Freddie Mac Drops a Bomb, Housing at More All-Time Lows, Dollar Rallies, the Asian EU, and More!

by Addison Wiggin & Ian Mathias

  • Freddie Mac drops a bomb… could housing take yet another turn for the worse?
  • Apparently so… NAR reveals all-time-scary home sales stats
  • The dollar rallies, pushes loonie clear back to $1.00… is this the end of the commodity currency rally?
  • China and India face new competition… 10 Asian nations unite in EU fashion
  • How ethanol could literally keep you up at night in 2008
  • Plus, GM unveils the car of the future… that only the Chinese can buy

In December 2004, we ran the playfully facetious headline “The Total Destruction of the U.S. Housing Market.”

Today, we take a moment to reflect on our forecast.

The crux of our argument at the time was that Fannie Mae, the nation’s biggest — and government-backed — enabler of the subprime mortgage market, was in deep s$*t. Internally, it had published a report revealing the firm’s exposure to the derivatives market. The author of the report was reprimanded… fired… and then the report mysteriously disappeared from the Internet.

Fannie had been engaged in Enron-style accounting. Heck, it even used Arthur Andersen as its accountant — the same firm used by Enron. Franklin Raines, then CEO, was asked to resign. His severance and bonus structure came under scrutiny. And several of the top executives he’d brought in to Fannie after his tenure as budget director in the Clinton White House suffered a similar fate.

Congressional hearings followed suit. The great fear at the time was that Fannie would have to slow its purchasing of mortgages… and tank the housing market. It was ugly. It looked bad.

It was soon completely forgotten.

Today, however, the saga rears its ugly head once again…

After the closing bell yesterday, Freddie Mac, Fannie’s more heavily exposed brother, halved its quarterly dividend and announced it would sell $6 billion of its own stock. Ouch…

Freddie posted a $2 billion loss last week — three times what analysts had expected. And disclosed that it needed to raise more capital to meet regulatory requirements. In order to raise that capital, Freddie cut its dividend by 50%. The trouble in Freddie’s accounting department has whacked the stock for 50% since the beginning of November.

“News from Freddie Mac lately has been nothing short of terrifying,” reports Brian McAuley of The Survival Report. “While the market seemed fixated on the dividend news, the far more important news went largely unnoticed. If market conditions continue to deteriorate and the dividend cut fails to raise enough capital to meet regulatory requirements, Freddie says it will consider slowing purchases in its mortgage portfolio.

“This is a very big deal for the housing market. Ever since the secondary market for mortgage-backed securities dried up over the summer, Freddie Mac and Fannie Mae have been the reliable source of credit that has kept a pulse beating in the mortgage market. Now Freddie is telling us that if conditions continue to deteriorate, it may have to purchase fewer mortgages….

“Up to this point, even as the availability of jumbo loans, no-doc loans, interest-only loans and various adjustable-rate products became scarce, there was some comfort in knowing that Freddie and Fannie would always be there to buy standard full-documentation loans for amounts less than $417,000.

“However, if Freddie and Fannie are forced to curtail their purchasing of mortgages, this would take even more homebuyers out of the market.” In other words, the mortgage industry is continuing to slide from bad to worse… and taking the housing market with it.

As if on cue, the worst home sales report of all time was issued this morning. Existing home sales fell 20% in October (year over year), to an annual rate of 4.9 million, the lowest ever recorded by the National Association of Realtors.

The median price of homes sold during October fell over 5% from the same time in 2006, to $207,800 — a record drop and record low of its own. October marked the 15th out of the last 17 months in which this price measure posted a year-over-year decline.

And wouldn’t you know, a record level of homes are now sitting in inventory — a whopping 11-month supply.

“No matter how you slice it, fewer mortgages mean fewer homebuyers, and that means lower home prices,” say The Survival Report duo. Mish and Brian punched the numbers and forecast home prices to fall as much as 43% by 2011. To find out if your home is at risk, click here.

And yet… even with the real estate market imploding and banks getting hammered alongside it… the U.S. markets rallied yesterday, sending the Dow up 1.7% and the Nasdaq and S&P 500 up 1.5% apiece.

Citigroup’s Arabian tryst must have sexed up traders on the financial sector. Is there a sovereign wealth fund ready to whisper sweet nothings… and slap nine-figure checks on the bedside table… for every flailing financial business on the Street?

Apparently so: J.P. Morgan, Barclays, Merrill Lynch, American Express and Morgan Stanley all rallied big.

Even Wells Fargo got a little action… despite the $1.4 billion write-down they announced yesterday. The news comes just 10 days after CEO John Stumpf assured his shareholders that the company was well positioned to weather the storm.

Wells Fargo stock shot up 5% this morning. Again… all we can say is: Huh?

The dollar rallied with vengeance overnight, too. The greenback gained two full points on the yen, back to 109… pushed the euro back to $1.47. And kicked the pound to the curb at $2.05. Ka-pow!

