Roast the PIIGS, and End the Euro Crisis

Mankind differs from the animals only by a little and most people throw that away.
Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

The last meltdown was caused by the financial crisis in the United States, which was triggered by the onset of the housing and mortgage crisis. We now have the potential for a full blown currency crisis to unfold. Greek debt has been reduced to junk status and both Spain and Portugal have had their ratings lowered. This is going to make it much harder and more expensive for these 3 nations to borrow money, especially Greece and rightly so. The next in line could be Ireland or Italy. The UK is also another time bomb waiting to explode. If Spain runs into the same problems that are now facing Greece, the fall out could be extreme. The amount of money necessary to bail out Spain would be significantly larger and the EU block might not have the capital or the stomach to fund such a huge bailout. Thus it is imperative that they take a stand now and send a strong message to other stragglers; fix your house or burn.

The PIIGS share a common trait with many States in the US, especially California, New York and New Jersey; they all continue to borrow more money than they earn and no one at the top has suffered any consequences pursuant to these actions, at least not yet. There is also one big difference; all US States must balance their budget every year. This is done by raiding some funds or cutting benefits, cutting work hours, or firing workers, etc. Whatever is necessary is done; though in the long run you cannot put your house in order by spending more and cutting programs. Eventually there will be nothing left to cut, and you move from the fat, to the muscle and finally to the bone.

The Greeks took things one step further, they blatantly lied about their finances and continued to spend like billionaires, when, in fact they were not even millionaires. Living like a king on a soldier’s salary is a recipe for disaster. The simple solution would be to let them fix the problem on their own or allow them to default and fling them out of the EU. Short term this will be very painful but long term it will strengthen the Euro and send a strong message to the other laggards; get your house in order or risk the same treatment.

While everyone assumes all is well here in the U.S, pay attention to the fact that the world is connected and that even though it might appear that the US is starting to move ahead, a crisis in Europe could derail everything. Not too long ago, the US was the brunt of all the jokes as everything appeared to be well in the Euro zone, now the opposite is occurring. Things are not much better in the US; they just appear to be so because Europe’s problems are more severe. Think of Europe and the US as two ships with large holes; just because one is sinking faster than the other does not mean it’s in better shape.

From a mass psychology perspective, the sentiment against the Euro is building up in intensity and so from a long term perspective the Euro could hit an extreme inflection point over the next few months where the worst case scenario will already be priced in. The worst case scenario would be a default by one of the PIIGS. Ironical, it almost sounds like PIGS; perhaps this was an early warning signal of what was to unfold in the future.

The negativity on the Euro has not hit the extreme of extreme points yet; we will do our best to spot this moment, so that traders can shift out of US dollars into Euro’s as it could make for a great play in the next few years..

We are at a stage where the trend is pushed to the limit and so the euro will probably go through the same hell that the Dollar went through before it mounted a turn around. We will have a lot of false starts at the beginning of the turnaround. This play could be particularly beneficial to individuals with US dollars because the dollar is projected to put in a series of new all time lows before a long term bottom takes hold.

Conclusion

The Greeks want to live LA Vida Loca without putting in the extra work; in essence, live beyond their means on borrowed Euros. The party has to end and when it does the hangover is usually very painful.

They borrowed more money than they could ever pay back; they knew this day of reckoning would come and so lied to everyone about their true state of affairs to push this day out as far as possible.

Goldman’s dirty tracks have appeared again and this time in Greece, so there is a good chance that something illegal was done. Goldman is accused of helping and encouraging the Greeks to cook their books in order to hide a large part of their debt.

Goldman Sachs has been the most important of more than a dozen banks used by the Greek government to manage its national debt using derivatives. The bank's traders created a number of financial deals that allowed the country to raise money to cut its budget deficit now, in return for repayments over time or at a later date.

In one deal, Goldman channelled $1bn of funding to the government in 2002, in a transaction called a cross-currency swap. There is no suggestion of any wrong-doing by Goldman Sachs. Such deals are an expensive way of raising money, but they have the advantage of not having to be accounted for as debt. Full Story.

We now learn – from Der Spiegel last week and today’s NYT – that Goldman Sachs has not only helped or encouraged some European governments to hide a large part of their debts, but it also endeavored to do so for Greece as recently as last November.  When the data are all lies, the outcomes are all bad – see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of Barings.  But a single rogue bank can bring down the world’s financial system. Goldman will dismiss this as “business as usual” and, to be sure, a few phone calls around Washington will help ensure that Goldman’s primary supervisor – now the Fed – looks the other way. Full Story

The other problem is one does not know what data one can trust, for if they cooked the books, then they are capable of cooking the data everywhere. Thus one can understand why German citizens are up in arms about providing any loans to the Greeks.

They may have once been the cradle of civilization; today they are better known as the cradle of over indulgence. They should be flung from the frying pan into the fire; short term it will be painful but long term it will bring about stability for the message will be clear live within your means or risk being roasted alive.

