You know someone loves you when you post a $3.6 billion quarterly loss and you end the day up 1 percent. We are talking about the mortgage giant Fannie Mae. Incredibly, the action on the stock today was breathtaking. At a point, it was up 10+ percent on the OFHEO announcement of relaxing capital requirements but again, unless Fannie Mae and Freddie Mac get into the business of no income and no documentation loans, there may only be a slight relief in the housing markets. I think the markets realized this by the end of the day thus the 1 percent gain.
We also got more news that housing sales are in the absolute dumps. A few people are starting a market bottom whisper campaign but this won’t last once they realize that the amount of bad mortgages floating out there is simply breathtaking. You can understand the positions of banks if you really force yourself for a second. They realize that if they are made to mark to market many of their toxic mortgage products, they are going to face tough times and large amounts of write downs. Make no mistake about it, the bailout of the monoline insurers is more to ensure that the continue cover up continues and the day of reckoning is pushed a bit further into the future. If you have any doubts, do you think that any of these Real Homes of Genius will actually reach their peak value anytime in the next 10 years? If we use the rating agencies guidelines, these homes are rated AAAAA+++++ and will soon bounce off the current market lows.
I know many of you are bewildered by the market action. Home prices are tanking yet the market is up 500+ points in the last few days. We have so many bailout options on the table it is hard to keep track of them all. Let us put a list of some of the genius ideas to stop the housing correction:
FHASecure
Hope Now Alliance
Project Lifeline
Negative Equity Certificates
Lifting Mortgages Caps to $729,500
Wal-Mart Vouchers at $600 per person
Fed Funds Rates at Historical Lows
Foreclosure Moratoriums
There are more in the pipeline of course. For all the naysayers about comparing this mess to the Great Depression housing debacle I bring to you the following:
“There is precedent for such in effort: In the 1930s, the government created the Home Owners’ Loan Corp. to help borrowers avoid foreclosure. The corporation made more than 1 million loans to refinance troubled mortgages, and in 1937 owned 14 percent of all outstanding U.S. mortgages, according to testimony last month by Alex Pollock a resident fellow at the American Enterprise Institute.
In addition, the document said lawmakers are working on a separate $20 billion (€13.4 billion) in grants and loans to state and local government to help to buy up foreclosed and abandoned homes. Doing so would be designed to help stabilize neighborhoods wracked by foreclosures. Lawmakers are also proposing to spend $200 million (€134.5 million) more per year in grants for housing counseling.”
We are now using Great Depression remedies in 2008. It almost seems a given that there will be some sort of bailout. The real question is the magnitude and depth the American public is going to get reamed with. I’ve read through a few proposals and I keep reading “market value” in regards to purchasing homes and the price that will be offered. Of course, this raises many questions. Who will appraise the homes? Are government agencies going to rely on appraisals by the current mortgage holders? Which loans will qualify for buyouts? Clearly, in a rapidly deteriorating market, we see that today’s price will be much lower tomorrow. Already we have seen in a few months the median price for Los Angeles drop nearly $100,000 and the median drop $120,000 in Orange County. Given the trend, will they offer prices on the projected future value? As you can see, there are so many questions that need to be answered before we move forward. Given that the U.S. housing market is worth approximately $20,000,000,000,000 USD, even the recent announcement by the Case/Shiller Index showing a 9.1 percent drop, that means that in one year $1.82 trillion in housing wealth has evaporated if we are to assume that the 20 metro areas are reflective of the nation. Most likely it is given that most of the housing wealth (bubble froth) is held in these areas. Let us look at the home sales numbers further.
Home Sales - Party like its 1994
*click to enlarge
The current new home sales numbers reported by the Census Bureau are breathtakingly bad. We would have to go back to 1994 to find numbers this low. What you’ll also notice in the graph above is the amazing drop that occurred. You clearly see a trend from 1995 to 2005 of nonstop growth that has no comparison in this chart, which dates back to 1963. The magnitude and steepness of this correction gives me pause, and you know how bearish I already am to begin with. You’ll notice on the chart that every winter, the numbers dip which is typical selling patterns. But if you measure the drop to other seasonal drops we are clearly in a new pattern.
