GSE’s Now The Hero

Fannie Mae and Freddie Mac have been designated as the official toxic waste dump.  Ok, that’s my headline, not the government’s.  It is a wait-and-see situation with this new plan for Fannie and Freddie to take on the problems in the mortgage market.  Will it help at all?  I’m not optimistic, considering these two are in so much financial trouble now, and they need to raise capital even with the lowered reserve requirements.  The Federal Reserve Board has lost their collective mind and everyone trying to come up with new proposals to save the housing market are grasping at straws.  If the government doesn’t stop it’s interventions, this mess is just going to keep getting worse.

Stock Market - Pre Open Report for February 28th 2008

The Q4 GDP updated figures were issued this morning. The top line GDP did not change, many times in previous GDP data sets there was usually a small revision to the top line number but this time the number was left unchanged. So the GDP of 0.6% is a real number and reinforces to us that recession has arrived.

Moody’s summarizes it as follows:

There was no revision to reported economic growth in the fourth quarter; real GDP increased at an annualized 0.6% rate. The consensus expectation was for a small upward revision. There was a downward revision to imports, which increased GDP growth, and an offsetting downward revision to investment in inventories. Economic growth in the fourth quarter was poor, and the U.S. economy is likely in recession now.

Initial jobless claims climbed to 373,000 and the continuing claims also continues to rise and is now at 2.8 million.

Freddie Mac (FRE) released earnings this morning:

[FRE] Freddie Mac Reports Q4 -$3.97 v -$2.34e, R -$678M v -$198.3Me ($2.5 Billion Loss)

- Notes estimated regulatory core capital was $37.9B at Dec 31, 2007,
- Still extremely cautious entering 2008.
- Remediated material weakness in internal controls.
- Sees credit losses boosting in 2008. (emphasis added)
- Sees varying expenses as housing market is still pressured.
- If economy weakens further credit costs will be higher.
- Reports Q4 total credit losses of $236M.

The CEO of Freddie Mac (FRE) says that they may need to "tap the market" for more capital.

Yesterday’s dismal financial report from Fannie Mae (FNM) has prompted Moody’s to possibly cutting the rating of the company.

FNM: MOODY’S SAYS IT MAY CUT "B+" FINANCIAL STRENGTH RATING FOLLOWING 2007 RESULTS

Thornburg Mortgage (TMA) released their 10-K, and tucked away in there were some scary statements.

Beginning on February 14, 2008, there was once again a sudden adverse change in mortgage market conditions in general and more specifically in the valuations of mortgage securities backed by Alt-A mortgage loan collateral. As of February 15, 2008, our Purchased ARM Assets included approximately $2.9 billion of super senior, credit-enhanced mortgage securities, all of which are AAA-rated and backed by Alt-A mortgage collateral. Our current credit assessment of these mortgage securities in our portfolio suggests a low possibility of future downgrades and even less risk of actual losses. We have not realized any losses on these mortgage securities to date. However, we have observed deterioration in the liquidity for these securities and increased difficulty in obtaining market prices. Accordingly, market valuations of these securities have decreased between 10 and 15 percent since January 31, 2008, and as a result, we have been subject to margin calls on this collateral. Since February 14, 2008, we have met margin calls in excess of $300 million on our Reverse Repurchase Agreements, the substantial majority of which is related to the decline in valuations placed on these securities. However, in the short term, the sudden decline in the valuation of these securities has left us with reduced readily available liquidity to meet future margin calls, relative to our cash and unpledged securities position of December 31, 2007. In the event that we cannot meet future margin calls from our available cash position, we might need to selectively sell assets in order to raise cash

Freddie Mac (FRE) and Fannie Mae (FNM) are being downgraded by various analysts this morning as the realization of the implications of lifting the cap is likely to create. The lifting of the portfolio caps for these two mortgage companies it essentially creates a toxic waste dummping ground.

Pre market futures are showing a very weak opening. Ben Bernanke speaks yet again today, but this time to the Senate Finance Committee. Something very interesting from yesterdays testimony. Someone unknown to us has created a you tube video clip of an exchange between Ben Bernanke and Ron Paul discussing the value of the US dollar. Rather Interesting:

Stock Market - Pre Open Report for February 27th 2008

The big even in the overnight hours was the continued decline of the US Dollar. At 4:07am (US EST) the US Dollar hit a new low of $74.22. Since that time corporate events have continued to deteriorate the pre market futures. The biggest is the earnings from Fannie Mae (FNM) released a short time ago (see Lisa’s post earlier). Also we have bad news on the biotechnology front with Amgen (AMGN) and Johnson & Johnson (JNJ) having received data that one of their prize drugs used to treat anemia may be increasing the risk of blood clots and even death.

This morning we received the Durable Goods Orders data (Durable goods are industrial products with an expected life of one year or more. They include intermediate goods, such as steel, lumber and electronic components; finished industrial machinery and equipment; and finished consumer durable goods, such as furniture, autos and TVs.). The data this morning showed a decline of 5.3% for January. We have been watching this data over the past year and we identified the down ward trend long ago, this new data adds to the trend down ward (chart will be in tonight’s commentary).

At 10:00am we will also get the Mass Layoffs data, this data, which is usually not talked about much in the media is tracked by us as it provides an early look into the unemployment rate.

And Ben Bernanke will be talking today as well… grab some coffee and a bag of pop corn for the show.