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Fannie Will Test Laissez-Faire

By: Rick Ackerman, Rick's Picks


-- Posted Thursday, 3 July 2008 | Digg This ArticleDigg It! | Source: GoldSeek.com

Rick’s Picks

Thursday, July 3, 2008

“Phenomenally accurate forecasts”

  

Ugly. With bullish seasonality ratcheted up to the max, the Dow still managed to fall 167 point yesterday. Perhaps we shouldn’t be too surprised, since the stock market just finished its worst June since 1930. However, given the nearly 200-point short-squeeze that had turned stocks around a day earlier, we were waiting for bears to re-emerge yesterday, despairing and perhaps just a little freaked over the fact that not a single U.S. bank made it into the headlines with some new horror story. Adding to the warm glow of things, Secretary Paulson was in London to soothe true believers with the usual litany of  falsehoods, including the notion that the government is loathe to meddle in the affairs of businesses supposedly too big to fail. “We need to create a resolution process that ensures the financial system can withstand the failure of a large, complex financial firm,” Paulson told listeners.

 

 

If Uncle Sam is indeed backing away from moral hazard, intending to let the financial system heal itself, we’ll be interested to see how it handles the coming collapse of Fannie Mae and Freddie Mac. They are going to zero, according to the calculations of a seer for whom we have always had a great deal of respect, Porter Stansberry. In the June issue of his peerless Investment Advisory, Porter lays out a seemingly airtight case in support of his thesis. He notes, among other things, the following: “Today, on a combined basis, Freddie and Fannie own or guarantee 45% of all of the mortgages in the United States – $4.8 trillion worth of mortgages. But looking only at the mortgages they actually own and hold on their balance sheets, you find mortgages with a face value of $1.7 trillion. They hold these assets with only a sliver of equity, about $70 billion in ‘core’ capital. On a combined basis, they’re leveraged by a little more than 24-to-1. Thus, a 5% loss in the value of their mortgages would wipe out 100% of the equity in each firm. Looking beyond their balance sheets to their off-balance-sheet guarantees, you see that they’re actually leveraged 68-to-1, meaning a 1.4% decline in the value of their total on- and off-balance-sheet would wipe out shareholders.”

 

Loans Still Metastasizing

 

Amazingly, the government’s “hands-off” approach so far has been to enable the GSE’s to greatly expand their respective mortgage books. Freddie’s response must have been particularly gratifying to dovish regulators, since the company grew its home loans in April at an annualized rate of 42%. Talk about pouring gasoline on a fire!  Porter has generously consented to make the June issue of his newsletter available to Rick’s Picks subscribers. It is an absolutely brilliant piece of work, finding historical resonance in the economic disaster that followed the San Francisco Earthquake of 1906. Did you know that most of the fires that destroyed the city were started by homeowners whose insurance did not cover earthquake damage? Or that the physical gold used to pay off claims took all too long to find its way to the city?  In fact, earthquake losses were directly responsible for the bank panic and financial crisis of 1907. You’ll be amazed at the historical parallels to today. To access a .pdf version of Porter’s newsletter, Rick’s Picks subscribers need only go to the Intraday Notes section of Thursday’s Inside Edition and click on the link I’ve provided. If you are not a subscriber, a one-month trial subscription to Rick’s Picks, including access to a chat room frequented by veteran traders from all over the world, can be had for a pittance by clicking here.

 

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Last Chance to Take Seminar

 

Because of family vacation plans, I will be able to offer the Hidden Pivot Seminar only once this summer – on two consecutive weekday evenings, July 23-24. If you’ve been thinking about signing up, now is the time to do it, since once this class is full there will not be another opportunity to take it until fall. Click here, and then on the “Upcoming” tab to register;  or here if you would like more information as well as a detailed description of the Hidden Pivot Method and a free Hidden Pivot calculator (our latest model, perfect for beginners).  

 

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Saving America

 

We don’t have any easy answers, but we’re hoping to hear from readers with ideas about how to return the U.S. economy to health. The person who submits the best essay on the topic What Will Save America will receive not only a scholarship to the Hidden Pivot seminar, but also unlimited access to post-graduate tutorial sessions held each week during market hours. The value of this package is $1,150, and a week into the competition we’ve received no fewer than 21 submissions, including one that argues that Americans need, more than anything else, to get serious about diet and exercise. 

 

Essays should be 750 words or less and must be received at this e-mail address by no later than July 15.   For details about the Hidden Pivot seminar and comments from those who have taken it, click here.

 

 

Our own idea about how to save America is to become a global leader in energy. A solution that works for the whole world would be a triumph for Yankee know-how on a par with the invention of the automobile assembly line. To stimulate thought on this topic and others, we will be presenting occasional guest commentaries by people with backgrounds in science and engineering. Economists need not apply. In the meantime, we welcome any contributions at the e-mail address linked above. We’ll print the best of them once the competition has concluded next month.

 

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com 


-- Posted Thursday, 3 July 2008 | Digg This Article | Source: GoldSeek.com




 



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