgemonitor.com/175?cluster_id=7169
During the time of the May 2008 CMR newsletter Fannie was trading at approximately $28 per share. Fannie is currently sitting at $13.20 per share and Freddie at $8.00. Below is the snapshot of this "Anatomy of A Collapse." If you were a shorter then congratulations.
Folks, Fan and Fred are probably toast but do not worry because they are too big to fail so the government will have no choice to step in and bail them out. If you are an taxpaying citizen of the good old USA then we will all pick up the tab on the future nationalization of these two red headed step childs who have never been managed properly.
If you do not know how Fred and Fan work please look below:
The implosion process of Fred and Fan will be messy and will probably put further downside pressure on the stock market and housing prices in certain areas of the country. If you read my last CMR issue I wanrned you the stock market was going on "defense" and hopefully you took the proper action on your stock accounts. If you have sat around and done nothing then a bunch of your money has gone to financial heaven and it is gone. The buy and hold or "buy and hope" days are over and you must focus on risk management in real estate and securities in this day and age.
The future of Fred and Fan are critical to the economy and real estate industry which is why the government will have to step in. Doing nothing would make the Bear Stearns predicament look like childs play. Fannie Mae and Freddie Mac are government-sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities. If one or both couldn't function, the result would be chaos. At the end of last year, Fannie alone had packaged and guaranteed about $2.8 trillion worth of mortgages, approximately 23% of all outstanding U.S. mortgage debt. And these securities are highly rated and sold to investors all over the world.
From the NY Times: The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.
Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.
It is tough enough these days finding qualified home buyers so if the government did nothing the real estate market would be frozen. Our fearless leaders in DC will NOT let this happen and we will all just to pay the piper to the tune of a trillion plus dollars. Vote your frustration at the polls but either way you look at it both political parties have dropped the ball on this deal.
If you want to communicate with your clients or prospects regarding this situation feel free to use this newsletter if you want. I would be proactive and communicate with clients regarding this because it will be all over the news. Nobody has a crystal ball on how this situation will effect our beloved industry but it will get fixed....it just will not be pretty. Let your clients hear from you rather than the hysterical media and I guarantee you they will appreciate it.
Just remember as all this bad news comes out it brings us closer to a bottom (Which will take time) and the market is cleaning out the BS that has been created during the past few years. Hang in there everyone because these are difficult times but persistence and proactivity will help you get through this ugly part of the cycle.
Good luck!
Thanks, brad
Sources: The Charleston Market Report May 2008 Newsletter www.charlestonmarketreport.com
Fortune Magazine The Fannie and Freddie Doomsday Scenario http://money.cnn.com/2008/07/09/news/companies/benner_fanniefreddie.fortune/index.htm?postversion=patrick.net
The NY Times US Weighs Takeover of Two Mortgage Giants http://www.nytimes.com/2008/07/11/business/11fannie.html?pagewanted=1&_r=1&ref=patrick.net
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
Let's take a look at what is being socialized/nationalized: *Banking (Thanks Bear Stearns) *Lending (Thanks Fannie Mae and Freddie Mac) *Airlines *Amtrak (Long time ago) *Health Care (Coming)
What's next?
We can top it off with the election of Barrack Hussein Obama in November.
God Bless America!
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
The Q2 2008 Report will be out soon. Please go to the website and subscribe if interested. It is important you subscribe because The Charleston Market Report will soon be moving to a subscription site that will include Real Estate, Investments and Economic Analysis. Subscribers will be offered a Charter Membership once the site is ready.
Disclaimer:This is a personal web site, reflecting the opinions of its author. It is not a production of my employer, and it is unaffiliated with any NASD broker/dealer. Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
