Mortgage Manipulation, Bond Market Truth, Are Stocks Cheap? and More!

by Addison Wiggin & Ian Mathias

  • Government mulls mortgage price-control plan… who needs the free market anyway?
  • Dan Denning on the true meaning behind the recent bull market in bonds
  • Stocks rally on Beige Book release… did the Fed send us the wrong copy?
  • Bill Gross on stock evaluation for the Brave New World of tomorrow
  • Byron King with anecdotal evidence that oil is well oversold

  The vomit approach continues at the Treasury. This time their throwing up historically low mortgages on the wall… just to see if they stick. The U.S. Treasury is considering a proposal to offer new mortgages at 4.5% through Fannie Mae and Freddie Mac. That’s a point and a half lower than the silly “free market” says it should be.

  Should this mortgage plan come to pass, we note that the U.S. government would be manipulating prices in almost every major market.

They are now the dominant force in commercial paper. They are propping Libor through the Fed’s multitrillion-dollar lending facilities. And through equity purchases in the TARP, they’ve inflated shares of nearly every bank engaged in the mortgage-backed security trade — the very stocks the market hates the most.

Maybe the Treasury should take a page from Franklin Roosevelt and just announce a closing price for the S&P 500 every day. FDR reportedly fixed the dollar price of gold every morning over breakfast… that is, until he tired of the practice in 1933 and just declared the yellow metal an illicit commodity, illegal for Americans to privately own.

“You can add the bond market to that list,” notes Dan Denning. “The Fed is systematically decimating the yield on U.S. government bonds and notes. It is blitzkrieging its way through the U.S. yield curve, buying, or threatening to buy, U.S. bonds and notes in order to lower rates.

“Don’t believe it? Bloomberg reports that the yield on 90-day Treasuries is 0.01%, while 10-year U.S. notes yield 2.66%. Both yields, as you can see on the chart below from the Dallas Fed, are down.

“By buying up securities with different maturities, the Fed lowers interest rates. Investors crowd in looking for safety and, of course, rising prices. But what is the Fed really up to? Is it really trying drive interest rates on government bonds so low that savers, and, more importantly, banks, begin to loan out some of their excess reserves, or, better yet, use them to buy distressed assets from each other.

“If you want to use a military metaphor, the Fed is dropping big rocks on safe houses from its EZ Money helicopter battleship. One basis point at a time, it is methodically destroying any rational reason for investment advisers to put their clients in Treasuries.

“So if you’re not going to be in ultra-safe Treasuries, because they are really no better than cash, then what will you do with your money? You have to do something with it. You will spend it. Or invest it.”

  Thanks to the recent Treasury-assisted plunge in mortgage rates, mortgage applications soared 112% last week compared with the week before. According to the latest from the Mortgage Bankers Association, rates fell to an average 5.4% last week, about 50 bps lower than the week before.

Judging by news emanating from the Treasury, this trend is likely to continue.

  Major indexes in the U.S. enjoyed a wild ride Wednesday. Despite all the dire economic data we reported yesterday, the Dow ended up with a nice gain of 172 points, or 2%. The S&P 500 and Nasdaq fared even better, up 2.5% and 3%, respectively.

Indexes were down, with about 1.5% losses, but then turned around after the Fed released its latest “Beige Book.” Traders must have seen something we didn’t… our eyes were drawn to statements like:

  • "Overall economic activity weakened across all Federal Reserve districts”
  • The manufacturing outlook is pessimistic, as activity “declined noticeably”
  • “Retailers were preparing for a relatively slow holiday sales season”
  • "District reports generally described labor market conditions as weakening.”

Perhaps this is a sign of a temporary bear market bottom… a Beige Book like this would send stocks to the woodshed in any other market.

  Harvard’s endowment fund reported this week it lost 22% from July to end of October. That’s $8 billion down the drain. Only six other colleges in the U.S. have a total endowment greater than Harvard’s recent loss.

Harvard officials say the loss is likely higher, as the totals don’t include “hard-to-value assets” like real estate and private equity deals. The endowment also told The Wall Street Journal they are planning for 30% net losses by June 2009.

  AT&T, DuPont, Viacom, Credit Suisse, Adobe and Merck all announced deep job cuts this morning. Between the six companies, another 28,450 jobs will be shed.

  Yet… three out of four men engaged in a friendly game of tennis this morning in Baltimore, Md., believe the “bottom is in” for stocks. Two of the men work for money management firms in town. Another is getting shellacked in the crabbing business. The fourth is an editor and publisher of financial newsletters. Guess who thinks we have another couple legs down?

  One of the nation’s leading 401(k) stewards wants you to think the bottom is in, too. We received this nifty graphic from Fidelity this week. The subject line of the message was enthusiastically titled “U.S. Stocks Often Rebound During Recessions”

  “Stocks are cheap,” bond king Bill Gross opined in his latest investment outlook, “when valued within the context of a financed-based economy once dominated by leverage, cheap financing and even lower corporate tax rates. That world, however, is in our past, not our future. More regulation, lower leverage, higher taxes and a lack of entrepreneurial testosterone are what we must get used to — that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less-productive corner…

“We are now morphing toward a world where the government fist is being substituted for the invisible hand; where regulation trumps Wild West capitalism; and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money.”

What’s Gross buying? He’s quite biased in this regard, but we’ll still pass his advice along: “Better to own corporate bonds than corporate stocks.”

  The dollar and gold have been relatively quiet over the last 24 hours. The dollar index remains at a lofty score of 79 today, while gold still goes for roughly $770 an ounce.

  In the oil patch, light sweet crude remains at $46 a barrel, despite yesterday’s rally in equities.

“The oil company BP,” notes Byron King, “has booked the Eagle Vienna, a supertanker capable of storing around 2 million barrels of crude oil.
“BP intends to use the tanker to store North Sea oil at sea and to sail it to an anchorage in the Gulf of Mexico. In other words, BP appears to be wagering that it can get a higher price for oil by holding stocks, rather than selling now.
“BP’s action brings the total volume of booked storage to at least 12 million barrels controlled by oil firms and traders. This is about 15% of one day of world oil demand. By leasing tankers for storage, BP — along with Shell — is betting that the cost of hiring vessels at the current depressed rates will be less than the gains to be had from waiting for an eventual upturn in crude prices.”

  “I believe that you are being cavalier,” writes a reader, “and much too harsh on the reader who suggested pegging a federal tax on gasoline to uphold a certain price level. This country does not plan, it only reacts. Look at the green projects canceled or on hold now due to the low price of oil. Even oil exploration and development projects are on hold.

“There is no way to stimulate free market alternative fuels research and production if the market price of gasoline sinks below a certain point. People respond to pain. Fuel economy is the result of pain in the pocketbook; and the capital of entrepreneurs goes where it is appreciated. Did no one learn anything from the ’70s oil crisis?

“I don’t expect that you would remember the 1970s because you probably were still pissing in a diaper at that point.”

The 5: Nice. At least in the ’70s they were still teaching civility to little kids. Although it would appear they must have skipped the generation before us.

  “Thank you for your snarky responses,” writes in yet another, “to readers espousing the benefits of taxation and communism in today’s edition. We need to beat the apologists back with a stick and take back capitalism so that this country can truly thrive. Additional taxation and regulation, which is where we are heading, is not the answer. Long live free markets with unfettered risk and reward. And if you know where I can find such an economic utopia, let me know where it is!”

  “Your response yesterday to a reader,” says the last, “was right on point — the same point was made many years ago by Einstein — but in a few less words: "The problems we face today cannot be solved by the minds that created them.”

  “Reading comments from your readers,” writes another, “makes me wonder what the dissenting subscribers to your great services are looking for. The minute the status quo — increasing returns on the ‘market,’ housing bubble, easy credit, etc. — changes, they cry for more regulation. If I’ve learned anything in damn near 60 years on this orb, it’s the more a thing is regulated, the more it diminishes in functionality.
“In a totally ‘free market,’ if one will ever exist, surely, there will be charlatans, fakers and humbuggers trying to take advantage of the uninformed and witless. Hence, the rub. If we are more informed and keep our wits about us, the riff-raff will be less successful in the efforts to separate us from our hard-earned assets. At the risk of sounding like more esteemed members of your organization, I say, ‘Let the whole thing crash’ The survivors will be stronger and the system of trade, trust and communication that results might actually work, long term.
“Keep preaching the gospel of ‘Agorism.’ There are more of us acting in support of the gospel than you may realize.”


Addison Wiggin,
The 5 Min. Forecast

P.S. You may enjoy the “Gospel of Agorism” from time to time, but are you a true believer? Are you privy to the highest degree of our market analysis and investing advice? For a very limited time, the Agora Financial Reserve is open… click here to test your faith.

P.P.S. We’re off to discuss one of our favorite subjects on the local NPR station. Dan Rodricks, a columnist for the Baltimore Sun and host on WYPR, is pitting yours truly against a columnist form Motor Trend in a debate over the Big Three auto bailout proposal being debated before Congress today.


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