Financials Back in Big Trouble, Inflation Soars, Housing Stats Still Bottomless, Congressional Craziness, and More!

by Addison Wiggin & Ian Mathias

  • Fannie and Freddie plunge again… the latest news that reeks of an imminent bailout
  • Financials still in hot water… why the sector’s biggest players will have to cough up an unplanned $208 billion by 2009
  • Wholesale inflation skyrockets… producer prices rising at nearly 10%
  • More drama from the housing sector… starts, permits and sentiment data below
  • The surprise of the day… as the market returns to its losing ways, one assets class amazingly bucks the trend

  The classical economists argued that the depths of a bust will be directly proportionate to the excesses of the preceding boom. Unfortunately, there are a scant few practicing classical economists left on this shining ball we call home. None of whom has much influence on government policy or sway with American consumers.

  Today, we see further evidence of how deep the housing bust will go. Housing starts, for one, have fallen to a 17-year low. Builders broke ground at an annual rate of 965,000 homes in July. That’s an 11% decline since July 2007 and the fewest homes since 1991.

In the same report, the Commerce Department said building permits for single-family homes sank to a 26-year low in July.

As you might imagine, the Homebuilder Sentiment Index published by Wells Fargo has remained steady at 16 in August, the lowest on record.

  Likewise, shares in the giant government-backed mortgage enablers Fannie Mae and Freddie Mac are getting hammered again. According to Barron’s columnist Jonathan Laing this week, Fannie and Freddie are so starved for capital they’re refusing to make good on their subprime guarantees.

In many cases, when a mortgage defaults, Fannie or Freddie has been paying only the required interest payments, not the full value of the mortgage. Laing concluded a government bailout is practically imminent.

  Fannie and Freddie had a “Bear Stearns” sort of day in the market yesterday. Investors were demanding over 16% yields on Fannie or Freddie debt. The price of credit default swaps jumped 11% at Fannie and 8% at Freddie. Meanwhile, shares of both companies fell over 22%.

At yesterday’s close, Fannie was “worth” $6.6 billion, Freddie less than $3 billion. Raising as little as $5 billion — which Freddie plans to do — would severely dilute shareholder value. Existing shareholders have no reason to stay, and prospective share buyers are demanding sky-high yields.

  But Fannie and Freddie aren’t the only ones. According to Dealogic, among the 10 biggest banks on Wall Street, maturing bonds will total $27 billion in August, $52 billion in September, $23 billion in October, $20 billion in November and $86 billion in December.

That’s an extra $208 billion flowing out of Wall Street for the rest of the year… just to keep the lights on.

  So where will financials get the money they need? From these guys:

The smartest guys in the room

U.S. commercial banks borrowed, on average, $17.7 billion a day last week from the Federal Reserve — an all-time high.

  Thus, we’re not at all surprised to see another measure of inflation shooting through the roof this morning. Producer prices inflated “modestly” in July, Reuters reported this morning. And you would agree with it, if you considered nearly 10% “modest.”

Including food and energy, the Labor Department’s measure of PPI jumped 1.2% in July — and 9.8% over the past year. You’d have to reach all the way back into your Calvin Klein designer jeans to see a rate that high. Try 1981.

While July’s number is a bit lower than May’s 1.8% increase, the latest PPI reading was still double Wall Street’s best guess. Even the Fed’s “core” rate is up to 3.5% — a 17-year high.

  Congress is helping out with these critical issues by doing… nothing! Nothing useful, anyway. According to the 20 years of data compiled by Taxpayers for Common Sense, the 110th Congress has passed “only” 294 laws — the fewest since these wonks began keeping a tally. That’s the good news…

Curiously, at the same time, this Congress has proposed over 1,900 resolutions, which is also a record.

Hmmmn… let’s see. They’ve managed to declare Pittsfield, Mass., the official “origin” of baseball; resolved that July is National Watermelon Month; nominated the fourth Saturday in July as the day of the American Cowboy; ooh, and let’s not forget National Funeral Director and Mortician Recognition Day.

One of the members of this Congress, we remind you, will be the next president of the United States. We retooled the poster for I.O.U.S.A. for their benefit:

  The U.S. stock market is reacting as you’d expect.

The Dow, S&P 500 and Nasdaq all fell about 1.5% yesterday. The balance sheet recession among Wall Street banks led the indexes down… Fannie and Freddie standing proudly at the helm.

