The week before last ended with gloom in light of the impending nationalization of Freddie Mac and Fannie Mae (political jargon for “we the taxpayers will pick up the check”). The Bush administration extended a $300 billion lifeline to the endangered species of mortgage providers; placed limits on short selling activity and the market responded extremely positively. In addition the market was helped by a smaller than expected loss from Citibank; homebuilding activity (excluding a statistical blip as a result of legal wording changes in New York City) dropped to its lowest level since 1991 and Freddie Mac even registered its stock with the SEC in anticipation of raising good old fashioned equity from the market now that it’s share price has responded positively.

Expectations were that the market bottomed following the Bear Stearns bailout in February only to be dashed when the test of the February lows in July failed with new lows being established. Now the euphoria may be that the Freddie Fannie bailout may have been the bottom. It may well have been, we will know when the inevitable test of these lows are concluded in the foreseeable future.

In the meantime conservative, well defined with risk properly analyzed investment strategies may still provide investors with above average positive investment returns.

What goes on inside your head when your portfolio implodes?

One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive.

Merely reading the words "market crash" in this sentence can instantaneously jack up your pulse and your blood pressure, the output of your sweat glands and the tension in your muscles. Stress hormones will flood your bloodstream. Your eyes will widen and your nostrils flare, making you hypersensitive to any further danger. All this occurs automatically, involuntarily and unconsciously. You can't be an intelligent investor if, without even knowing it, you are thinking with the panic button in your brain.

The countless people who bailed out of the market in the horrifying plunge of October 2002 missed out on the generous returns of 2003 through 2007, when stocks returned 12.8% annually. The same is likely to be true of those who cut and run in today's turbulent market.

Fortunately, you can train your brain to stay calm when the markets are gripped by panic.

Here are some ways you can control your fears.

Reappraise. Forget what you paid for that stock or fund; instead, imagine it was a gift. Now that it is priced, say, 20% more cheaply than in December, should you want to return the gift? Or should you buy more while it is on sale? (If rethinking a fallen price this way doesn't make you feel better, maybe you should sell.)

Step outside yourself. Imagine that someone else has suffered these losses. Think of questions you might ask to give that person advice: Other than the price, what else has changed? Is your original rationale for this investment still valid?

Control your cues. Even witnessing someone else's pain, or glancing into another person's frightened eyes, can fire up your amygdala. Because fear is as contagious as the flu, quarantine yourself from anyone who obsesses over the momentary twitching of the Dow. Tear yourself away from the computer or television; better yet, while the market is closed, make an advance date with friends or family to get your mind off stocks during market hours.

Track your feelings. Fill in the blanks in this sentence: "Today the Dow closed down [or up] ___ points, and that made me feel __________." Your emotions shouldn't be hostage to the actions of the roughly 100 million other people who compose the collective beast that Benjamin Graham called "Mr. Market." You need not be miserable just because Mr. Market is.

Finally, if the market is open, your portfolio should be closed. Sleep on any sell decision until the next day, when your fears may have faded. Intelligent investors act out of patience and courage, not panic.

For the entire article in THE WALL STREET JOURNAL click here:

Rates on 30-year fixed mortgages fell for the second week in a row on increased speculation that the Federal Reserve will not raise interest rates before the end of the year, according to mortgage backer Freddie Mac.

Freddie Mac (FRE, Fortune 500) said that 30-year fixed-rate mortgages averaged 6.26% with an average 0.6 of a point in the week ending Thursday, down from 6.37% last week. Last year at this time, the 30-year loan averaged 6.73%.

"Mortgage rates fell this week amid market speculation that the Federal Reserve may not raise the overnight bank-lending rate this year after all," said Frank Nothaft, Freddie Mac vice president and chief economist, in a written statement.

Nothaft cited Federal Chairman Ben Bernanke's grim economic outlook in his July 15th semi-annual testimony before Congress as one of the factors changing market perception of the Fed's movement of interest rates going forward.

"The economy continues to face numerous difficulties, including ongoing strains in financial markets, declining house prices, a softening labor market, and rising prices of oil, food, and some other commodities," Bernanke told the Senate Banking Committee early Tuesday.

