Treasury bonds got hit hard yesterday after retail sales posted a decent gain. I continue to be confounded by the recent spate of non-recessionary economic figures. But with housing showing no signs of bottoming in the near term, I'm sticking with a recessionary view.
This morning Freddie Mac reported a loss that was less than expected. I plan to post more on this as I read more detail. I really want to understand how Fannie Mae posts such a bad number yet Freddie manages to post a more mild loss. In other words, either Fannie is really doing something wrong or Freddie's numbers aren't all they seem to be. The stock was up 8% overseas. I'm going to try to hear the conference call today and will post what I think. Please post your comments.
Offsetting this was a slightly better than expected CPI number (Core 0.1% vs. exp. of 0.2%). Treasuries had been down 1/2 point before the number and are now flat. Technicals remain crappy for intermediate bonds so I'm cautious. On the upside (in yield), I think the next technical level on 10's should be at 4.05, although 4% might wind up being a psychological level and thus producing some resistance there. On the downside, as proven in recent days, we can easily slide into the 3.70's on a short-term move. I feel like we have some gaps to fill between 3.88 and 3.95%.
Meanwhile the BBA has "put LIBOR under review" and will announce any changes on May 30. People I've talked to think more New York banks will be added to the US $ survey, which I'd think would cause LIBOR to post a bit lower. Anyway, angst over LIBOR continues, and is pressuring swap spreads. 2-year spreads moved almost 4bps wider yesterday and are another 1.5bps wider today.
Wednesday, May 14, 2008
Freddie Mac and CPI: You've had a busy day!
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Treasury bonds got hit hard yesterday after retail sales posted a decent gain.
Actually, in real terms they fell.
But who's counting.
AI said.."I continue to be confounded by the recent spate of non-recessionary economic figures.""
Be careful not to be a victim of propaganda by the left-wing bias of the mainstream media. Whenever a Democrat is President, it is always a "soft landing". Whenever a Republican is President, ANY economic weakness is always a "recession", usually "deep and prolonged".
Freddie's loss predictions were much more aggressive last quarter than Fannie's. These loss numbers from both are based primarily on predicted future defaults in their portfolios, so a lot of modelling decisions (i.e. guesses) come in to play, and there is no way for either company to really know just how rotten this last batch of loans were until they are done rotting. Also both companies are still figuring out what accounting rules make them and OFHEO equally happy so the numbers may hop around a bit as they change the rules.
Mortgage accounting is a mess, by the way, the FAS rules are generally constructed without giving any thought to what they mean for mortgage based assets. As an example, they almost passed a rule that said something like any option has to be assumed it will be executed if it is in the money. That would mean that if rates drop you have to assume that your entire portfolio prepays all at once, immediately! Good fun. There is of course the debate over whether you should mark-to-market an asset that you plan to hold to maturity, which I think Freddie does and Fannie does not?
It looks like they took a loss more then offset by valuation gains.
I don't think anyone believes they made money this quarter. They are trying to hunker down and boost balance sheet capital sooner rather then later.
The single most important thing is whether they are making money on current business at current prices and current underwriting.
They did double fees and significantly tighten up underwriting. If they aren't making money on new business, its all over.
I read somewhere (sorry, don't remember where) that Fannie just took a major write off due to an increase in guarantee fees. Apparently expected losses are calculated over a long horizon using the fee number, so a higher fee maps into a big charge.
I don't know whether Freddie did the same thing, but such items might explain some of the difference.
FRE has $157b of the infamous 'Level 3' assets
FRE used an accounting gimmick, err change, to significantly reduce its loss
But never mind about those details.
So FRE clarified that the $157 billion in Level 3 assets were ABS debt that was re-classified from Level 2 -- because they were relying on mark to model quotes from dealers. Management tried to imply that these were somehow "real" quotes -- just because someone else made up the numbers. Just because someone else made up the numbers doesn't mean they aren't mark to imagination -- its just someone else's imagination. That someone else sold the crap-- I mean assets-- in the first place and probably still as some on their own books; meaning they have lots of incentive to imagine a favorable number.
With the leverage employed by the GSEs (before Congress even gets into the act) is already as high as LTCM shortly before it blew up.
FRE's Level 3 assets amount to more than twice the shareholder's equity of FRE and FNM combined (and FNM no doubt has some trash of their own).
Bernanke recently was quoted saying there remains some disturbances in the financial markets. Very low volumes even before summer starts -- meaning even "moderate" sized trades can cause significant price swings.
Why is it so hard for a Princeton PhD to figure this out?
-- No one believes CPI numbers are right, not even people who think inflation isn't an issue.
-- No one believes the big monoline insurers are truly AAA. A fair number of people (albeit a minority so far) believe the monoline insurers are insolvent.
-- More and more people are realizing the GSEs have absolutely no clue what their risk levels are. Given their leverage exceeds 60-1, the only question is when, not if, these things will implode
-- The Fed has assured us that inflation is under control, and moderating, for two years now. CPI (which has its own problems) started slightly ABOVE the Fed's target zone, and after "moderating" for two years is now WAY ABOVE the target zone
Who does Bernanke think he is fooling besides himself? Go to any AA meeting in any city you like, and they will tell you the same thing: first you have to admit to yourself that you have a problem.
Bernanke is lying to himself, never mind the rest of us... and the big problem is that he seems to believe his own propoganda
While we are talking about Bernanke's delusional statements, lets not forget this whopper:
"The United States supports a strong dollar"
Short squeeze.
"I continue to be confounded by the recent spate of non-recessionary economic figures."
Don't be, this is easily explainable and Russ Winter talks about it often. The incessant putrefaction of the Treasury and Fed balance sheets can mean only one thing: much, much higher interest rates. The reason rates have been so stubbornly (and artificially) low has to do with the petro-recycling and Godfather Protection Racket we are running. The Arabs (and Asians) must take all of the USD and recycle them back into agencies and treasuries to maintain pegs and if they don't, well nobody can tell what bad things might happen to them.
There is a logical end to this madness, of course, and that is when the FCB's say "NO MAS!" to the hyperinflation in their own currencies. This is a logical choice that must be made, either willingly or unwillingly. The end result is the same, just one option produces chaos and toppled governments and the other doesn't.
So what can the pigmen do about the current state of affairs, knowing full well that the bond bubble must collapse? Simple, get the MSM (Ministry of Truth) to keep trotting out "better than expected" economic reports for various things and bake-away outrageous inflation numbers and obvious retail weakness. In this manner, the MOT can proclaim that interest rates are rising because we are coming out of recession or were never in one to begin with! Simple, yet diabolically brilliant.
Why the Fed and the MSM have any credibility left is a mystery, but these reports are a total joke and defy any kind of reason whatsoever.
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