The Aussie and loonie rallies have run aground. One month after being almost a nickel short of greenback parity, the Australian dollar is back down to 87 cents — a 2½-month low. The Canadian dollar, after reaching $1.08 three weeks ago, is struggling to maintain parity this morning at US$1.00 even.

“The commodity currencies like Aussie and Canadian,” laments currency voyeur Chuck Butler, “have really been taking on water lately.

“Their weakness has to do with the weakness in commodity prices, to a degree. But if we go back to 2003 — when the first commodity sell-off began — we’ve seen about a dozen or so of these commodity sell-offs, and each time the commodities have come back even stronger. So I’m not about to give up on them yet.”

“Cyber Monday,” as retailers are labeling the Monday after Thanksgiving, saw a 21% rise in sales compared with the same day in 2006. CNNMoney branded Monday “the first official day of the online shopping season,” and it seems as though consumers came out en force. $733 million was spent online Monday, $33 million more than last year. $733 million marks a 83% jump from the daily average online spending in the four weeks preceding “Cyber Monday.”

Yet just like “Black Friday,” while online shopper volume rose on Monday (by 38% year over year), the average amount of money spent per buyer fell by 12%.

Al Hubbard, President Bush’s chief economic adviser, quit his job today. It must really suck to work for this administration.

Leaders of 10 South Asian nations have agreed to join forces in an agreement similar to that of the European Union.
Dignitaries from Indonesia, Thailand, Malaysia, Singapore, Brunei, the Philippines, Cambodia, Laos, Myanmar and Vietnam met last week and have recently altered what they have dubbed the Association of Southeast Asian Nations, or ASEAN, to an EU-style bloc of unified nations.

The ASEAN agreement, originally formed in 1967, will now allow citizens of these nations less restricted travel between countries, simplified international business regulations, and enough “standardization” to make your head spin. The group aims to “substantially” reduce restrictions on air transport, health care and tourism by 2010 and most trade barriers and logistic hurdles by 2013… and have one big happy ASEAN family by 2015:

How do you say “cheese” in Malay? Or Thai? Anyone?

“Businesses say we have a five-year window in terms of catching up with China and India,” said Robert Yap, chairman of the ASEAN Business Advisory Council.

“Plans to ‘remove or relax’ restrictions on capital flows,” comments our Christopher Hancock, “are a great attempt to compete with China and India for foreign direct investment (FDI)… Remember, FDI into China wasn’t about only ‘cheap’ labor. In the long term, foreign investors wanted a piece of the potential billion-plus consumer market.

“The ASEAN agreement is a very natural step for the smaller Southeast Asian countries to play ball… However, opening up the financial services industry will present a MAJOR challenge.”

Investment-wise… Mr. Hancock recommends riding the infrastructure train for quite some time. Property development, roads, pipes, rails… steel, cement and major property development stocks. Those stocks represent a major theme in his Free Market Investor newsletter. Guoco Group, for example, has a good presence in the second-tier Asian development scheme. as well as Singapore, Vietnam and Malaysia. Be sure to check it out.

Hungarian down pillows — the most elite pillows in the world of luxury sleeping goods — are set to skyrocket in price next year. Freakin’ ethanol…

“Producers are getting into an impossible situation,” said Peter Kovacs, managing director of Hungaria Tollfeldolgozo Kft, a European and North American exporter. “Feed has become expensive, the price of maize shot up to the sky, severely affecting the viability of the sector.” Coupled with a few bouts of avian flu, Hungary’s feather production this year is slated to fall over 40%.

“Interesting that you would use Wrigley Field as an illustration for the Citi job cut story,” writes a reader in response to yesterday’s unflattering announcement.

“A more fitting analogy might be Citi Field — set to open as the N.Y. Mets home in 2009 — which, ironically, is estimated to hold… 45,000. Maybe Citi can give the firees free tix to opening day as part of the severance package. Any word on whether the field will be renamed to Abu Dhabi Field?”

The 5 Responds:
Oh, the irony. Citi will pay $20 million each year for the next 20 years for the privilege of calling the new Shea Stadium “Citi Field.”

“As much as I tend to admire your perspective,” writes another, “you are sadly mistaken in your disparaging reference to Daihatsu. I used to own a Daihatsu sedan, and it was probably the best car I’ve ever had — well built, reliable and economical (40 mpg). We could use a few more Daihatsus on the market right now.”

The 5 Responds:
Perhaps, but they still make ugly cars …

An addendum to the auto industry thread: GM announced early this morning that it would soon be unveiling a brand-new state-of-the-art hybrid car… in China.

The American automaker is aiming to compete with Toyota, currently the only manufacturer selling hybrids in China. GM claims its yet-to-be-named Chinese hybrid will be for sale in time for the Beijing Olympics.

Great idea, right? Sell the trendiest new cars to the world’s biggest emerging market? Maybe not… Toyota sold a grand total of 2,000 Prius hybrids in China last year.

Best regards,

Addison Wiggin
The 5 Min. Forecast

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Wells Fargo Sinks Into Mortgage Morass
Bush economic adviser Hubbard to step down
GM to build hybrid cars in China from 2008


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