The 15-year fixed rate mortgage this week averaged 5.78% with an average 0.6 of a point, down from last week when it averaged 5.91%. A year ago at this time, the 15-year fixed rate mortgage averaged 6.38%.

Five-year adjustable-rate mortgages (ARMs) averaged 5.80% this week, with an average 0.6 of a point, down from last week when it averaged 5.82%. A year ago, the 5-year ARM averaged 6.35%.

One-year Treasury-indexed ARMs averaged 5.10% this week with an average 0.6 of a point, down from last week when it averaged 5.17%. At this time last year, the 1-year ARM averaged 5.72%.

For the entire article from CNNMoney click here:

ADAM SMITH thought that private companies chartered to fulfil government tasks had “in the long run proved, universally, either burdensome or useless”. That has not stopped them thriving. America has five government-sponsored enterprises (GSEs), set up to subsidise loans to homeowners or farmers. (Sallie Mae, which deals with students, gave up GSE status in 2004.) Because they count as privately owned, GSEs are kept off the government’s books. For politicians that has made them irresistible ever since the Farm Credit System’s creation in 1916.

Fannie Mae and Freddie Mac dominate the GSE system, accounting for four-fifths of its total credit portfolio. Fannie was created in 1938 as a government corporation. In 1968 the Johnson administration decided to list its shares to reduce the budgetary pressures created by the Vietnam war, according to Thomas Stanton, of Johns Hopkins University. Freddie was born in 1970 and listed in 1989. Both companies aim to support the secondary mortgage market. They have succeeded all too well: they own or guarantee about half of all mortgages.

Their supremacy reflects their privileges. As well as an implicit state guarantee, which allows them to fund themselves cheaply, they enjoy exemption from some taxes. They run with far less capital than banks and have more latitude to include as capital dubious items such as preference shares and tax assets. The capitalised value of these privileges is huge: between $122 billion and $182 billion, according to a 2005 study by the Federal Reserve.

It gets worse. The same analysis concluded that shareholders, who enjoy turbocharged gearing without higher borrowing costs, siphoned off about half of the subsidy. Managers trousered an unseemly sum too: between 1998 and 2003, Fannie’s top five executives received $199m.

With so much at stake, no wonder the companies built a formidable lobbying machine. Ex-politicians were given jobs. Critics could expect a rough ride. The companies were not afraid to bite the hands that fed them: in 2004, the day before a congressional committee discussed the regulation of Fannie, the company ran a television advertisement attacking the committee. Their regulator, the Office of Federal Housing Enterprise Oversight, says its powers were weakened during its creation in 1992: for example, its budget must be approved annually by Congress and thus depends on political goodwill.

Accounting scandals in 2003-04 (the two firms restated earnings by a total of $11.3 billion) led to a change of management, and, supporters argue, of culture. The pace of balance-sheet expansion and accumulation of risky private-label securities has slowed. Yet neither company can be accused of anticipating the housing crash. An end to GSE status looks unlikely: as truly private companies Fannie and Freddie would require unrealistically large injections of equity. The government wants to avoid nationalisation. That leaves the status quo, the public subsidy of private profit: a combination as toxic as it was in Smith’s day.

 

HOME BUILDERS STOCK INDEX:

For the entire article from THE ECONOMIST click here:

The market rebound of the past week eased investors' fears, but it could be a temporary affair -- what is known as a bear-market rally.

It is common for rebounds -- sometimes strong ones -- to punctuate a long market decline. One example was the 13% increase from March 10 through May 2, when the Dow Jones Industrial Average seemed to be moving back toward its October record. Some thought the bear market was over. Then the Dow fell to a fresh two-year low on July 15.

Now stocks have rebounded again, with the Dow up 3.6% for the week, including a gain Friday of 49.91 points, or 0.4%, to 11496.57. The Wednesday-Thursday rise of 4.4% was the sharpest two-day advance since October 2002, when a new bull market was just beginning.

That got some people hoping that this also might be the start of a new bull market. It could be -- but many doubt it.

Investors give many reasons for skepticism.

After 2½ months of sharp declines, stocks were overdue for a temporary bounce.

Bear markets usually end in despair, with investors abandoning stocks. This time, there was some blood in the streets, but plenty of optimists were telling people to buy. Analysts also remain bullish -- maybe too bullish -- for second-half corporate profits. At a true bottom, that optimism normally would be gone. More stocks would be in trouble, and the cascade of selling would be heavier.