BHP Billiton, the world’s largest miner, reported record earnings and nearly doubled its dividend.

  Despite the inflationary news coming out this week, the U.S. dollar index has held its ground… and even inched up a tenth of a point, to 77.1.

  At the same time, oil fell. Just as traders disregard negative news on the way up, no one seems to care about bullish news on the way down. OPEC threatened to cut output… and Hugo Chavez was overheard blabbering from his fat mouth again today… but the only news that matters is the improved forecast for Hurricane Fay.

As such, oil is trading around $112.

  Only gold, it seems, has reacted to the PPI number and worsening housing and financial crises. The spot price cracked $800 this morning, up about $15 from yesterday.

  “Addison, I say stock picking by an individual investor is almost always a fool’s game,” declares a reader, referring to our market coverage yesterday. “You can’t beat the house. The ‘house’ in this case is the large brokerage houses or funds. They who control over 90% of the market are in charge.

“If you doubt that the deck is stacked against you, consider the recent market. On good news, stocks go down, and on bad news, they go up. The individual gets the news late, after the big boys have moved, and winds up buying/selling after the stock price has moved. The individual investor is too late again.

“There is one area in which a small investor can do well — small stocks. The big boys don’t play here. Here good news still results in an increase in a stock price. What say you?”

The 5: We say have you met our small cap guru Gunner Guenthner ?

  “When one of your readers asked wouldn’t more immigrants provide an increase in tax revenues,” paraphrases a reader, “you answered (more or less) yes.”

“I dare to say: More people and taxpayers do not mean more value. You do not want more money: You want more value. And in our ever more bureaucratic world and government, more working taxpayers do not mean more value. Most ‘taxpayers’ are paid by taxes themselves."

“These arguments about more people is bull***t to me (at least here in Germany). More people mean more intraspecific stress and aggression, and thus more unfriendliness, more murders, more rapes, more negatives … less happiness.”

The 5: And more xenophobia. At least there in Germany.

  “Why don’t YOU give us some fact-based views?” asks a reader, this one referring to the housing crisis. “Have you seen the USA map that color codes foreclosure crises? The ‘collapse’ of the housing bubble (if it indeed has occurred) has mostly been contained within DEEP, but not WIDE pockets. My home is, in fact, worth more than a year ago, but I realize I am in the ‘other kind of hot spot’ in one of the top five fastest growing counties in the sunny South. But even in a normally not-mentioned-by-the-NYT state like Alabama, housing prices, for the most part, are still trending upward.
“I have friends in the real estate (housing) business here. Dallas, Austin, San Antonio, Houston all have deep and serious POCKETS of housing woe. Deep, to be sure, but not broad. Many, if not most, of those pockets are ‘crises’ because of lawbreaking or policy bending on the part of homebuilders and lenders (usually together, in a scheme). One of my friends works in the Texas Real Estate Commission and serves as an expert on how lenders break the already lax mortgage loan laws and get away with it year after year after year. A few of his ‘persons of interest’ have recently been convicted and sent the slammer.

“The entire nation (via Freddie/Fannie/Feddy) is suffering not because housing is such a bad idea, but because crooked, corrupt people on BOTH sides of the real estate contract have triggered pockets of crisis. And crooked, corrupt, amoral people in the financial industry packaged lousy loans into pig packages and spritzed them with perfume to sell to the musical chairs players.”

The 5: Umn… OUR home has gone up in value, too. What we reported is the national average, which HAS gone down 16%. Have YOU seen the latest (Case-Shiller Index)?


Addison Wiggin
The 5 Min. Forecast

P.S. We’re running a bit late today. In the morning we did some pre-interviews with Fox and CNN. We’ll be on live with Fox Money for Breakfast tomorrow morning around 8:15 a.m. and on CNN on Thursday at 10:30 a.m. Then… off to Omaha for the premiere of I.O.U.S.A. We’re slated to have a formal dinner among the filmmakers, the Peter G. Peterson Foundation , Warren Buffett, Bill Novelli from AARP and William Niskanen from Cato before the premiere.

Don’t people pay millions of dollars each year by way of eBay to have dinner with Buffett? Crazytown.

Between the media and travel, it’s going to be a rough couple of days timewise, but I think the film is getting the attention it deserves. Please, if you get a chance, come out and see the premiere and help give it a chance at a fruitful run in theatres. The live Q&A with Buffett et al. following the film should prove rather entertaining in its own right. Join us. You can find a theatre near you, right here.


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