Fed Speak Translations, Oil Forecasts, Treasury Calls for Help, Crazy Freddie Mac Stats, and More!

by Addison Wiggin & Ian Mathias

  • The Fed admits impotence… nation stuck between falling economy and rising costs
  • Yet stocks rally… The 5 translates the Fed speak that aided yesterday’s huge rally
  • Treasury Dept. enlists help to rescue Fannie and Freddie… which Wall Street wolf will soon be “protecting” the herd
  • Freddie drops another head-scratching earnings report… talk about a time bomb
  • Oil prices continue retreat… Dennis Gartman’s price targets and market advice
  • Home heating costs expected to soar… Kevin Kerr on the coming winter of discontent

  “Although downside risks to growth remain,” read the meat of the Fed’s interest rate statement yesterday, “the upside risks to inflation are also of significant concern to the committee.”

Such is the state of the union. The economy is sputtering; prices are rising. Without a game plan, the Fed did nothing. They left rates at 2%.

  Of course, following the logic in today’s market, traders took their inaction as a sign to “BUY!” The major indexes on Wall Street rallied all day long:

  This snippet from the Fed release, in particular, got traders all lathered up:

“Labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction and elevated energy prices are likely to weigh on economic growth over the next few quarters.”

“Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities… The committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.”

Translation: “We think the economy and market are still in trouble, but we can’t tell how bad inflation might get.” And thus, rates are likely to stay at 2% for some time. For a nation addicted to credit and the stock market, low rates are cause to celebrate.

Who really needs a stable currency, anyway?

  Indeed, the dollar dipped immediately after the announcement yesterday.

On the whole, the greenback has been slowly trending up this week. The dollar index — a measure of its purchasing power versus six of the world’s most formidable currencies — is up to 74. But for a little perspective, let’s look at 74 in relation to the index’s history since its inception in 1971:

  The U.S. service industry is still contracting. The Institute for Supply Management reported yesterday that the U.S.’ “nonmanufacturing” sector scored 49.5 on its index in July. That’s actually a slight improvement from June, but the sub-50 score still signals a recession.

Since the service industry makes up over 70% of the U.S. economy… umn, that’s not so good.

  This morning, the Treasury Department announced it’s hired Morgan Stanley to help guide its rescue of Fannie Mae and Freddie Mac.

In a move akin to hiring a wolf to tend your flock of sheep, the government intends to use Morgan’s “market analysis and financial expertise” to aid its new lending and share buying facilities for Fannie and Freddie. Morgan Stanley officials say their firm will not be charging any fees for their consultations. They’re only requesting preferential treatment, a guaranteed government bailout should the need arise, call girls, dinner and some country club memberships.

It is true that Morgan Stanley has fared better in the “credit crisis” than most of its competitors. But still… they’ve written down over $14 billion in bad loans and CDO exposure. Only seven other financials around the world have managed to lose more.

  Also this morning, Morgan Stanley announced it has frozen thousands of home equity loans. The second biggest securities firm in the U.S. can’t figure out how much their clients’ homes are worth, so they put the kibosh on a bundle of equity credit lines until they can. Good luck with Fannie and Freddie, guys… seriously.

Freddie Mac reported its fourth straight quarterly loss today. At $821 million, it managed to triple the losses the Street had anticipated. The government-sponsored enterprise (GSE) blamed the loss on $2.8 billion in “credit-related expenses”… whatever they are. And then, just for kicks, it threw in a $1 billion “mortgage-related” write-down.

Freddie will slash its dividend by 80%, to a measly 5 cents a share. The company still has over $130 billion in subprime and Alt-A loans on its books. They’ve written down only about 5-6% of these suckers to date.

“If I had better foresight,” Freddie CEO Dick Syron said regarding the risky loan portfolio Freddie took on under his tenure, “maybe I could have improved things a little bit. But frankly, if I had perfect foresight, I would never have taken this job in the first place.”
Yeah, that’s what we like to see in the top executive of the nation’s second largest government-backed mortgage firm: confidence. Get ’em, tiger.

  Gold held up well overnight. Spot prices shed only about $5 after the FOMC announcement, but have since bobbed back to yesterday’s levels. If you’re inclined to bury the stuff, you can pick up an ounce today for the low, low price of 885 paper dollars.

  Oil held steady at $119 overnight, too. This morning’s supply report from the Energy Department was a mixed bag. Oil inventory rose 1.6 million barrels, far better than the million-barrel decline the Street anticipated. But gas supplies fell 4.3 million barrels, far worse than the 1.4 million decline traders were expecting.

The two supply surprises have zeroed each other out. And crude looks like it’s going to stick to the $120 range for a while before heading lower again.

