About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Monday, September 08, 2008

Fannie / Freddie -- Comments and Alert

Several weeks back, unnamed US Gov. officials told the NY Times
that putting Fannie and Freddie into a gov't conservatorship was
a "live" option. That gave the attentive an opportunity to dump
remaining equity holdings and derivatives, and foreclosed a
Bear Stearns fiasco for shareholders. As of last Friday, only
"rise from the ashes" players should have had long positions.

I guess the Gov. had hoped it could kick the can down the road
until next Jan. when a new administration would have had to deal
with it. But rising yield spreads to Treasuries and concerns about
rolling over the paper forced Bush's hand.

Like you, I have read the terms of the deal and many of the
comments ushered forth. In a nutshell, we the citizens must secure
the liquidity of the mortgage market and underwite the value of
our homes as needed.

By my reading of US demograhics, the market for housing will
remain subdued for another 8 - 10 years, before the large Gen Y
cohort starts moving into its prime home buying years. Yes, pent-
up demand is building, so there will be a recovery in sales and in
construction at some point in the next year or two, but it will be
moderate. Moreover, the days of sustained rapid home price
appreciation may not return for years.

The alert I have in mind concerns the amount of liquidity that
the Fed may have to provide to mop up errant Freddie / Fannie
paper. Some are guessing this could reach up to $25 billion. This
is managable, especially if the Fed starts unwinding primary
dealer liquidity support in Jan. '09 as they have indicated. The
Fed has been stingy with liquidity since 2004, as it moved to
water down Greenspan's egregious excesses. But the markets
will watch what They do carefully, since rapid liquidity infusion
might only re-excite the commodities markets and get the big
money back to thinking about hedging inflation. A train of events
of this sort would punish householders, the housing market and
the economy at large.

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