It is now official: EUROPE UNDER THE GUIDANCE OF THE TWO DEANS OF PSY-OPS HAVE A PLAN FOR RECAPITALIZING THE BANKS AND BOLSTERING THE EUROPEAN FINANCIAL SYSTEM. The world heaved a sigh of relief that the Sunday meeting in Berlin resulted in a PLAN. The intricacies of what the plan entails are a secret, but for today the markets reacted positively, grasping for any sense of hope. The world’s equity markets reacted as if EURO’s were being air dropped all over the continent. The BUNDS were sold as the reallocation trade sent money exiting the havens in search of risk and the possibility of higher returns … at least for a day.
Posts Tagged ‘Fannie Mae’
No real surprises on the data releases yesterday. The U.S. inflation numbers were much as expected but all the DEBT futures markets rallied as it seems the shorts in the markets are nervous about new uncertainties in the Middle East. One would think that the equities would have been sold and the DOLLAR bought for safe-haven purposes, but this was not to be the case. The DOLLAR safe-haven status is breaking down on a correlative basis, throwing all the “talking heads” into a confused state. As I continually warn the readers of NOTES, markets are dynamic in data usage and always in flux and for those who stay static in thought, I merely offer a shoulder on which to cry. What is bothering the markets?
The FEDERAL RESERVE gave its interest payments earned on the MBS and other securities to the U.S. Treasury as mandated and the media pundits were giddy. It’s very difficult to determine what this “profit” means. If the FED was forced to mark its massive purchases to market would there really be any gain? The FED would say that they can hold the securities to maturity but that would mean that they have no exit strategy from the Large Scale Asset Purchase policy–QE by any other name–and any talk of such exit plan would be mere rhetoric.
Notes From Underground: Notes From Underground: Bill Gross calls for “full nationalization”of the mortgage finance system (REPOST)October 18, 2010
In the wake of the recent housing foreclosure issues, we bring you this piece from August about Bill Gross and his call to fully nationalize the mortgage finance system.
The labor day period ended and the markets returned to risk-off profile as the media was awash with stories about the European stress tests being flawed. It seems that some analysts have awoken to the fact that the European tests were curved so as not to be overly bogged down by sovereign debt issues. There is nothing new to this as we talked about the flaws in the tests when they were administered, but the market ran with the “story” anyway and so we had a day of risk off. In addition to the Euro stress tests there was some softer German manufacturing data, which aided the equity selloff and, of course, put downward pressure on the EURO and other non-dollar currencies. The YEN, SWISS FRANC and GOLD were the biggest beneficiaries along with the long end of the global DEBT markets.
The Japanese are certainly not happy with the YEN strength but at this time it seems like there is not a great deal that the BOJ or MOF plan to do. In a Wall Street Journal opinion piece by Naomi Fink, who we consider to be a first-rate analyst, argues that the appreciating YEN may well be a blessing for the Japanese. We don’t agree with her analysis at the present time, but we think she raises many interesting points and is certainly worth reading and considering.
In Australia, we heard that Julia Gillard has cobbled together a Labor-led coalition in Australia. If the outcome means that the resource extraction gets watered down, we would view this as a positive for the AUSSIE. The Labor program has yet to be finalized so we are still cautious in our Aussie bullishness. The RBA stood pat on rates and offered a somewhat hawkish statement, but global growth uncertainty tempered any Aussie growth prospects.
Tomorrow morning we will hear from the Bank of Canada. The market is mixed about the probability of a rate rise–overnight rates are currently 75 basis points and it’s 50/50 that they will raised to 100 basis points. As with Australia, we will read the statement carefully. The latest data in Canada has been mixed but the BOC has been desirous of getting ahead of the curve but we want to see if the lack of U.S. growth causes the Canadians to hold rates since they remain cautious because of slowness in the other developed countries.
A reader of ours raised a question about the reason Larry Summers is in China during recent economic policy headlines from the OBAMA administration. The point raised was that Summers may be there to inform the Chinese that there are plans to refinance MBS mortgages and because China holds a great deal of that paper they want to let them know what the plans are and the potential impact the REFINANCE will have on the Chinese. Maybe a mark down of MBS is a far less painful path than to have tariffs and surcharges imposed on Chines imports. Senator Schumer is banging the drums louder for Chinese revaluation, which will benefit no one but send fears of an impending trade war. We stress again that the biggest bang the Obama administration can get would be a massive refinance plan, which would result in much lower monthly mortgage payments and aid millions of people who are currently underwater on their homes but would stay current with a much lower monthly payment.
