----- Original Message -----
From: Greg Simmons
To: '*G SIMMONS'
Sent: Wednesday, January 19, 2005 11:44 AM
Subject: "MARKET UPDATE" JAN 18 '05 + MORE ON FANNIE MAE
JANUARY 18 2005
THE SPX CLOSED UP 11.46 @ 1195.98
THE VIX CLOSED UP .04 @ 12.47
THE LAST TWO TRADING DAYS RALLY HAVE ERASED ABOUT HALF OF THE DROP SO FAR IN 2005 …
I HAVE PURPOSEFULLY SPENT TIME TALKING TO "BULLISH" PEOPLE LATELY TRYING TO FIGURE OUT HOW OR WHY THIS MARKET CAN GIVE INVESTORS SUCH A CALM AND COMPLACENT ATTITUDE = NOTICE THE VIX PRETTY MUCH JUST
CREEPING ALONG MULTI-YEAR LOWS EVEN WHEN WE WERE DROPPING.
WHAT I HAVE COME AWAY WITH IS THAT THE THINGS THAT ONE WOULD NORMALLY BE SOMEWHAT AFRAID OF SHOULD BASICALLY JUST BE IGNORED i.e. PE RATIOS - - WHICH MAY CHANGE DRASTICALLY AFTER JUNE 15TH IF COMPANIES ARE FORCED TO REPORT STOCK OPTIONS CORRECTLY AS I HAVE READ, DIVIDEND YIELDS, THE DOLLAR, INTEREST RATES RISING, THE REAL ESTATE BUBBLE, THE CONSUMER NUMBERS LOOK MORE LIKE A RECESSION ON THE HORIZON THAN GROWTH, THE DEBT BUBBLE, THE TRADE DEFICIT - - WITH THE RISK THAT JAPAN OR ONE OF OUR TRADING PARTNERS GET NERVOUS ABOUT THE DOLLAR AND SELL, THE CHANCE THAT TERRORISTS MAY RESURFACE VIA I DON’T THINK THAT OUR ACTIVITIES IN MIDDLE EAST ARE GOING TO CALM THEM DOWN - - AS A MATTER OF FACT I THINK THEY MAYBE MORE UPSET? AND I CAN NAME MANY MORE THINGS THAT ONE WOULD THINK WOULD HAVE INVESTORS AS A WHOLE SLIGHTLY MORE NERVOUS THAN THE VIX INDICATES.
THE MAIN POINT THAT WAS MADE TO ME REGARDS JUST IGNORING THE ABOVE LIST OF "MAYBE SOMEDAY PROBLEMS" IS WHO KNOWS WHEN SO LETS JUST STAY IN THE MARKET AND RELAX. AFTER ALL WHAT ARE YOU GOING TO DO PUT YOUR MONEY IN THE BANK AND GET 2% WAITING FOR HIGHER YIELDS?
PERSONALLY I LIKE THE LAST THOUGHT AND FEEL LIKE IM IN THAT EPISODE OF THE "TWILIGHT ZONE" WHERE THE GUY SEES THE MONSTER OUT ON THE WING OF THE PLANE AND ATTEMPTS TO TELL THE PEOPLE ABOUT IT AND THEY JUST ORDER ANOTHER DRINK AND TELL HIM TO RELAX.
THE "MONSTER ON THE WING" FROM WHERE I SIT IS STILL FANNIE MAE - - IT IS ILLOGICAL TO ME HOW WHEN WORLDCOM OR ENRON WAS IN THE PROCESS OF BLOWING UP THAT IT EFFECTED THE MARKET AND THOSE COMPANIES STOCKS PRICES.
FANNIE MAE HAS BARLEY DROPPED IN PRICE SINCE ITS PROBLEMS HAVE SURFACED AND IS SO MUCH BIGGER THAN A LITTLE PHONE COMPANY AND A UNIMPORTANT ENERGY STOCK THAT CAUSED SO MUCH HAVOC. IT MAKES ME THINK THAT WITH OVER 80-1 LEVERAGE THAT "LONG TERM CAPITAL" AND ALL OTHER FINANCIAL DISASTERS BEFORE AND SINCE PALE IN COMPARISON AND NO ONE SEEMS TO CARE.
BELOW IS MORE ABOUT THE "MONSTER" :
The Daily Reckoning
January 15-16, 2005
By Addison Wiggin and Tom Dyson
MARKET REVIEW: NO PLANES FOR FRANKLIN RAINES
Fannie is in the news again, and it sure ain't good news.
Two Ohio public retirement funds have been granted lead plaintiff status in the case against Fannie, Ohio's Attorney General announced on Thursday.
These two retirement funds - one for teachers and one for public employees - lost millions of dollars by investing in Fannie Mae, and they're calling it fraud...securities fraud. They say Fannie has issued "numerous false and/or misleading statements and financial reports."
"Here's the big deal," began Addison Wiggin after we sought his opinion on the crisis. "It's a trial that everybody is watching...If Ohio can win its case, every other state pension system in the country is going to be on this in a heart beat. They were ALL heavily invested in Fannie."
The decision is critical. If they rule in favor of Ohio, Fannie's liability will be huge. And not just litigation expenses either...the entire profitability of Fannie's operation will be in jeopardy. As its
credit rating slips, Fannie's financing costs increase and its competitive advantage evaporates.
For the last 20 years, Fannie Mae has been a profit machine. In fact, it has now strung together 19 consecutive years of profit growth. Unfortunately, good times don't last forever and profits are already being eroded:
"Fannie Mae's annual earnings may drop for the first time since 1985," said Bloomberg on Thursday, reporting the results of a survey from Thomson Financial. 19 analysts were asked to submit estimates for Fannie's 2005 earnings. The median estimate predicted Fannie's earnings-per-share would fall 3.4% this year.
"It's a major litmus test for the U.S. financial system," Addison continued. "Because any decision in favor of Ohio would risk major havoc in the stock market, the housing market and the economy itself, there's going to be immense political pressure to steer this one in Fannie's favor. We're always pointing the finger at Japan saying: you can't recover from your credit induced bubble burst because you won't let your big banks fail, but are we about to let the nation's second
largest financial institution get trounced in the markets and the courts? That's the question."
Last week, Fannie's share price barely budged. It lost 49 cents to $69.51 per share. And so far this year, they're down 2.4%. Last year, Fannie Mae's shares fell 5 percent, after rising 17 percent in 2003. And according to Bloomberg, the stock is now trading at 9.22 times earnings, compared with 21.5 times in 2000.
"This Fannie story is going to become quite a spectacle," cautioned Addison as we left work on Friday. "Think Enron...or LTCM. Franklin Raines should move to Europe, or Asia, and get the hell out while he can still use the airports."
Either that, or line him up as Greenspan's successor in 2006…