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August 22, 2008 GSEs Still in TroubleAll three US indexes trended down this week, though we caught a nice rally today when Federal Reserve Chairman Ben Bernanke commented that he saw inflation slowing into 2009. The Dow Jones Industrial Average declined 0.3 percent; the S&P 500 lost 0.5 percent; and the Nasdaq Composite gave up 1.5 percent. Uncertainty continues to swirl around Fannie Mae and Freddie Mac, both of which may see the government take large ownership stakes in an effort to bailout the cornerstones of the mortgage industry. The government would most likely purchase large blocks of the lenders’ preferred shares, raising worries that common equity holders would essentially be wiped out. That’s generated heavy selling pressure in the two lenders’ shares. I did hear one interesting thought on the potential bailout this week when I attended a Lipper Leaders press briefing. Anton Schutz, portfolio manager of the Burnham Financial Services Fund, speculated that the likes of Annaly Capital Management, which deals primary in mortgages backed by the government sponsored enterprises (GSE), could see a pop as moves by the government would make the mortgage guarantees more explicit. That would reduce the credit risk on the REIT’s portfolio, which--in turn--would generate more investor interest. Annaly is up just more than 2 percent on the week. Shares in troubled Lehman Brothers jumped more than 12 percent today amid speculation that the firm may be acquired after the Korea Development Bank (KDB) said it’s considering investment in the firm. That comes a day after reports that Lehman failed to sell a 50 percent stake in itself to the KDB and CITIC. The potential buyers said the financial firm’s asking price was too high. An outright takeover by the KDB seems unlikely, but the capital infusion would be good news for the company. And although it may not want to be absorbed into a larger enterprise, that remains a possibility as each passing day makes it seem like the only way Lehman can remain viable. A story emerged earlier this week that, in an attempt to prevent a run on Lehman, Federal Reserve officials have been working to run down negative rumors surrounding the company. Last month, the Fed contacted Credit Suisse Group to confirm rumors it had pulled a credit line from the company, which--in fact--it hadn’t, and dozens of other hedge funds and financial firms were subpoenaed by the Securities and Exchange Commission (SEC) about four other bits of gossip. In July, US producer prices continued their meteoric rise, up 9.8 percent over the previous year, including food and energy prices--the sharpest rate of increase in 27 years. On a month-over-month basis, including food and energy, the increase was 1.2 percent. Demonstrating that the worst of the increases remain focused on food and energy, the numbers came in at 3.5 percent and 0.7 percent, respectively, with those items excluded. So although Bernanke may be forecasting an inflation slowdown into 2009 as the dollar recovers and commodity prices decline, it does appear that inflation is probably here to stay for a while longer. He seems to have a similar suspicion, however, warning that if price increases don’t slow in the “medium term,” policymakers will act. Jobless claims fell last week, coming in below analyst expectations, with initial claims down by 13,000 from last week’s revised number to 432,000. Continuing claims also declined, down to 3.362 million from 3.417 million, though there’s actually a greater number continuing to draw benefits. There’s currently another 1.284 million workers drawing benefits under the federal extension program. So despite the declines in the numbers, it hardly indicates a much improved labor market. The National Association of Home Builders housing market index, a measure of confidence amongst homebuilders, held steady at its record low of 16 in August as expectations for significant improvement in the market remained weak. Any reading below 50 indicates that more builders foresee poor conditions. This is Your Best Investment Strategy For 2009 But You Must Act Now! No matter which candidate gets into the White House, post election changes to the tax law could wipe out companies profits and with it, most investors portfolios. Partnerships avoid taxation, which will shield them from the new tax laws. I have some specially selected partnerships that’ll protect your portfolio while giving you returns as high as 43% in a year. Go here to get my free report and see why partnerships pay much higher dividends –– like 21.1% a year for the past 5 years. And those watching the real estate markets have reason for pessimism, as both housing starts and building permits continued their decline after a small spike last month in anticipation of regulation