Renowned investor Wilbur Ross added more support to this argument. Ross, who has invested heavily in the finance business in the last two years believes that the government should aid homeowners to avoid “negative equity rat holes.” In an interview, Ross said “holders of MBS securities should get tax benefits for giving borrowers better terms.” Yes, we know that ROSS and his companies will come out to the good but we only care if the policy makers latch on to this concept. Mortgage relief is what is needed to halt the rise in foreclosures, which is putting even more pressure on bank balance sheets and thus tying up the securitization market. Credit will not flow until banks have some sense of certainty that the downward pressure on residential real estate is abating. The effort to stem the balance sheet recession has to begin somewhere. Why not mortgage relief? Drips and drabs of tax relief will not prevent further write downs or get credit flowing, for as the market asked today: Is that all there is?
The unemployment rate moved higher but that is meaningless for the markets. However, talk radio will have something negative to discuss. The interesting data was that private sector jobs grew more than expected and, more importantly, average hourly earnings (AHE) rose much more than expected and that is a good thing for potential consumer spending.
The more important news is a story that the Washington Post broke about a new stimulus package coming from the Obama administration. The Obama camp have the cover of Nobel laureate Paul Krugman to bring forward a much more robust stimulus package heavily centered on tax cuts for small and medium business. What else is going to be forthcoming? We have no idea but this package will err on being bigger not smaller than previously projected.
Why do we believe a bigger program is coming? Because Secretary of Commerce Gary Locke opened his big mouth in a November 2009 interview and was forced to recant his words as being “impercise.” It seems to us that Secretary Locke was so excited about the stimulus plan that he couldn’t contain his enthusiasm. A package of tax cuts aimed at small business is what the financial markets want to see.
A payroll tax moratorium would be a major move but we at NOTES doubt they will do that because if wage earners saw what came out of their weekly checks in real time there would be tax sticker shock. We still think that Geithner has plans for doing some type of massive mortgage refinance as the executive branch has control of Fannie and Freddie and does not need Congressional approval.
The bottom line is that something is up and coupled with a “less bad” employment, the Obama administration may be able to gain some positive momentum heading into the November elections so as to stem some of the negative political fallout. This election is not about wars. It is totally focused on the economy. The commerce secretary, through his premature excitement, has let the cat out of the bag. The question remains: How loud will it roar? If the plan includes the cut on dividend taxes, we could see the equity markets rally hard. We wait to see how aggressive they plan to be.
The unemployment data has become much more difficult to trade as the breakdown of information is filled with so much countervailing data. We need to look at the private sector job creation as the census jobs roll down, then the average hours worked because average hourly earnings take on more importance as an indicator of possible increased consumer spending. However, the overall jobless rate may stay the same or go higher. The consensus number for non-farm payrolls is 105,000 lost , but we caution to wait for the full breakdown before getting too excited.
The housing confab was the big story Tuesday as the Obama administration was trying to figure out how to put the biggest slush fund to work. Last Christmas Eve, the U.S.Treasury–under the spell of eggnog and mistletoe–nationalized Fannie Mae and Freddie Mac by removing the caps on the losses that the two GSEs would be allowed to absorb.We don’t know where “PIMCO’s” Bill Gross was but we had assumed that the removal of loss caps was nationaliztion by stealth. Now as the largest holders of MBSs next to the FED, he is openly calling for outight government control of the mortgage market because Gross doesn’t believe there is room for the private sector. Yes, he is correct if the mortgage market reverts to NINJA loans and other zero-down types of nonsense. However, if the originate-to-distribute model were to be restructured so that only deserving loans were made, private lenders would be lining up to get into that business. We caution our readers to understand that today’s conference on GSEs was meant to give some type of cover to an already conceived plan of how Fannie and Freddie can absorb more losses and for the Obama team to gain some political advantage.
All eyes are now focused on the release of the U.S. employment data. This has taken on a new level of importance as the inflation/deflation argument heats up. The pundits have woken up to the fact that without robust job growth the U.S. will remain mired in a deleveraging quagmire. All the economic modelers and Greenspan put followers cannot understand how you cannot have growth and an equity rally with zero interest rates … hmmm, they must have been sleeping like MOTHRA while Japan deflated.
There is a Reuters blog making the rounds that the Obama administration is planning a surprise for the 15 million homeowners who are undergoing severe stress on their mortgages. It is surmised that Fannie and Freddie are going to absorb the mortgage losses by writing new mortgages based on the depreciated value of the homes in foreclosure. This will be a major act of forebearance on the part of the two NATIONALIZED mortgage lenders.