Tuesday, May 6, 2008

The Insanity Continues/Market update

Hello everyone!

Well it was another psychotic day in the markets today as the denial continues.

Fannie coughed up a miserable earnings report today. They lost over $2.1 billion dollars or $2.57 a share vs. the .64 loss that analysts were expecting. That's a huge miss!! So what did the stock do? Up 9%. Huh?

Here is the earnings report:

"Fannie Mae rose 8.9 percent after the Office of Federal Housing Enterprise Oversight said it will lower surplus capital requirements to 15 percent from 20 percent to allow the company to buy and guarantee more mortgages, its biggest source of profit. Washington-based Fannie Mae reported a $2.19 billion loss, cut the dividend for the second time in six months and said it plans to raise $6 billion to increase capital. "

So you cut your dividend, you lose two billion $$ in ONE quarter, and you are forced to raise capital and the market reacts by rewarding you? This is absolutely insane. So what does Washington then do? Changes the rules so they can go out and buy more mortgages. Party on boys!!!

Anyone smelling a bailout as Freddie and Fannie buy up the whole housing market? I believe many on the street are betting this way. I think its too early in this disaster to conclude this.

They could easily go bankrupt first. These two companies have only $80 billion in capital between them versus trillions in debt. Will we end up footing the bill if they need to get bailed out? With our Santa Fed who knows. I am staying far away from both companies long or short.

What amazes me about this rally is how many suckers actually believe there is endless capital that will save the financials.

This is very very risky behaviour. There is still no bottom in housing, and according to Harvard economist Martin Feldstein the bottom means everything:

"May 6 (Bloomberg) -- Harvard University economist Martin Feldstein, a member of the committee that charts the American business cycle, said the U.S. economy is ``sliding into a recession.''
``This is a weakening economy,'' Feldstein, president of the National Bureau of Economic Research, said in a Bloomberg Television interview in New York. ``If you compare where the economy is now, with where it began at the beginning of the year, just about every indicator is down."

Feldstein, 68, said the biggest risk to the economy is a sharper downturn in housing.
Fed Rate Cuts
``It's really too early to tell,'' he said. ``Everything hinges on what's going to happen to house prices,'' and ``therefore the whole credit crunch.'' Home prices will ``come down somewhat more,'' Feldstein said."

My Take:

Mr. Feldstein also said that the deterioration of housing prices accelerated from the 4th quarter going into the 1st quarter and showed zero signs of slowing. The Case/Shiller Index shows the same thing.

This is the greatest housing slump since The Great Depression. The slick Wall St. traders that now speculate on Wall St. were not even born yet when something like this occurred.

These idiots are trading this financial crisis like its going to be another baby recession aka 1990 and 2001. Ben Bernanke himself has said no event like this has ever happened in housing since the depression. This is a once in a lifetime financial event!

Most of these guys were not on the street during the last serious financial crisis in the '70's. to expect them to understand the downside risk to what has happened is a rather large assumption. I don't know a guy on Wall St. who fully understands the financial innovation of derivatives and level 3 assets.

What I see right now is a lot of big money chasing bad companies. none of these financials have shown me how they are going to make any money going forward. Their business models are dead and they are bleeding red. I want to invest in companies that make money not lose it.

If housing continues to free fall, they are going to lose their ass. Until I see a capitulation in housing I will not touch any of these stocks.

Betting on a Bailout

This is also not a smart way to invest, and if you listened to Senator Charles Shumer screaming about Countrywide today you might be regretting that bet:

"May 6 (Bloomberg) -- Bank of America Corp. should consider cutting the $4 billion price it plans to pay for Countrywide Financial Corp. if the mortgage company's past profits were based on bad lending practices, U.S. Senator Charles Schumer said.

``These latest revelations should make Bank of America think even harder about how they want to proceed,'' the New York Democrat said in prepared remarks before a Senate hearing today on how Countrywide treats borrowers who've fallen behind on loans. ``These practices will not be allowed to continue.''

My Take:

More proof that the Countrywide deal is dead in my opinion. Can you say election year? It looks increasingly like the democrats are going to sweep all three houses, and this is the type of tough talk you are going to hear following the elections by the Democrats. Wall St. will not enjoy this new environment of higher taxes and more regulation.

Was this a warning shot from the dems Across the Bow to Bank of America telling them to stay away? Looks like that to me. I wouldn't want to be taking on $1 trillion of Countrywide debt if I was Bank of America's CEO after hearing this kinda talk from a powerful senator.

If Countrywide gets left at the alter it will be a watershed moment for the housing market in my opinion.

Let the insanity roll on!! We all know how this is going to end. Its just a matter of time.


Avl said...

From Newsweek.com May 6, 2008. Excerpt from interview with ex-NAR economist David Lereah: It’s Going to Get Worse

"[I] just didn't realize the scope, the extent, the magnitude of the loose underwriting—not looking at incomes and wages, just providing so many mortgage loans based on [expected] future price appreciation rather than the creditworthiness of the borrower," Lereah says. "That got so out of hand, and none of us realized the magnitude of it until it was too late."
"Wall Street has an intense interest in [this], because they're looking for when is the recovery going to come, and at what point does the cycle turn," Lereah told me.

His answer: not yet. "We're not at the bottom," he says. "[People] want it to be near the bottom, but we're not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There's still supply out there in abundance … This thing is going to get worse before it gets better."

Jeff said...


Great stuff.

Didn't catch that. Lereah was the biggest cheerleader of them all!

It goes to show you how the mania of a bubble can make you stupid...lol

Now if the sellers would realize this then maybe we could start heading to the bottom!

Jeffrey said...

This kinda stuff is what makes me angry. Wall St.'s mistakes are causing problems around the world.

I feel bad for the 1 billion people this is affecting. Keep speculating on the commodities guys. So sad.