“I don’t think we are going to see the end of this volatility for some time,” said Dennis Gartman this morning on CNBC. “But I think we have seen the end of the bull market. I don’t think it will go past $145 for a long time, maybe two years.”

Our commodity-centric friend said crude could “easily” go back to $80-90 a barrel. But no matter what it does, he’s staying on the sidelines. “I am so frightened of what’s going on I am staying far, far away. I find myself trading stocks more than I have in a long time.

“Buy things that are starting to go up, sell things that are still going down. It’s time to start being bullish in stocks again.” Our managing editor Chris Mayer may agree with Gartman, but we’re still wary of stocks. Choose very carefully. The one trade Gartman offered the masses?

Short Toyota, long Harley-Davidson.

The national average price at the pump fell another cent today, to $3.86 a gallon. We expect gas prices to continue falling… oh, until about Nov. 5. Heh.

  Even though gas and oil are retreating, heating your home still promises to be expensive this winter. Heating oil is already 36% higher than it was last winter. A gallon of the stuff sells for around $4.50 these days — more than double its price three years ago.
“The market has been completely turned on its head this summer,” Andrew Heaney told The N.Y. Times today. Mr. Heaney runs a heating oil cooperative. “I’ve been in this business for 15 years, and this is the most volatile we’ve ever seen.”
The average heating bill in the Northeast — where heating oil use is most prevalent — is expected to jump $1,500 this year.

“Even if oil pulls back, you will still have to pay $5.20 a gallon,” writes our Maniac Trader, Kevin Kerr, from his home in Connecticut. “If it continues to climb, you could end up paying as much as $8, if you can even get it. Doubling heating oil bills may put already marginal homeowners in the Northeast over the edge. Seniors and those on fixed incomes could be facing a crisis this fall. Suddenly, living in Estonia and heating with wood stoves is looking like a good idea.”

  “There is a high possibility the [Japanese] economy has entered a recession,” Shigeru Sugihara said last night. Sugihara is the Grand Poobah of business statistics in Japan. As we forecast on Monday, the Japanese government looks like they’re prepared to admit the Asian economy is “deteriorating.”

  In a curious move, China’s central bank raised business loan quotas this morning. The People’s Bank of China (ironically, owned by the state, not the people) announced it has raised its annual target for the number small business loans it doles out by 10%. The target number for larger institutions was bumped 5%.

We have lost count of how many times the Chinese government has hiked required reserve ratios and lending rates to cool its white-hot economy. Now most of the world is expecting Chinese growth to abate after the coming Olympic Games. Looks like Chinese central bankers are worried, too.

  “Everything in Norway is more expensive, relative to the USA,” writes a reader responding to The Economist’s Big Mac index . “Gas was recently $12 a gallon. But wages may also play into this; the minimum wage is $21-plus per hour! That’s considerably more than 120% higher than those of most states with a minimum wage higher than the federal standard. I would venture that wages are lower in all of the countries mentioned with lower-costing Big Macs relative to ours. So by that thinking, you may not want to invest in countries with higher wages. But I doubt Brazil has eclipsed our minimum wage.
“I think The Economist should throw in a wage comparison, and maybe a tax factor also, to the index. Also, it should add a measure of state-to-state prices versus the average wages in those state, and then maybe it would have more meaning to me.”

The 5: Hmmn… we’ll take it up with them when we speak to them next.

  “Greed and selfishness are a human constant and, therefore, can’t be the causes of economic change,” writes a reader in response to our closing comments yesterday. “Following are a few statements that have never been made in any society and never will be made: ‘Thank you for the promotion, boss, but please don’t give me the 10% raise. I don’t want to be too greedy and selfish’; ‘Mr. Jones, I want to sell my house to you, but I’m afraid I can take only $100,000 for the house and not the $200,000 you are offering.’; ‘Honey, sell all of our gold and tell the dealer I will take only $350 an ounce and not a penny more than what I paid for it.’
“If I don’t eat, it is my stomach that growls, not yours. If I don’t fix the hole in my roof, it’s my furniture that gets ruined, not yours. Bottom line, no one loves a man as much as he loves himself.
“They tried to make the perfect socialist man. It didn’t happen, and it ain’t gonna happen. Those who blame greed and selfishness for our economic woes have their heads so far up their b***s that they are chewing on their own tonsils.”

The 5: Not sure we would have phrased it like that, but the image you evoke is, umn, complex. We, for one, wouldn’t want to live in a world where the socialist man had been perfected. But it sure is fun to mock people who believe it’s a laudable objective.


Addison Wiggin
The 5 Min. Forecast


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