Man who stands on hill with mouth open will wait long time for roast duck to drop in.
Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

 

Tactical Investor

VIP Futures Timing Service

SWC; a compelling Palladium Investment

To believe in one's dreams is to spend all of one's life asleep
Chinese Proverb

In an article titled the Palladium; the stealth bull market, we explored the Palladium bull market and laid down the criteria necessary for Palladium to trade to the 800 ranges. We are going to post some of the excerpts of this article below before we take a look at Still water mining (SWC).

It broke through the 1st resistance point at 375 with relative ease and is now attempting to break past an even stronger zone of resistance. The $465-$475 ranges make up a zone of very strong resistance, and most likely it will take several attempts before palladium manages to break past this zone; once it does though it should be clear sailing to the 550-600 ranges.

The $465-$475 ranges which should have provided a zone of strong resistance, was once again taken out with ease, indicating that Palladium is in an extremely strong upward bullish phase. What is even more astounding is the fact that it has managed this in the face of a strengthening dollar; it is the only precious metal that continues to put in a series of new highs in tandem with a rising dollar.

Palladium will now need to trade past the 465-475 ranges for 12 days in a row. If it can achieve this, it will set up the base for a rally that could take it all the way to the 800-890 ranges. If we had to put a time frame on this, we would say that once it trades past the 465-475 ranges for the suggested period of time, it could hit these targets within 12-18 months.

It has managed to trade past the $465-475 ranges for more than 12 days in a row, laying the ground work for a move to the $800-$890 ranges. If Palladium maintains this momentum it could end up striking these targets a lot faster than we originally projected; potentially, it could hit these targets before the year is over.

We have two palladium producers in North America, PAL and SWC, but SWC has a much stronger pattern and so our focus for now will be on this chap.

SWC has had a tremendous run in the past 52 weeks and those who opened up positions early in the game and held onto them are now sitting on decent gains. As we do not like to chase a trend (we like to get in before the crowd jumps in) we are going to offer our long term and short to intermediate term views on this Stock.

Long term view

If SWC can close above $18 on a weekly basis, the odds of it testing its 3 year highs will be rather strong. We would not be surprised if after testing the $23.00-$24.00 ranges SWC experienced a small bout of profit taking. If during this round of profit taking SWC manages to stay above $12, then the next leg up should lead to a test of $30.

The main leg of the battle would begin in $34-$36 ranges; if SWC can close above this level twice on a weekly basis (in other words remain above this level for 2 weekly closes in a row) or trades above this mark for 9 days in a row, the next target will fall in the $48-$51 ranges.

A true bull market does not begin until its all time high is taken out; for SWC this would mean trading past the intra day high of 50.81 and above the closing high of 46.625. Once in the true bull phase, SWC should be able to at least double in price before putting in a long term top; this would equate to a target of roughly $100-$120.

Short to intermediate term outlook

The above chart clearly illustrates that SWC has had a stellar run in the past 12 months; from low to high it has risen over 150%. Thus it would be normal to expect a bout of profit taking to take hold anytime. As long as it does not close below $12 on a weekly basis, the short to intermediate term outlook will remain bullish and a break past $18.00 for 3 days in a row could result in SWC trading to a new 3 year high. In the short term, we would be slightly cautious on how much new money we deployed into SWC as it would be best to wait for a pullback before committing new funds.

Some stats on SWC

Forward P.E. of 11.91

Average sales growth for the past 5 years has been 25%

Total cash on hand 201 million

Total debt 195 million

% of shares held by insiders is a very healthy 52%

% of shares held by institutional and mutual owners is 35% and this accounts for 72% of the float.

Additional factors that support a bullish outlook for Palladium

Worldwide sources of Palladium are rather limited. Over 80% of the world’s Palladium is concentrated in just two countries, Russia and South Africa, with Russia's accounting for nearly half of the total Palladium supply. Russia has 3 sources of Palladium, the Norilsk Nickel mine, Gokhran and the Russian Central bank. Norilsk mines are the main source of palladium in Russia and production peaked back in the late eighties and output started to fall from the 90’s, primarily due to lack of investment. Once prices started to rise in the 90’s Norilsk started to invest more money into production and supplies of PGM’s started to rise. However, production has started to fall again and to meet these supply short falls the Russian government has been selling Palladium from its stockpiles. This programme has now come to an end and with it roughly 125,000 pounds of Palladium will suddenly vanish from the supply chain. This is going shock the system (the shock process might already be underway) for taking out such a huge amount of Palladium of the market just when demand is rising is the perfect recipe to precipitate a run on Palladium as companies start to hoard supplies for fear of not having enough of the metal on hand. This could perhaps explain why Palladium is the only precious metal to put in a series of new highs in the face of a rising dollar.

Note that world Palladium supplies fell by 1% in 2009 to 6.31 million ounces despite a 5% increase in South African output to 2.48 million ounces. This increase was off set by a drop in Canadian production due to the closure of the Lac des Lles mines at the end of 2008.

