From: Greg Simmons
Sent: Monday, December 27, 2004 3:45 PM
To: Greg Simmons
Subject: "MARKET UPDATE" DEC 27 04 + HOUSING STARTS REPORT COMM.+ FNM DOWNGRADE ART.
DECEMBER 27 2004
THE SPX CLOSED DOWN 5.21 @ 1204.92
THE VIX CLOSED UP .91 @ 12.14
I KEEP THINK THAT THERE IS STILL A RETRACMENT OF THIS LAST RALLY LURKING AROUND OUT THERE...
I HAVE NO IDEA WHAT EXACTLY WOULD BE THE SPARK THAT SETS IT OFF, BUT I WILL SUGGEST THAT IF HOUSING PRICES WERE TO FADE WITH RATES GOING UP THIS PRIMARILY CONSUMER DRIVEN ECONOMY COULD BE IN FOR TROUBLE.
BELOW IS SOME COMMENTS REGARDS THE LATEST HOUSING STARTS:
Beginning of the end?
A separate report showed housing starts unexpectedly plummeted 13.1 percent last month, the biggest dive since a 17 percent tumble in January 1994, as groundbreaking activity fell sharply across the nation.
Housing starts slid to an annual rate of 1.771 million units in November from an upwardly revised 2.039 million clip a month earlier, the Commerce Department said.
Economists had expected starts to ease only slightly and some saw the report as a sign of brewing trouble for the long high-flying U.S. housing sector.
"The housing market is finally beginning to cool off. This is the beginning of the end," said David Wyss, chief economist for Standard & Poor’s. "The housing number is scary."
JUST HAVING KNOWLEDGE OF THE ABOVE, COUPLED WITH THE BELOW INFORMATION ON FANNIE MAE (I AM SURE THAT WHAT COMES FROM THIS COMPANY WILL SOMEDAY HAVE A MAJOR EFFECT ON THE MARKET AS A WHOLE - - I JUST DONT KNOW WHEN), CERTAINLY WILL MAKE IT DIFFICULT TO LOOK IN THE MIRROR IF THE BEAR MARKET STARTS THE SECOND LEG OF IT'S JOURNEY WITH YOU ONBOARD.
The Daily Reckoning
December 25-26, 2004
By Addison Wiggin and Tom Dyson
MARKET REVIEW: CHRISTMAS TURKEYS
It's Christmas. We're in New York. The feet are elevated,
the wine's fortified and for the first time in 8 weeks, the
food hasn't been fried. And other than the credit rating of
Fannie's preferred stock, keeping warm is the only real
On Friday, Fitch Ratings lowered Fannie's credit rating by
one notch, amid concern that it might not be able to pay
dividends next year. And even more troubling, Fitch says
they'll downgrade Fannie's debt much further should
dividends actually become suspended.
Dividend suspension is a very real possibility. Dividends
are decided by the Office of Federal Housing Enterprise
Oversight (Ofheo) and can only be paid out if Fannie is
healthy. But Fannie is not healthy. On Tuesday, Ofheo said
the giant mortgage company was 'significantly
undercapitalized' and ordered it to raise some $3 billion
in additional capital by June.
Raising capital can be done in a number of different ways.
Fannie can simply issue more preferred stock, or even
liquidate some of its mortgage portfolio. This is where
credit ratings are important...the better your rating is,
the less interest you pay on your debt. So every time they
cut Fannie's rating, her financing costs increase.
This is a big deal, dear reader. But don't take our word
for it...just ask Franklin Raines and his chief financial
officer, Timothy Howard. These two book-cookers are now
unemployed. Just two days ago, they were at the head of the
table, now they're the main course - a pair Christmas
turkeys if you will. Two days ago, they ran the finances of
a company with assets over $1.6 trillion. Now they're at
the center of a crisis...a crisis that could easily become
the greatest in America's financial history.
Or ask St. Louis Fed president, William Poole. "It does
seem to me," said Poole in a recent speech in Chicago,
"that investors have priced these obligations under the
assumption that there are no possible risks that might
strain GSE capital positions. This is exactly the behavior
that has preceded the classic crises described by
"In my opinion," continues Poole, "GSE capital positions
are undesirably thin and leave these firms unnecessarily
vulnerable to surprise shocks. There is no way to predict
what kind of shock might shake market confidence, but the
reason a shock could have serious adverse effects is that
GSEs pursue a strategy of borrowing short and lending long
with a thin capital margin."
Market confidence remains intact, for now. In fact, this
week, the major indexes all hit major multi-year highs. The
Dow closed the week at 10,827, a new three-and-a-half year
high. The Dow's highest ever reading was taken in January
2000, at 11,908. In June 2001, it was back above 11,000
again. But it didn't stay there long...and has never been
Nevertheless, Mr. Market is fighting back, and on the eve
of 2005, the Dow's only down just over 9% from the all-time
high. For comparison, the S&P is down 22% and the Nasdaq is
The markets maybe showing strength at the moment, but the
same can't be said for everyone. "Since this latest Fannie
story broke, the phone's been ringing off the hook," says
Addison Wiggin. "I suddenly find myself inundated with
interview requests. Fannie Mae is the only thing these
people want to hear about. I'm definitely starting to feel
a degree of panic that just wasn't there before."
Fannie may be crumbling, but it is Christmas. So we shall
forget the 'structural imbalances' and 'rating
downgrades'...for now! We suggest you do the same. Pour
yourself another glass of sherry, dear reader, and have a
The Daily Reckoning