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Fannie, Freddie Bailout Full Steam Ahead


Capitol Hill gets in on housing game.


We enter the week with a little less trepidation about financials, some real hope the airlines are getting their act together and thinking that maybe crude oil has peaked - for now. (Let's face it, they aren't making any more of the stuff and until there's action rather than rhetoric, oil will eventually move higher.)

Over the past year every time investor optimism began to materialize it felt like someone opened Pandora's Box.

Even with three better than expected economic releases on Friday, investors were so tentative the Dow slipped into negative territory late in the session and only managed to stumble into the plus column by the time the closing bell rang. Of course I would guess investor sentiment is better than it was a couple of weeks ago. That is different than the notion that people are willing to throw caution to the wind. We are a long way from investors becoming rambunctious. Heck, we are a long way from investors thawing out from their deep freeze brought on by fear and confusion.

So add to the mix confusion and false alarms. We've already seen it this year in the financials, where investors have presumed (or hoped) the worst was over only to experience another dip lower. Of course, the last move down, which could rival the plunge of the most fearsome rollercoaster rides on the planet, should have buried any notion by investors that the financials could rebound.

Yet the index has made an impressive move off the recent low, even on news that more often than not didn't logically justify such a move.

However, a lot of money has poured into the financials in the past two weeks. How much of it was long term dough versus trading dough (I feel one of my best ideas of the year was to get in and out of Washington Mutual (WM) for a 31% gain in over a three day stretch) remains to be seen, but I think well-heeled investors with multiyear outlooks are buyers.

The KBW Bank Sector Index (BKX) made a giant move off the low to get in the shadow of 72, which will now serve as a key breakout point. Early in the week look for 60 to be a pivotal support point. Below there we see pockets of support down to the must hold support point of 48.

Click to enlarge

Banking News Doesn't Take Weekend Off

There was a lot of action in the financial sector of the weekend, including the failure and quick acquisition of two banks in hard-hit housing markets.

On Saturday all the deposits of First National Bank of Nevada and First Heritage Bank NA of Phoenix were bought by Mutual of Omaha Bank, even those deposits over amounts protected by the FDIC.

It's not great news that banks are beginning to fail but it's not new and not unexpected. The fact a buyer was found so quickly is perhaps a bigger story.

The individual stories of these banks are interesting. For example, First National Bank of Nevada had a 30-year run that followed the trajectory of Nevada, and even in tough times the bank funded $1.0 billion in loans for local construction and real estate in 2007. Live by the sword, I guess.

The story illustrates the precarious position regional banks find themselves in these days. In addition to finding a buyer, there didn't appear to be massive panic or the proverbial run on the banks over the weekend.

Governor Jim Gibbons of Nevada said the bank takeover will be "closely monitored" and Arizona Governor Janet Napolitano issued a statement saying the FDIC takeover of First National is "not indicative" of the overall banking climate.

Congress Borrows Bernanke's Helicopter

Then there is Freddie Mac (FRE), Fannie Mae (FNM) and the American taxpayer.

On Saturday HR 3221 was passed by the Senate in a vote of 72-13 as Capitol Hill tries to play a role in helping homeowners even if it means bailing out government-sponsored enterprises, Fannie Mae and Freddy Mac. The bill is estimated to help upwards of 400,000 homeowners. Highlights from the bill include:

  • $300.0 billion in mortgages offered by the Federal Housing Administration.

  • Permanent increase to $625,000 size of loans FNM and FRE could buy and FHA could issue.

  • Treasury Department unlimited power to lend money or invest in FNM and FRE
    Federal Reserve will have a consultancy role in overseeing FNM, FRE and FHA.

  • FNM and FRE can buy/back mortgages that are 15% higher than the local media home price.

  • Low income housing tax credit up to $7500 for first time homebuyers (April 9 2008 to July 1 2009).

  • FHA gets $180.0 million for pre-foreclosure counseling for struggling homeowners.

  • Increased financial assistance for disabled veterans.

  • An additional $800.0 billion added to statutory limit on national debt takes total to $10.6 trillion.

The Cost of Living

The most anticipated news this week comes on Friday with the employment data but there is also a lot of hope that future news will happen with the continued retreat in commodities prices. Although gas prices go down a lot slower than they go up I think we could see a swift lower at the pumps that takes regular unleaded gasoline to $3.75 by Labor Day and around $3.30 by the end of the year.

Of course it's other commodities prices that consumers are concerned about as well including the price of milk and eggs. On Friday consumer sentiment data was released that was better than expected but dismal nonetheless. Tomorrow we get even more information on the state of mind of consumers but there is no doubt prices of stuff folks buy at the supermarket will have to come down before there are real changes in confidence.

Click to enlarge

June 2008 prices percentage change from year ago period on basic food staples and gasoline (regular unleaded):

  • Gas: 4.065 (per gallon) up 33%
  • White bread: 1.370 up 15%
  • Ground chuck: 2.835 (one pound) up 4%
  • Chicken: 1.181 (per pound) up 4%
  • Eggs: 1.920 (per dozen) up 40%
  • Orange juice (per 16 ounces, frozen concentrate): up 3%
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