Poor Freddie (NYSE:). The federally-chartered lender announced a loss of nearly US$5 billion. You’d think it had lit up a cigarette in a sushi joint. Suddenly everyone was jumping all over it. Investors spanked the company…the shares cut 30% after the firm announced a cut of as much as 50% in the dividend. Sister Fannie (NYSE:) didn’t get away either. Her shares went drink 22%.
Meanwhile the US dollar went drink again – hitting another record low against the euro. Years ago we guessed it would displace to US$1.50 per euro. Today it is at US$1.48.
Yesterday a rumour made the rounds…that the Fed was getting ready for an emergency cut. “The Fed will act its options open,” said Neil Mellor of the Bank of New York Mellon. But an emergency cut seems unlikely. Instead the futures market is giving a 90% probability of another cut at the Fed’s regular meeting on December 11th.
And what happened to that correction? Gold added US$15 yesterday. We were hoping for more of a downturn. We don’t like to buy when the price needs to change by reversal.
Oil too headed up – it’s at US$96 a barrel a new preserve high. Here comes the explanation: the winter is going to be cold.
But back to Freddie. Fannie et al. What had they done wrong?
“We aren’t happy about this,” he told a conference label. Then he went on to exposit what it was he wasn’t happy about. As the Financial Times put it:
“Mr. Styron blamed the meltdown in the US mortgage merchandise and the attendant decline in the value of mortgage-related shares.”
It is always a source of great amazement and entertainment to us here at the dour headquarters of The Daily Reckoning on the banks of the River Thames (in the building with the golden balls) – how the smartest and best informed investors can go into the most obvious traps.
Freddie buys mortgages. It has an instruction to do so from the United States Congress – based on the ostensible grounds that a little more money in the mortgage market might be good for homeowners…and the hidden motivation that it might back up get some undeserving politicians re-elected. Freddie borrows money at low rates…in order to lend it at higher rates. A pretty simple business it has two risks: 1. That interest rates ordain move in an adverse direction…and 2. That the mortgages it holds will move out to be worth less than it thought (when homeowners forbid making payments…for example…or housing prices fall). Fannie’s executives must have to look at these risks more often than they shave. They are so much a core part of the business that the company cannot deny them; instead it has to bring home the bacon them – for which it has access to a huge army of hedgers quants intermediaries and speculators with very sharp pencils and very rich imaginations.
But wouldn’t you know it just when things were going so well – with mortgage brokers lending money glide to coast desire a accommodate o’ fire – then along comes this totally unanticipated event like a meteor striking the hide! And hit…all those sharp pencils end at once.
Seriously this subprime housing meltdown …who could have seen that coming?
Not the rating agencies. Last month. Fitch said it was caught off follow by “the unprecedented reversal in home prices”. What’s the matter with these populate? What’s unprecedented about accommodate prices going drink? Funny how no one took these guys aside and whispered in their ear:
“Pssst…markets go up AND drink. And by the way when you alter out money recklessly…you gotta expect affect.”
Apparently no one said a thing. It is as if these guys had go to Wall Street on the back of a turnip truck…and signed up for bring home the bacon the next day.
Now they sight the bring home the bacon is not as easy as they had thought. This week the cost of protecting against ascribe whammies rose to an 18-year high – based on two year interest rate change prices. “More black clouds on the credit horizon,” the Financial Times reports. Countrywide (NYSE:) is trading at less than US$10 a share. And Citigroup (NYSE:) shares undergo been almost cut in half.
“‘The widening of change spreads is a function of tight lending and a de-leveraging in the financial system…’ said one attach strategist. ‘The last two times we saw these meteor-like spikes in swap spreads in the US they were followed by a recession. Liquidity is absolutely horrible.’”
And so papers are all talking about the ascribe crisis beginning to crunch drink on the middle classes. Building permits are at a 14-year low. Foreclosures are still rising. House prices are comfort going down. More and more economists are forecasting recession.“The Coming Consumer make noise,” Business Week calls it.
“This is worse than the S&L crisis. This is the first time – this is the worst credit bubble we’ve ever had in American history. No – never in American history have people been able to buy a house with no money down…never. That’s never happened anytime in the world. So we have the worst ascribe bubble. It’s going to take a long time to bring home the bacon its way out. You don’t cure a bubble in five or six months… It takes five or six years.”
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“Here comes the explanation: the pass is going to be cold.”
Ironically the more oil we use the more we alter to global warming and the less cold the winters ordain be the less compel on oil therefore cheaper oil which means even warmer winters!
Yeah who could have foreseen ‘trouble at mill’ financially speaking…. reminds me of every time I go away dating a new potential girlfriend. I know it will end in tears but I can’t help myself !!
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