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Five Things You Need to Know: Song of the Goat

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Economists, innocent of the song of the goat, can be forgiven if they mistake it for the sound of a bull snorting.

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

1. Song of the Goat

"It's not often that you will hear a goat bleating for no apparent reason, and if you do, it most often signals that something is wrong. Act immediately!" I took those two sentences directly from Goat World.com and, by God, they are worthy of being stone-carved keepers. There are certain resources I always keep handy, just in case... I cannot disclose them for competitive purposes... but you can bet, for reasons that will soon become clear, Goat World.com is one of them.

The song of the goat... Most Americans have never felt it... And make no mistake, it's not so much a sound as a feeling... the stomach twisting churn of the bleating goat. So, naturally they have no idea what to do when it arrives. When I was a kid, no more than 11 or 12, a deranged neighbor sneaked onto our property one evening and staked a goat in our yard as payment for a gambling debt, or as notice of a gambling debt owed, I can't remember which and that detail is insignificant now anyway. But I will never forget being torn from sleep by the awful, gut-clenching, teeth-grinding sound of the song of the goat... And, in a way, I suppose I don't want to forget; a lingering reminder of how the cloak of sleepy darkness is capable of bringing furious and unimaginable change.

The Ancient Greeks knew, and feared, the song of the goat. And they had the good sense to capitalize on that knowledge and fear by creating an entire industry around it, one that would make Hollywood's vilest cretins and debauchers scream in horror and moral outrage. I am talking about Dionysian satyrs, half-man, half-goat mutants, engaged in frenzied orgiastic rituals, the very foundation of which the Greeks turned into theatrical spectacles they could sell tickets to; tragôidiâ, tragedy, literally, the song of the goat.

As usual, we have much to learn much from the Ancient Greeks; namely, how to capitalize on economic doom and tragedy. If I had any measure of good judgment, I would stop right now. Being "right" about economic doom is the quickest way to lose all of your friends and create more enemies than you can shake a stick at. It's a bit like telling a man his wife is cheating on him... with his son. If you are lucky, you will merely be hated; unlucky, and you will be stoned to death by someone who will then scratch his own eyes out.

The Greeks wrote myriad tragedies dealing with this kind of truth-telling, and people paid good money to watch as oracular prophets stoned out of their minds on ethylene gas made weird, dire predictions that usually came true. Looking back at the Ancients from our economic perch today, this enterprise of staging truth-telling performances in exchange for money seems almost quaint.

Economists, innocent of the song the goat, can be forgiven if they mistake the sound of crude oil spilling off a quick 20% since mid-July, the sound of inflation receding and the U.S dollar suddenly thriving for the song of the bull snorting.

And surely retail sales, down a mere 0.1% to kick off the third quarter, do sound bullworthy amid the gloom, but that sound isn't what you think it is, friend. That's just the sound of economic stimulus checks evaporating into cash-starved registers... Every tragedy opens with a chorus, a Dionysian dythyramb that prepares the audience for the song of the goat, and this tragedy is no different.


2. Fannie Faces Tab Banishment

The tab jumper is a bartender's worst nightmare. Worse than the lecherous gin guzzler that gropes female patrons. Worse than the executive junior vice president that slurps booze on the company card as if prohibition is looming and then doesn't tip... because of "corporate policy." Yes, each is awful in its own special way, but nothing is more ruinous for a bar than people WHO WON'T PAY.

And so there's this news today that the bartender is worried about a very big customer who is drinking less than usual... Fannie Mae (FNM)... skipping out on her tab.

See, despite a now EXPLICIT government guarantee, Fannie Mae bonds are trading at near their highest yield ever over benchmark Treasuries. Fannie 30-year agency debt currently yields 6.02%, or 212 basis points more than Treasuries of similar maturity, according to data from Bloomberg. That means the bartender fears she won't pay, mostly because people who have been drinking at her bar are skipping out on their tabs.

It's a vicious and dangerous circle, which is why, for decent and reputable bartenders, it is nothing short of a nightmare. Once it starts, you have NO CHOICE but to crack heads or face financial ruin. The market is cracking Fannie's head.


3. Subdoomed, Alt-doomed & Doomed

So this is where things stand. Fannie Mae said last week it will no longer buy and guarantee Alt-A mortgages because the default rates on these mortgages are increasing at a rapid rate.

The number of Alt-A loans where payments are 60 days late has quadrupled from a year ago to nearly 13%, according to the First American CoreLogic. Even worse, many Alt-A borrowers are facing upcoming resets that could nearly double their payments.


4. Just When We Thought It Was Over...

This is creating new headwinds for housing, even as some have been optimistically predicting stabilizations. Fannie and Freddie are no longer able, and willing, to step up and buy and guarantee entire segments of the housing market. Meanwhile, lenders, according to the Federal Reserve's Quarterly Senior Loan Officer survey are dramatically tightening residential mortgage lending standards, and the reclassification of borrowers based on these tighter standards is showing up in demand.

You can see this in action in the two charts below:

Loan Officers Reporting Tightening Standards

Click to enlarge


Loan Officers Reporting Stronger Mortgage Demand


Click to enlarge



5. Liquidation... at Any Cost

As if the tighter lender standards and sluggish demand for residential mortgages wasn't enough, the Wall Street Journal notes that banks, stuck with an increasing glut of foreclosed homes, are shedding them at increasingly steep losses... which not only will add to banks' losses this year, but force repricing in many neighborhoods.

This is the beginning of the "liquidate at any cost stage."

A Detroit News story making the rounds today shows a house in foreclosure that recently sold for ONE $1 dollar.

Meanwhile, also in Michigan, this Bloomberg story notes that workers are dumping their outdoor toys as quickly as they can to raise cash.

No positions in stocks mentioned.

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