Huh, that's weird...

by Larry Levin

As most of you probably know the recent spate of news hasn't been good - just less bad than expected. However, the argument "it may be bad but could have been worse" argument may be running out of steam with the new news which was indeed worse than expected.


Consider the fact that retail sales are bad, employers are still slashing jobs, top line corporate revenue is falling like a rock, home prices are still falling fast, and most of the so-called good news in home sales are distressed sales (shhhh, don't tell anyone!).

Today's retail sales were awful: economists expected a +.8% gain but it was actually -.1% -- way off the mark. Retail sales account for about one-third of final demand in the economy, and they are down 8.3% compared with July 2008. "We know a clunker when we see one, and the July retail sales report was a real clunker," wrote Richard Moody, chief economist for Forward Capital.

But that's not all; excluding the "cash for foreign automakers" gimmick, retail sales FELL -.6%. Huh, that's weird - I thought the consumer, and therefore retail sales, were all better now?

The Labor Department said this morning that first-time filings for state unemployment benefits rose by 4,000 last week to 558,000. Huh, that's weird - I thought unemployment was all better now?

Yesterday a housing report showed us that home price declines accelerated in the second quarter, dropping by a record 15.6% from a year earlier, as foreclosures weighed on values. Huh, that's weird - I thought housing was all better now?

With this backdrop, only the government could be stupid enough to ignore the recent past - the recent blow up in the housing sector. Well, the idiots in Congress have forgotten and the government is making like it all never happened; as if Freddie Mac, Fannie Mae, Bear Stearns, Countrywide, Wachovia, Lehman Brothers, Indy Mac, Shitibank, Merrill Lynch, AIG and others never went bankrupt or weren't saved by your tax dollars. Huh, that's weird - I thought this all happened?

Now the government wants to INCREASE your risk by turning Ginnie Mae and the FHA into the next Fannie Mae, et al.

Please consider the full article The Next Fannie Mae by the Wall Street Journal.

Last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this "phenomenal growth." Ginnie Mae's mortgage exposure is expected to top $1 trillion by the end of next year-or far more than double the dollar amount of 2007. (See the table below) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department's Inspector General's office as saying, "Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions" in loan volume? (Have you heard this on TV? Why not?)





Ginnie's mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam's home mortgage shop. (Sound familiar?) Ginnie's growth is a by-product of the FHA's spectacular growth. The FHA now insures $560 billion of mortgages-quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

Herein lies the problem. The FHA's standard insurance program today is notoriously lax. It backs low down payment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending-the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.

On June 18, HUD's Inspector General issued a scathing report on the FHA's lax insurance practices. It found that the FHA's default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA's reserve fund was found to have fallen in half, to 3% from 6.4% in 2007-meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a "Congressional appropriation intervention to make up the shortfall." (That would be ANOTHER HANDOUT!)

Massive 33-1 leverage? Horrible default rates? Atrocious underwriting standards that lead to high delinquency problems?

Huh, that's weird - I thought the recession was over and this sort of thing wouldn't be happening?




Previous Day's Trading Room Results:

Trade Date: 8/13/09

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

1) VA sell @ 9:00am at 1000.50 = -1.50 (1 lot)

2) Algorithm positions (5)

3) "Reading the Tape" positions (26) ...combined Secret's, Algo, & "Reading the Tape" total...+24.75


Electronic (YM) Mini-Dow:

1) None today



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