Saturday, August 9, 2008
Fannie, Freddie and More
Well the news seems to be going from bad to worse for these two mortgage giants. Both reported earnings this week and losses were multiples of what analysts expected. Freddie, the smaller of the two, reported a quarterly loss of $821 MM and cut its dividend 80% to preserve cash. Fannie Mae, lost $2.b BB for the quarter and also slashed its dividend to 5 cents from 35 cents. Both are going to be in need of more capital before year end. Combined these quasi government entities own or guarantee one half of the $12 trillion in US home loans currently outstanding. With delinquencies continuing to rise I doubt that their problems are over.
On a brighter note the US markets and particularly the US Dollar had a great week. Faith the in Greenback has returned seemingly on the back of falling commodity prices. I continue to be a commodity bull in general and view these pullbacks as a buying opportunity. Natural Gas in particular, but also the precious metals, seems to be offering good entry points. I do believe that growth is slowing, particularly in the developed countries, but not enough to grind the global economy to a halt. Rising prices has resulted in some demand destruction, which could explain at least some of the pullback, but longer term demand has nowhere to go but up for most of the core commodities. The tough part is figuring out what price brings the forces of supply and demand in to equilibrium over the longer term, and the experts I rely on are telling me higher then prices at the moment.
No doubt with this much uncertainly over so many core economic and financial variables, the volatility will continue. Keep those seat belts fastened.