Tuesday, November 20, 2007

Freddie Mac (FRE) and Fannie Mae (FNM) Trading Like Chinese Small Caps

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This is some scary stuff - these charts look like some no name, small cap chinese small caps. Fannie Mae (FNM) and Freddie Mac (FRE) are two quasi gov't entities and in theory will help us get through this mortgage mess. Not the way they are going... I get a kick out of all these politicians saying we need to raise the cap on mortgages from $417K that these entities will insure. What? Those are all overpriced homes which need to come down in value so normal people can afford a real mortgage. Why would you lift the cap? So we can all bail out these institutions with federal money next spring? Dumb.

I can only imagine what is going on in the Federal Reserve right now. I insisted from the minute the last Fed cut came that we will have another Dec 11th no matter what they are saying. The way things are going we might be getting an emergency intervention before that time. (bears on notice?) Credit markets are really seizing up ... this has nothing to do with bailing out equities... this is serious stuff behind the surface and without trust you do not have lending. No one trusts anything coming out the mouths of any of our lending institutions - I don't know how you fix it, but its a bad situation. Who is going to lend money to these fellows? Trust me, it's going to take you and I the way things are going - goodbye tax revenue, hello bailout...

Keep in mind, we are in the EARLY innings of the housing correction no matter what Mr Yun of NAR thinks [Housing will be flat next year! Whew!]. So this will feed on itself as more and more houses fall in value and this is not a 6 month issue, we are talking years. This is a very direct reversal of years of excess in lending - gosh why do we always have to have these seismic events happen simply because the word "regulation" is so hated in the country. It always takes major events and everyone having to pay, one way or the other, before anyone sees that companies left to their own devices will simply maximize short term profit at all other costs or long term stability. I can see a whole parallel to Sarbanes Oxley hitting the financial firms over the next few years as this all plays out .... but those who profited most will be off in the Hamptons enjoying the good life - "retired".

Check out these 2 charts... today down 25-31% off Freddie's ugly numbers.
  • Shares of mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM) are getting spanked in trading, after the former posted a $2 billion third-quarter loss Tuesday morning.
  • Freddie shares were plummeting almost 29% after announcing before the opening bell that it may need to cut its dividend by 50% and seek out additional sources of capital. The so-called government-sponsored entities, which purchase residential mortgages and mortgage related securities, hired Goldman Sachs (GS) and Lehman Brothers (LEH) to help it hit the Street for fresh funds.
  • "We do not believe it would be wise to be sanguine about the intermediate-term housing market," said CEO Richard Syron during Freddie's third-quarter earnings call.
  • McLean, Va.-based Freddie said it would need to set aside $1.2 billion in the third quarter to account for bad home loans, prompting the nation's second-largest guarantor of home mortgages to seek additional sources of capital.
  • Fannie and Freddie are facing increasing defaults and significant shrinking of the values of U.S. homes. As a result, the quasi-governmental agencies are beginning to be forced to ratchet down the prices of mortgage assets they hold on their books. Freddie's asset values fell by about $8.1 billion in the third quarter. Also, total mark-to-market losses amounted to $3.6 billion.
  • Although an unlikely prospect, given their implicit government backing, the shaky markets have Fannie and Freddie trading as if they might falter in the face of the market dislocation -- a prospect that Syron attempted to address.
No trust = no lending. Remember the "quote of the century"

Emerging markets are being favored in part because "financial innovations are less common in developing countries," said Heidemarie Wieczorek-Zeul, German economics minister, in remarks to the IMF/World Bank Development Committee.





Position: Utter disgust


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