Monday, August 25, 2008

Fannie & Freddie: "To Regulate or Not to Regulate... that is the Question"

As I write this piece, the current stock prices for Fannie Mae (FNM) and Freddie Mac (FRE) are sitting just off their 60’ year lows at $5.20 and $3.28 respectively. There has been a plethora of talk, both on Wall Street and those around Capital Hill as to what exactly should and can be done with these Government Sponsored Entities (GSE's).

Here’s a question; Assuming these entities are “too big to fail” (or perhaps too important) which I believe they are, it begs to question who really benefits if these firms are not privatized.

My thoughts: Both of these companies have some of the largest lobbyist groups in the country. The non-balance sheet payrolls these firms have include very senior officials in both branches and on both major governmental parties. In fact the GSE's have some of the most impressive "paid" supporters of any industry.... and that’s pretty impressive considering the likes of the auto industry, oil, and others.

While the discussions may publicly revolve around the GSE’s ability to remain solvent or if necessary raise more capital to meet federal regulations as it relates to balance sheet ratio’s, a real challenge remains; Will the large number of people who receive a handout from these firms do the right thing, look themselves in the mirror and recognize the overwhelming benefits of taking these firms off of the national balance sheet or will greed and self interest prevail. Unfortunately, I believe we all quickly realized the answer to that question. So look for more shallow justification about the values and virtues of keeping the mission statement alive for Fannie and Freddie.

This week’s economic news:

Release Date & Time
Economic Indicator
Consensus
EstimateMy Analysis

Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction. Just kidding!!! This number is insignificant… most pundits are now in strong support of a lengthy recovery which may last till 2010.

Tue. Aug. 26, 10:00 a.m. ET
July New Home Sales
Down 1.3%
Most fixed income traders will take a pretty good look at this number. This data is expected to add one more hopeful sign to a growing number of signs that the worst of housing bubble may soon be behind us. While this is a narrow minded approach, the sales number that matches the forecast won’t likely influence the direction of mortgage interest rates much. A sales pace number showing a drop of 0.6% or less will probably put a little upward pressure on mortgage rates. My personal opinion is that the consensus estimate will likely prove to be too pessimistic this time around.

Tue. Aug. 26, 10:00 a.m. ET
Aug. Consumer Confidence
53.0 vs. last 51.9
Investors are always far more interested in what the consumer is actually doing -- than how they say they are feeling. Look for this data to have little, if any direct impact on the trend trajectory of mortgage interest rates today.

Tue. Aug. 26, 2:00 p.m. ET
Minutes of Aug. 4th & 5th Federal Open Market Committee meeting released
While this document will likely do little more than reinforce mortgage investors’ conviction that the Fed will not hike short-term interest rates anytime in the foreseeable future, it will provide for some guidance for Wednesday and Thursday and a low volume trading week in the equities.

Wed. Aug. 27, 8:30 a.m. ET
July Durable Goods Orders
+0.1% vs. last +0.8%
July orders probably eked out a small gain on an uptick in demand for aircraft and auto manufacturers response to increased calls for more fuel efficient vehicles. This data will likely do little more than take up space on this week’s calendar.

Wed. Aug. 27, 1:00 p.m. ET
Treasury auctions $31 bil. of 2-year notes
It likely will be very difficult for mortgage interest rates to move to notably lower levels in the face of the deluge of supply coming in from Uncle Sam over the next two days.

Thurs. Aug. 28, 8:30 a.m. ET
1st revision to Q2 Gross Domestic Product
+2.7% vs. last +1.9%
New information released since the government made its initial estimate of the value of all the goods and services produced in the United States points to a sizeable upward revision here. Mortgage investors have already priced this expectation into their rate sheets.

Thurs. Aug. 28, 8:30 a.m. ET
Initial jobless claims for the week ended 8/23
Down 2,000
Unless this number is significantly lower, this report will likely have little, if any impact on direction of mortgage interest rates today.

Thurs. Aug. 28, 1:00 p.m. ET
Treasury auctions $21 bil. of 5-year notes
Wednesday’s $31 billion of 2-year notes and today’s big 5-year note offering will likely choke the thinly traded pre-holiday market. If my assessment proves accurate, it will be very difficult for mortgage interest or any fixed income products rates to move notably lower today.

Fri. Aug. 29, 8:30 a.m. ET
July Personal Income Spending PCE
Index 0.0 vs. last +0.1% 0.2% vs. last +0.6%+0.3% vs. last +0.3%
The few traders still at their desk will likely shrug off the income and spending figures but will bore in on the personal consumption expenditure index with laser-like intensity. A gain of more than 0.3% for this measure of inflation pressure at the consumer level will likely prod investors into pushing mortgage interest rate higher.

Fri. Aug. 29, 2:00 p.m. ET
US market will closes early for Labor Day Holiday

Tuesday, August 19, 2008

Anyone had enough of the Economic Ride we’re on?