changes in New York. Housing starts fell to 965,000 last month, from 1,084,000 in the prior month, with single-family homes leading the way as usual. Multi-family construction also fell by 24 percent versus the previous month. That puts construction activity at its lowest level in more than 17 years. Building permits fell to 937,000 in July, from 1,138,000 in June. That’s actually good and bad news; it signals weakness, but a tightened supply will help arrest falling home values. Unfortunately, it could take at least another year for supply constraints to really start pricing into the markets. Mortgage applications also continued their slide, falling 1.5 percent last week despite falling interest rates. The average interest rate for a 30-year fixed-rate mortgage declined to 6.47 percent from 6.57 percent in the prior week, 15-year fixed-rate mortgages fell to 5.99 percent from 6.17 percent, and one-year adjustable-rate mortgages (ARM) were down to 7.07 percent from 7.15 percent. In this week’s issue of Commodity Trends, analyst George Kleinman took a look at the corn and silver markets and the bottoming we’ve seen in the commodities markets of late. As always, he includes several graphs in the article, so click the link at the bottom for the full picture.“History doesn’t repeat, but it does rhyme.” These are the profound words of Mark Twain. Although no two markets are exactly alike, today I’ll examine the phenomenon known as “blood in the streets,” an occurrence that repeats throughout market history. I’m not giving you investment advice here; rather, I’m presenting two specific commodities that are potentially ringing the bell you hear at, or near, the bottom. In previous letters, I've discussed the recent commodity meltdown. Last week the dollar was trading at seven-month highs and gold closed below $800 an ounce for the first time this year. The master commodity, crude oil, is now more than $30 a barrel off its highs, and this is a major reason for weakness in the outside markets. I’ve been looking for commodities as an asset class to bottom out as the Olympics come to an end. Beijing has effectively shut down 350 industries and an estimated 7 million cars are off the roads. No wonder world oil consumption is down. Just a 1-million-barrel swing in demand can swing the world’s marginal demand from a shortage to a surplus condition. As oil goes, so goes a host of commodities. The stock markets of the world are bouncing, but after a 25 percent break from the October top, an 8 percent to 9 percent upside correction is considered normal for a major bear market. Certainly, most of the major markets and asset classes are related today. Now is the Time to Get In To Make a Killing I’ve found 7 irresistible bargains whose stocks prices are down today, but they have strong balance sheets. Their prices will soon rocket back and give you the chance to double your money. My readers are already enjoying annualized returns of 28.9% from buying Wall Street’s bargains. Follow this link and see what discounts you can take advantage of today. Bottom picking is tricky. Markets in bear trends will exhibit sharp, short-covering rallies at times, and bottoms rarely occur in a “V” (straight down, then straight up). Still, I see signs in two commodities that bottoms are forming. This often takes place after the blood in the streets, and this is what blood in the streets looks like. Silver collapsed last week, falling more than 40 percent from the top, dropping 20 percent from week-earlier levels, with a $1.42-an-ounce break on Friday, 60 cents above the overnight lows. There may have been a bigger silver break in history, but I don’t remember it. This is the blood in the streets seen at market bottoms as the last weakening longs capitulate. However, from a longer-term perspective, silver has retraced 50 percent of the major move from the November 2001 lows to the March highs, and this would be a perfect place for this market to find support. Consider this: It was a similar collapse that formed the bottom last year, almost to the day, Aug. 16, 2007. My point here is to remember Mark Twain’s words. Go here for the complete article. Speaking Engagements Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government. Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott. Go here or call 800-970-4355 and refer to priority code 011364 to register as our guest. We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue. This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal. 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| Friday Market Wrapup is a weekly e-zine written by Ben Shepherd and published by KCI Communications, Inc. Mr. Shepherd is research editor for Personal Finance.
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Friday Market Wrapup - August 22, 2008: GSEs Still in Trouble
