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Five Things You Need to Know: On Tap This Week; Fannie & Freddie; Black Friday Preview; Citigroup Downgraded to Sell; PNC Financial Services Selling Brokerage Firm to Piggly Wiggly... Seriously


What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. On Tap This Week

Although it's a holiday-shortened week, there is no shortage of market moving data and news on the horizon.

  • Today:
    The big item on the agenda today is the National Association of Homebuilders sentiment survey at 1 p.m. Most expect it to have hit a new low in November, and certainly the most recent comments and data from builders seems to support that likelihood.
  • Tuesday:
    First up Tuesday are Housing Starts and Building Permits. A positive surprise, however unlikely, will be Hoofy's last best chance to turn the sentiment tide into the holiday.
    Also on Tuesday, at 2 p.m., the minutes of the Federal Reserve Open Market Committee meeting from October 30-31. This will be carefully watched given the change in rates and the credit market issues that were discussed.
  • Wednesday:
    Initial jobless claims will be released and will attract some attention after the most recent Non-farm Payroll numbers from last week
    As well, look for the October Leading Economic Indicators and the Michigan Consumer Sentiment revisions, which might provide some consumer spending fuel ahead of Black Friday.

2. Fannie & Freddie

Also likely to provide some additional fireworks this week will be Freddie Mac's (FRE) earnings report before the bell tomorrow morning. Credit Suisse got the first jump on the company with a report already making the rounds today that FRE may report another $5 billion in losses due to the ongoing credit market turmoil. The stock is off 8% today ahead of tomorrow's report.

Meanwhile, Fannie Mae (FNM), Freddie's larger cousin, held an investor conference last Friday morning to address accounting questions raised by two recent changes at the company, and following an article from Fortune which questioned those changes. The stock was down 10% on Thursday, another 5% Friday, and is off another 6.5% 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, however, was in disclosing what the company's actual "cure rate" on these bad loans might be. That was part of the problem. The company, beyond admitting that the "cure rate" is going down, was not specific on what that 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 left 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 really 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."

Tomorrow morning perhaps we'll get an idea of Freddie Mac's "worst case scenario" for comparison's sake.

3. Black Friday Preview

Minyanville will post a larger Black Friday preview on the home page later this week, but we thought we would take just a moment to offer some background to the important upcoming kickoff to the holiday shopping season.

  • First, the Retail Sales report last week was far worse than the headlines made it seem.
  • According to Merrill's David Rosenberg, "stripping out gasoline, we have the trend in ex-auto retail sales running at a -1% annual rate over the past three months and at no time in the past 15 years has that trend been so weak heading into the most important shopping period of the year."
  • The last time that happened was during the 1990-91 downturn.
  • The weak categories were precisely the ones you would expect to be weak; sporting goods, hobby book & music stores (-0.4%), general merchandise stores (-0.1%), department stores (-0.5%), miscellaneous store retailers (-0.6%), nonstore retailers (-1%).
  • Retailers have been pretty unanimous - from Starbucks (SBUX), which reported an unprecedented decline in store traffic, to Macy's (M), Ann Taylor (ANN), JC Penney (JCP) and Lowe's (LOW) - in reporting a housing-related slowdown in consumer spending.
  • As Lowe's CEO Robert Niblock said this morning, "the deterioration in housing-related metrics combined with disruption in the credit markets and the
    tightening of lending standards and credit availability impacted our performance this quarter."
  • Indeed.
  • That's the same lethal combination of declining home values, tightening credit standards and reduced credit availability being reported across the retail spectrum, not a pretty backdrop for the next six weeks of consumer traffic.

4. Citigroup Downgraded to Sell

Shares of Citigroup (C) were downgraded to "Sell" by Goldman Sachs (GS) this morning, with the analyst citing, among other things, dislocations in credit markets, exposure to collateralized debt obligations (CDOs), and the possibility of perhaps $15 billion more in writedowns forthcoming.

  • But, hey, that's Goldman Sachs. Pessimists.
  • The New York Times this morning painted a glowing picture of the firm, an article sprinkled liberally with phrases such as "mighty investment bank," "good fortune," "swagger and contrary thinking," even "secret sauce."
  • In addition to the Citigroup downgrade, Goldman also cut price estimates for Merrill (MER), Morgan Stanley (MS), Bear Stearns (BSC), JP Morgan (JPM) and E*Trade (ETFC).
  • Citigroup, for its part, remained unfazed by the downgrades.
  • How do we know that?
  • Citi was out with a note on Friday recommending investors buy banks, raising ratings to "Overweight" from "Market Weight."

5. PNC Financial Services Selling Brokerage Firm to Piggly Wiggly... Seriously

So this is what it's really come to? Being in the brokerage business is so bad that PNC Financial (PNC) is selling brokerage firm Hilliard Lyons to the supermarket operator that runs Piggly Wiggly?

  • PNC Financial Services announced on Friday that it is selling Louisville, KY-based Hilliard Lyons for an undisclosed price to Houchens Industries, an operator of about 150 grocery stores under a variety of names, including Food Giant, IGA and Piggly Wiggly.
  • Hilliard Lyons has more than 1,000 employees at 76 branch offices.
  • PNC sought to sell Hilliard Lyons because the brokerage firm "did not fit into PNC's growth strategy," a press statement said.
  • So PNC is selling Hilliard Lyons to a grocery store operator.
  • Man, remember when being in the "Financial Services" industry was considered prestigious?
  • I'm familiar with the Houchens Industries chain because in my small Kentucky home town we had a Piggly Wiggly.
  • I remember our Piggly Wiggly so well because after the first couple of months of being in business half the letters on their neon sign burned out so that the store name read, simply, iggy wig.
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