As much as I would love to opine about the bottoming out of our economy and how now is the time to jump back into equity investing and home purchasing, I continue to shake my head in disbelief as I see a systematic dismantling of precious economic levels which have been supporting our economy over the past eight years. Above and beyond the obvious issues plaguing our economy (gas at $3.50+ a gallon, rising unemployment, inflation creeping to well over 1% a month, depressed or negatively convexed housing values) is the continued hammering and stress our financial markets are taking from overseas participants. Like it or not we live in a global economy. The US does not have the financial wherewithal to operate independently of the world. The economies of scale working with global partners allows our financial system to be much more efficient, in turn passes the savings on to us… the consumer. The stress I am eluding has been most publically seen in the Godfather and Godmother of our housing markets; Fannie Mae and Freddie Mac.
The Government Subsidized Entities (GSE), as Fannie and Freddie are known for rely heavily in foreign investment to keep the capital wheels well greased. With US government backing, foreign governments have traditionally purchased up to two-thirds of every multi-billion dollar note offering these two companies release of Mortgage Backed Securities (MBS). Last week? Central banks bought only 37 percent, down from 56 percent in May. Last week may be an anomaly, but considering the deficient our country presently has outstanding, and the unknown to what exactly the level of participation and to who’s detriment US government will bail these two behemoths is causing for quite stir. There are some who might argue against my next statement; but in my mind, there is no doubt that the US economy is a highly agile and fluid economy. Our capital markets and national diversified industries allow intellectual know-how to adapt very quickly to market pressures and demands both within the US and globally. That said, this economy will rebound with housing playing its’ part. Note: I did not say leading or significant part. However, should MBS bonds continue to trade poorly, Fannie and Freddie will be forced to raise rates to spur interest in their products. This will be like coming down with the flu while battling cancer….possibly deadly. As mentioned above, add an already increasing inflationary environment and we have a very, very painful period for everyone in every segment of the US economy. That includes Housing, Banking, Food, Energy, Technology, Consumer Spending, Finance, Public Services, and just about every supply or demand curve business.

Hand on kids… this ride isn’t nearly over yet.



This week’s economic releases

Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis


Mon. Aug. 18
Tue. Aug. 19, 8:30 a.m. ET
July Housing Starts &
Building Permits
-9.9%
-13.8%
These numbers are distorted by changes in the New York City building code that pulled June starts and building permits sharply higher as builders scrambled to get projects underway before the code changes took effect on July 1st. Excluding the northeast multifamily figures, housing starts probably slipped 4.0% lower last month. It really doesn’t matter all that much, investors have already priced in lower starts and permits figures for July – so a number a little higher or lower than expected won’t likely mean much in terms of its impact on the direction of mortgage interest rates today.

Tue. Aug. 19, 8:30 a.m. ET
July Producer Price Index
Core rate
+0.6% vs. last +1.8%
+0.2% vs. last +0.2%
Ugh oh!!! 1.2% is NOT what the Dr. Ordered. At this juncture, even a hint of building non-energy related inflation pressure will likely be enough to induce mortgage investors to defensively nudge mortgage interest rates higher.. and well expect them to have a serious movement.. if you know what I mean.

Wed. Aug. 20,
Nothing Listed

Thurs. Aug. 21, 8:30 a.m. ET
Initial jobless claims for the week ended 8/16
Down 7,000
This report has been skewed for the past several weeks by the impact of a federal program that extends the benefit period for many claimants. One way or the other, the story is the same – the labor sector remains weak – a factor that investors have already priced into current rate sheets. This report will likely have little, if any impact on direction of mortgage interest rates today.

Thurs. Aug. 21, 10:00 a.m. ET
July Leading Indicators
-0.2% vs. last -0.1%
This index is a composite of 10 different statistics ranging from building permits to the Gross Domestic Product figures – and is designed to foretell economic activity levels six to nine months hence. Its accuracy factor is not particularly high but a negative reading today (indicating slower economic growth ahead) will tend to support steady to fractionally lower mortgage interest rates.

Fri. Aug. 22, 10:00 a.m. ET
Fed Chairman Bernanke speaks on financial stability at Kansas City Fed symposium. My initial thought was that Bernanke will likely hold to the “company” line – talking up the Fed’s commitment to inflation fighting while talking down the likelihood the Fed will find it necessary to take any action in that regard. With the latest inflation numbers released today, I anticipate a little more calming of the waters talk than what may have been originally expected. Depending on what is said this event will likely have little or a lot to do with the trend trajectory of mortgage interest rates.

Mon. Aug. 25, 10:00 a.m. ET
July Existing Home Sales
Up 0.8%
Certainly one month of data does not make a trend and no one is suggesting that the bottom has been reached in the housing sector – but if the consensus estimate is accurate, the July number may be a first small step in the right direction.