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: