Losing Money is Bullish - No Really!

by Larry Levin

Up is down and down is up. Minus 10 is actually +10. Good is bad, and really bad is not just good...it's great. Witness the reaction to the horrendous results of Fannie Mae and D.R. Horton. But it doesn't matter much if you excuse this, and ignore that...down is up and bad is good. Yep, The Street has more excuses than Rosie O'Donnell's make-up artist.

Fannie Mae surprised everyone with a tremendously poor "earnings" result. Fannie said today that the steeper slide in home prices is accelerating the pace of foreclosures, which is hurting its business and responsible for its $2.2-BILLION first quarter loss. Right is left and North is South...Fannie Mae rallied for a gain of +8.91%.

In 2007 Fannie Mae expected to lose money on about four of every 1,000 mortgages it held on its $3-trillion book. Today Fannie says that it expects to lose money on 16 of those mortgages, a four-fold increase. Moreover, Fannie said it is slashing its dividend (again) and raising $6-billion (totaling $13-billion in less than 6-months) thereby further diluting the current shareholders value.

In response to the gross mismanagement of this quasi-governmental institution, big brother (OFHEO) rewarded Fannie Mae with a big prize: FNM can lower...yes reduce...its capital surplus from 20% to 15%. Similar to giving a junkie another fix, OFHEO went even further saying that it will reduce FNM's capital surplus to just 10% if the accounting-challenged firm (you didn't forget that did you?) kept its nose clean for a few months.

Here's the "interesting" part (read scary part): Fannie Mae and Freddie Mac are now handling more than 80% of all new loans and combined they have about $80-billion to service their colossal $5-TRILLION in debt and other commitments. What happens if home prices continue to slide? I guess OFHEO doesn't care, because it is allowing FNM to reduce its capital by enormous amounts. For the time being Wall Street is through with 30-1 leverage...but the government is just fine with FNM and FRE handling 60-1 leverage...and increasing.

Freddie Mac announces its results next week so surely we'll get more interesting news.

If Fannie or Freddie were to fail because of this leverage, taxpayers will be bailing them out at a staggering cost. It will be another blunder you never voted for, nor ever received a profit from when these companies were making money. But no matter, we'll just take another one for the team without complaint...as always. The government knows what's good for us - say the lemmings.

"We've taken tremendous risks by loosening these companies' purse strings," said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. "They could cause an economy-wide meltdown if they got into real trouble and leave the public on the hook for billions." On the hook for billions Senator? Try hundreds of billions, maybe more!

One of the nation's largest home builders, D.R. Horton Inc., reported a staggering $1.3-billion quarterly loss this morning, as housing weakness and turmoil in mortgage markets continued to drain its financial results.

Analysts polled by Thomson Financial had been looking for a loss of 39-cents a share on revenue of $1.36 billion, on average. But DHI surprised with a stunning $4.14-share loss. Last quarter DHI posted a $51.7-million gain, and let's assume that that has been the average for some time now. Today's loss of $1.36-billion would then wipe away 6-YEARS of profits...in just three months. For this stellar performance, much like FNM, its share price was rewarded with a large +5.5% gain by the close.

Swiss Banking giant UBS also reported horrendous earnings today. UBS lost nearly $11-billion last quarter. For this mind-bogglingly large loss in just 3-months, UBS shares closed down a teensy-weensy 54-cents.

And last but not least is oil. It made yet another new all-time high by trading above $122.00-barrel today. Goldman Sachs says a "super-spike" could get oil up to $200-barrel rather soon. Hello $5.00-gallon gasoline!

Like I said at the beginning, Wall Street has all kinds of excuses why the market rewarded these companies today - just like it had no problem with liar loans and garbage CDO's, etc. Like the problems that led to the credit-crunch, the rewards handed out today just don't "pass the smell test."

Trade well and follow the trend, not the so-called "experts." When you do you will be buying on days like today, regardless of the news.

Real Time Trading Signals*for

Trade Date: 5/6/08

E-Mini S&P Trades*
(before fees and commissions):

1) B/away sell @ 8:35am at 1399.75 = +1.00 (1 lot)

2) VA sell @ 9:50am at 1405.00 = -1.25 (1 lot)

3) VA buy @ 10:15am at 1405.50 = b/e (1 lot)

4) OTF buy @ 10:30am at 1404.50 = +2.00 (1 lot)

5) OTF buy @ 12:30pm at 1415.00 = b/e (1 lot)

6) Engf sell @ 12:50pm at 1416.00 = b/e (1 lot)

7) TP sell @ 1:40pm at 1415.00 = -1.50 (1 lot)

8) Algorithm trades (2)...combined total...-1.25

E-Mini Russell Trades*
(before fees and commissions):

1) Sell @ 1:15pm at 727.8 = +1.8 (1 lot)

2) Buy @ 2:12pm at 731.0 = -.8 (1 lot) ...+$100


Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!