Just as bear markets typically end with more-severe woe, bull markets typically begin with a bigger bang. In 2002, at the very start of the new bull market, the Dow rose 7.7% in two days. Last week's two-day, 4.4% rally wasn't even in the top 200 historically. The broader Standard & Poor's 500-stock Index was up 3.7% in the two-day jump, only the best since April. It ended Friday little-changed at 1260.68, up 1.7% for the week.

The economy appears still to be worsening, with both inflation and a recession threatened. Usually, a bull market starts when the market sees signs of a coming economic bottom. Falling oil prices, which are helping stocks, are the result of a softening economy.

The current recovery has an artificial feel. It was sparked by a government crackdown on short selling -- which is a way of betting on stock declines. Many short sellers moved to the sidelines, temporarily removing some downward pressure on stock prices. Seeing that, some speculators bet on stock gains.

"These are the kinds of things you typically see in bear markets," said Russ Koesterich, head of investment strategy at Barclays Global Investors in San Francisco. "This has some of the characteristics of a bear-market rally."

For the entire article from THE WALL STREET JOURNAL click here:

Oil and other energy prices played a major role this week.  The June Consumer Price Index (CPI) surged 1.1 percent, posting a year-over-year gain of 4.9 percent -- the biggest since May 1991.  The Producer Price Index (PPI) jumped 1.8 percent in June from the previous month and 9.1 percent from last June -- the largest year-over-year gain since June 1981.  Energy prices were the main culprit for both strong retail and wholesale headline inflation.

The effect of rising energy prices was also evident in June retail sales, which rose only 0.1 percent, despite a 4.6 percent jump in sales at gasoline stations as gas prices soared.  For the second quarter, retail sales grew 2.6 percent -- the slowest quarterly pace since the fourth quarter of 2002.  The published retail sales data from the Commerce Department are adjusted for seasonal factors but not for inflation.  Using the goods component of the CPI to adjust for inflation, retail sales declined in the second quarter.

A separate report this week from the Bureau of the Labor Statistics showed that incomes are not keeping up with prices.  Inflation-adjusted average weekly earnings fell 0.9 percent in June from May and were down 2.4 percent from last June.  Manufactures also reported sharp increases in the prices they paid for inputs, according to the Philadelphia Federal Reserve manufacturing survey, which showed that the price-paid index rose to its highest level since 1980.

For the entire article from the MORTGAGE BANKERS ASSOCIATION click here:

Fannie Mae and Freddie Mac may not have many friends these days, but they should be able to count on a certain loyalty in Beijing. China is the biggest foreign holder of debt issued by the troubled enterprises and a relatively captive buyer of the paper.

US Treasury data shows that mainland Chinese investors owned $376bn of agency long-term debt at the end of June last year, almost one-third of total foreign holdings of the agencies. Virtually all of this is probably held by an agency under the central bank which oversees the bulk of reserves. Extrapolating on the basis of China’s growth in foreign assets, economist Brad Setser reckons the country now holds $500bn-$600bn worth of agency paper, or a 10th of the outstanding stock of agency debt.

Rather than sticking with straight debt, SAFE has been shovelling up the agencies’ asset-backed securities
– at the end of June last year, China held $206bn. That may well be harder to dump. Even in more normal times, commercial banks – the other natural buyers – often have balance sheet constraints. Pricing is also more sensitive to changes in market rates.

In future, switching into different instruments could also prove a struggle for China given the volumes involved. Replacing annual purchases of $150bn or so of agencies with alternatives is tough. Buying more Treasuries would impact yields, while moving into corporate bonds would ratchet up risk. That is something which China, still smarting from big paper losses in Blackstone and Morgan Stanley, is presumably keen to avoid. These US investments were both, in a roundabout way, funded by foreign exchange reserves. None of this makes government-sponsored enterprise debt especially compelling, but it does make China’s central bank a very attractive buyer.

The People’s Bank of China as America’s lender of last resort? Now that really would give Messrs Paulson and Bernanke food for thought.

For the entire article from THE FINANCIAL TIMES click here:

FROM BEN SARGEANT

 

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