Buzz Bits: Dow and Nasdaq End higher
Your daily Buzz & Banter highlights...
Fannie Mae: 2+2 = [Insert Own Number Here] - Kevin Depew - 2:10 pm
Fannie Mae (FNM) held an investor conference this morning to address accounting questions raised by two recent changes the company announced last Friday, and following an article from Fortune that made the rounds yesterday and which some blamed on the stock plunging 10%.
The stock is down another 5% today, so it would appear the conference call didn't go very well, but why? Last week Fannie Mae reported $670 million in credit losses in the third quarter related to charge-offs recorded when delinquent loans were bought from MBS trusts, or Mortgage-Backed Securities trusts, under an accounting principal known as SOP 03-3.
At issue in the accounting arena is that Fannie Mae says their experience is that the majority of these bad loans don't result in realized losses. How so? Suppose Fannie buys a $100 loan out of trust that is delinquent, which is a common part of their business. They compare their estimate of the loss on the loan (based on zip code data, etc.) to the market-based estimate of the loss and record the lower number. Lately the market numbers have all been substantially lower than the company's estimate, a function of a lack of liquidity and ongoing credit market problems. So say the loan is market valued at $70. Fannie takes a $30 charge up front based on the market estimates. In that way the loss is recognized before it is "realized."
To be fair, many of these recognized losses on these loans are, in fact, recoverable, or in the industry's parlance, many "cure." Where Fannie Mae was hazy on the call today was in disclosing what the company's actual "cure rate" on these bad loans might be. The company, beyond admitting that the "cure rate" is going down, was not specific on what the percentage might be. Fannie says "the majority" cure. But when asked if "majority" means 50-75% or 75% and higher, the company refused to narrow the range.
That leaves an obvious question hanging in the air: is the company being overly optimistic in its assumptions about how many bad loans will stay bad?
Fannie Mae also guided to an expected loss next year ranging from 8 to 10 basis points related to the same recording of charge-offs. And this is where things began to fall apart in the call. Fannie Mae CFO Stephen Swad said, "if there is a 4% national decline in home prices in 2008 and no nationwide recession, we may see a credit loss move into the eight to 10 basis point range."
Fannie Mae, at this point, may be the only institution in America counting on a 4% national decline in housing prices in 2008 and no national recession as the "worst case scenario."
Buybacks are Bursting in Tech - Sean Udall - 1:30 pm
- Cisco (CSCO) announces another $10 bln and it's still under $30? Broadcom (BRCM) does another billion and likewise has weak stock action of late.
- Advanced Micro Devices (AMD) gets a nice equity infusion, stock is punk. That almost 3/4's of a billion is not chump change on AMD's current market cap.
- Meanwhile Bear Stearns (BSC) issued some pretty darn good risk exposure numbers yesterday and it is still under $100.
- What is the path of least resistance over the next few weeks/months?
- Call me crazy but I think the "boy plunger" would be buying some of these names currently.
Position in CSCO, BRCM, AMD
What's a Driller? - Adam Michael - 11:17 am
Editor's Note: We saw the "drillers" performing well and asked Professor Michael his thoughts on the sector.
Be careful with the word drillers... lots of folks use that term to loosely describe the oil service stocks. They are not one and the same. Most of the drillers (think Nabors (NBR) and Pioneer Drilling Company (PDC)) topped out in January 2006 and have since been declining/building bases.
Fundamentally, I don't see how they can come in much more unless we enter a pretty good recession and get some demand destruction. That being said, I don't know that I'd buy the drillers here either as I'd prefer to see the stocks "wake up" first.
Wearing a Pair of New Shorts - Quint Tatro - 11:03am
It sure is a battle out there as the bulls try to scrape together enough bids to keep the market from plunging and the bears lick their chops as stocks fall.
I am trying to strike a balance this morning and stick with the charts and charts only. My gut says that the bears are getting a little too cocky and a Snapper is needed, but it hasn't stopped me from starting two new shorts:
- AT&T (T) is popping today but looks to be sitting in a confirmed downtrend. I have started this one with a high stop over $42. I would not be surprised to see some upward movement here, but if volume is light, I will add more to my short in the rise.
- Retail just looks awful and barring some miracle select stocks look ripe for further decline. I started Men's Wearhouse (MW) on this trend-line break today with a tight stop over today's high. The stock is broken in a tough sector. It may take some time and patience to work, but this one looks to be going lower.
Position in T, MW
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