Then what really gives? Why is the market rallying on all this bad news? These things don’t unfold overnight. This is nothing novel and I’ll provide you with a few paragraphs talking about the great crash from a fabulous book by Frederick Lewis Allen called Since Yesterday which is free online:
“A few minutes after noon, some of the more alert members of a crowd which had collected on the street outside the Stock Exchange, expecting they knew not what, recognized Charles E. Mitchell, erstwhile defender of the bull market, slipping quietly into the offices of J. P. Morgan & Company on the opposite corner. It was scarcely more than nine years since the House of Morgan had been pitted with the shrapnel-fire of the Wall Street explosion; now its occupants faced a different sort of calamity equally near at hand. Mr. Mitchell was followed shortly by Albert H. Wiggin, head of the Chase National Bank, William Potter, head of the Guaranty Trust Company; and Seward Prosser, head of the Bankers Trust Company. They had come to confer with Thomas W. Lamont of the Morgan firm. In the space of a few minutes these five men, with George F. Baker, Jr., of the First National Bank, agreed in behalf of their respective institutions to put up forty millions apiece to shore up the stock market. The object of the two-hundred-and-forty-million-dollar pool thus formed, as explained subsequently by Mr. Lamont, was not to hold prices at any given level, but simply to make such purchases as were necessary to keep trading on an orderly basis. Their first action, they decided, would be to try to steady the prices of the leading securities which served as bellwethers for the list as a whole. It was a dangerous plan, for with hysteria spreading there was no telling what sort of debacle might be impending. But this was no time for any action but the boldest.
The bankers separated. Mr. Lamont faced a gathering of reporters in the Morgan offices. His face was grave, but his words were soothing. His first sentence alone was one of the most remarkable understatements of all time. “There has been a little distress selling on the Stock Exchange,” said he, “and we have held a meeting of the heads of several financial institutions to discuss the situation. We have found that there are no houses in difficulty and reports from brokers indicate that margins are being maintained satisfactorily.” He went on to explain that what had happened was due to a “technical condition of the market” rather than to any fundamental cause.
As the news that the bankers were meeting circulated on the floor of the Exchange, prices began to steady. Soon a brisk rally set in. Steel jumped back to the level at which it had opened that morning. But the bankers bad more to offer the dying bull market than a Morgan partner’s best bedside manner.
At about half-past one o’clock Richard Whitney, vice-president of the Exchange who usually acted as floor broker for the Morgan interests, went into the “steel crowd” and put in a bid of 205 — the price of the last previous sale — for 10,000 shares of Steel. He bought only 200 shares and left the remainder of the order with the specialist. Mr. Whitney then went to various other points on the floor, and offered the price of the last previous sale for 10,000 shares of each of fifteen or twenty other stocks, reporting what was sold to him at that price and leaving the remainder of the order with the specialist. In short the space of a few minutes Mr. Whitney offered to purchase something in the neighborhood of twenty or thirty million dollars’ worth of stock. Purchases of this magnitude are not undertaken by Tom, Dick, and Harry; it was clear Mr. Whitney represented the bankers’ pool.
The desperate remedy worked. The semblance of confidence returned. Prices held steady for a while; and though many of them slid off once more in the final hour, the net results for the day might well have been worse. Steel actually closed two points higher than on Wednesday, and the net losses of most of the other leading securities amounted to less than ten points apiece for the whole day’s trading.
All the same, it had been a frightful day. At seven o’clock that night the tickers in a thousand brokers’ offices were still, chattering; not till after 7:08 did they finally record the last sale made on the floor at three o’clock. The volume of trading had set a new record — 12,894,650 shares. (”The time may come when we shall see a five-million-share day,” the wise men of the Street had been saying twenty months before!) Incredible rumors had spread wildly during the early afternoon — that eleven speculators had committed suicide, that the Buffalo and Chicago exchanges had been closed, that troops were guarding the New York Stock Exchange against an angry mob. The country had known the bitter taste of panic. And although the bankers’ pool had prevented for the moment an utter collapse, there was no gainsaying the fact that the economic structure had cracked wide open.”
I think you know how this story goes. There were a few big players coming in and pumping added money but this was only throwing good money after bad. We are in a parallel situation so that $2.6 billion injected into the monolines will be gone just as quickly. Even after this “bold” move, the market didn’t bottom for another 3 years:
*image credit: oftwominds
If you look closely at the graph, you can see 6 bear market rallies but the trend is unmistakable. All the jawboning and perma-bull talk is similar to that of the past. Read your history or be cursed to repeat it.
Neverland - Foreclosed?
Now I’m sure many of you have already heard, but the pop singer Michael Jackson’s home Neverland is reportedly being foreclosed. According to the L.A. Times:
“Unless entertainer Michael Jackson pays off a $24.5-million loan, his 2,800-acre ranch in Santa Barbara County will be auctioned off next month. The sale involves the land, house and all personal property, including furniture, appliances, rides, toys and “all merry-go-round type devices.”
Anyone going to exercise carpe diem and utilize the wonderful cap-less Jumbos? After all, you will be getting rides and toys and who can argue with that? A place called Neverland seems to fit well here in California.
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Sometimes executives can put their foot in their mouths, but calling global warming “a crock of s**t” goes beyond that. 
Since Henry Clay Ford Jr. become CEO of 
General Electric
