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 MArch 12th 2008

Yesterday’s market rally has appeared to quickly run adrift. When the news from the Federal Reserve was issued yesterday the US dollar quickly gained some upside moves. But overnight the dollar headed back down again. If we use the US dollar as a measure of confidence in the US economy then we can safely say this morning that confidence quickly wore out after yesterday’s excitement.

The health care sector is being hit hard today as the rising cost of health costs are actually hurting the earnings of the major health insurance companies. So why the surprise drop in earnings of the health insurance companies? Loss of jobs and the subsequent loss of insurance premiums and what is very concerning is that people are actually putting off some of their health needs in order to pay other bills.

Housing market problems… best to just let the CEO of Freddie Mac speak for us this morning:

Freddie Mac CEO: We are in a 100-year storm in the housing market; "Worst housing market in a century" the CEO said at an analyst meeting.

- Says home price drops are only about one-third over.

The number of mortgage applications have rolled back over and are back on a negative trail.

MBA MORTGAGE APPLICATIONS W/E MAR 7TH: -1.9% V +3.0% PRIOR
- Refinance  -4.7% to 2448.2

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: