Never mind that the two mortgage GSEs continue to raise funds at a very low rate – 75 basis points over Treasuries – and delinquent loans remain low relative to total outstanding. Yes, that 75 basis-point spread FNM and FRE have to pay over Treasuries is double the level of a year ago, but it is not a record high, nor is it anywhere near a level that makes doing business a problem.. Their very delinquent single-family loans are twice the level of a year ago too, but account for just 1.22% of total loans outstanding in FNM’s case and 0.81% for FRE.
On tech stocks, the concern that slowing global growth will hurt profits for one of the brightest sectors of late seemed to hit a crescendo – one hopes at least – yesterday, but those advancing this view must have forgotten what Oracle reported little more than two weeks back – operating profit up 25%, with their Americas segment – obviously dominated by the U.S. – up 18% from the year-ago period. If tech earnings were going to fall off a cliff this earnings season, one would think it to have shown up in Oracle’s results.
Market Activity for July 9, 2008
The charts below are intra-day trading for Wednesday.
The flood gates to the river of pessimism have been opened wide and it will just take some time to close them again as virtually everyone ignores any good news and, in my view, overhypes the negatives.In fact rumors and conjecture rule the environment at the present. Financials took it on the chin over FNM and FRE worries, but also hitting the group was a Credit Suisse report stating 40% of the biggest banks need to cut their dividends. Funny how after the bell yesterday the second-largest bank – Bank of America – mentioned they see no reason to cut the dividend or raise capital. Maybe their management is out of touch with what is occurring, but I doubt such an explicit statement would have been made if they were not very confident this will be the case.
Expanding on this conjecture point, there is supposedly an article in Forbes asking the question: What if FNM and FRE fail?
First, can they fail? Heck yes. Do I think they will fail? No. Fact is this all revolves around the housing market and as down as that market is, it is not as down and out as people are assuming when 92% of mortgages are being paid on time and 95% are either on time or just 30 days past due. If we’re going to go down this road of scary questions, why don’t we just ask: What would happen if we were hit by an EMP attack?
I’ll tell you what would happen; we’d be thrown back to 1870. You want light? Grab a candle. Hot? Can’t turn down the old thermostat; grab a magazine and waive it near your face – where’s that darn Chinese fan? Want to escape reality and listen to some music? That iPod better be charged, and even if it is you’re down to six hours of jammin’. Want some transportation? Get to walking or find a horse – oh my, now this is getting too tough to even contemplate for most Americans Walk? Damn you, you’re saying. But you see my point. We’re trading on conjecture here instead of likely possibilities.
Again, FNM and FRE can and may fail. I don’t think they will based on current delinquency rates and the fact that investors remain quite willing to provide them with capital. Further, if this were really the case, if these two were very likely to fail, you’ll know it because the Dow will lose 2500 points instead of 1/10 that figure, such as yesterday’s loss.
There are challenges, no doubt, and I’m not especially optimistic at the present regarding what may occur with tax rates and leadership that believes the government should get out of the way instead of some nanny state mentality winning the White House. But housing will come back – even if it takes another 12-18 months -- and the mortgage market will be stronger for it. Hopefully, we aren’t burdened with too many additional regulations. There are some that say the free market got us into this mess. Well, they must be forgetting that government meddling has been involved in the mortgage market for a long time – eg. Fannie, Freddie, the Federal Housing Association, the Community Reinvestment Act. They are also forgetting it is monetary policy mistakes that encouraged a rash of bad behavior.
On tax and trade, occasional stints of bad policy will lead to better longer-term polices down the road. Why? Because free markets work and allow economic participants to produce prosperity and socialism does not. Don’t take my word for it, look at the record.
Moving one…
Oil prices actually ended the day flat, reversing course after crude was 2% higher on news stockpiles fell more than expected and Iran test fired several missiles capable of hitting Israel, among other places.
Crude-oil stockpiles fell 5.84 million in the week of July 4, but gasoline supplies did rise 900,000 and sit at the average range for this time of year. The bulk of the decline in crude came from PADD 5 which is the West Coast. (PADD stands for Petroleum Administration for Defense Districts – these areas were delineated during WWII. PADD 1 is the East Coast, PADD 2 is Midwest, PADD 3 is the Gulf, PADD 4 is the Rockies and PADD 5 already mentioned.) I’m not sure what occurred over on the West Coast, but supplies plunged 8.25%, or 4.82 million barrels.
In any event the worries over slowing global growth, which we touched on at the top, overwhelmed the decline in supply and Iran worries.
As you can tell by this point of the letter, we didn’t have an economic release yesterday. Today, we get back at it though with initial jobless claims for the week ended July 4 and chain-store sales for June.
Oh yeah, nearly forgot to mention that optimism over U.S. stocks slid to the lowest level since 1994, according to Investors Intelligence. The share of bullish stock advisers fell to 27.4%. This is actually a very bullish indication.
Have a great day!
Brent Vondera, Senior Analyst
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