Finally let’s not forget the massive amount of interest the New Palladium and Platinum ETF’s are creating. These two ETF’s are gobbling up huge amounts of Platinum and palladium. As of March 2010, PALL holds roughly 520,000 ounces of Palladium; this ETF is barley 4 months old and its Palladium holdings have already surged past the 500,000 ounce mark. It took the London based Palladium ETF over 2 years to accumulate the same amount.

Now add in the lower supplies, increased demand due to the Palladium ETF, voracious increase by the Chinese for Palladium and the eventual hoarding of this metal by the automotive sector when they realise that they could be facing a shortage, all go to ensure that Palladium has a long way to go before a long term top is in place. Our suggestion is use strong pull backs to add to your positions in both SWC and Palladium bullion whenever the opportunity presents itself.

Conclusion

The long term outlook for SWC is extremely bullish. The current pattern is projecting a high probability that its all time high will be taken out; the if factor has been removed and has been replaced with the when factor. In between one should expect a lot of volatility; remember that good things never come about easily; if they do they were not worth it to begin with. Unlike Palladium bullion, there are two factors that come into play for SWC. One is the price of bullion and the second is the overall health of the equity's markets. If the markets are experiencing a strong correction then SWC might not move up as fast as it normally would, even if Palladium prices are rising. Therefore, it would be wise to have a position in both Palladium bullion and SWC.

Our long term targets for SWC now fall in the $100-$120 ranges. This could one day be viewed as a conservative target; once the real bullish phase of a rally begins it’s not unusual for a stock to at least double in price. A real bull market begins when the all time high is taken out; in this case, it would be $46.625. From a long term perspective SWC has just begun its bullish run.

Do not use a hatchet to remove a fly from your friend's forehead.
Chinese Proverb

 

Ultimate Futures Timing System

 

Tactical Investor

Precious metals; Gold, Silver and Palladium

All the precious metals are behaving extremely well in the face of a stronger dollar; the standout player is Palladium. Palladium has refused to buckle under the face of a stronger dollar and instead continues to put in a series of new highs. This is what a true bull market looks like.

Gold has refused to put in a new 6 month low even though the dollar has gone on to put in series of new all time highs. This action suggests that once this consolidation/corrective phase is over, the odds of the entire precious metals sector exploding upwards are rather high.

In general the strength exhibited by this sector suggests that the smart money understands that the current strength in the dollar is not going to last as precious metals are now diverging from the dollar. On a percentage basis Silver will show the highest gains in the next leg up; prior to this we favoured Palladium and had a very strong buy on it from late 2008 to early 2009.

As soon as a new weekly buy signal is generated we will be issuing new entry points for Silver, Gold and Palladium bullion. We will also issue entry points for several stocks in these sectors.

ETF players can take positions in SLV, GLD, GDX, PALL, etc,

Players looking for more leverage can jump into AGQ and UGL. Use Pull backs to open up new positions and strong pull backs to add to your position.

 

 

Tactical Investor

 The Ultimate futures Timing System

High Yielding Dividend Stocks

 

We are providing a list of high paying dividend stocks; please conduct your own research before deploying any money into these plays. Be aware that companies at times offer  a  very high dividend to attract new buyers  as the company may be going through difficult times, or sometimes it is done to mask potential long term  problems.

 

Stock	Dividend Yield	Market Cap	P.E. Ratio
AGNC	20.74	666 million	4.08
CPLP	18.51	231 million	7.63
HTS	18.3	953 million	5.50
CIM	16.46	2.68B	7.00
CMO	16.91	810 million	7.04
CFP	16.37	71.6 million	4.8

One can lock in great gains if one is nimble enough to jump in and out. The key  factor with such plays is to monitor them closely and not to consider them as long term investments; very few if any strong companies pay out such high dividends over the long run.

 

Remember the time tested Latin phrase. Caveat emptor; let the buyer beware

 

Disclosure; we have no positions in the stated investments.

 

Tactical Investor

The Ultimate futures timing system

Dollar, Gold and Silver

A man who has committed a mistake and doesn't correct it is committing another mistake.
Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

The dollar as expected has mounted a very strong rally, and it just missed its target of closing above 82 on a monthly basis by a few points. It did, however close above 81 on a monthly basis which indicates that it is going to trade higher before a top is in place. As long as it does not close below 78.00 on a weekly basis, the odds of it trading to the 85-86 ranges are rather high. If it manages to close above 82 on a monthly basis, it would move the final targets to the 90-92 ranges. While a lot of noise is being made about the Aid package that the EU members have in place for Greece, the Euro is still not out of the red zone as many members are still facing huge budget shortfalls. Potentially Spain, Portugal or Italy could find themselves in the same place Greece is now in.

Despite the strength in the dollar, the commodity's sector has held up remarkably well and this suggests that the smart money is deploying new funds every time this entire sector pulls back. It also a very ominous warning that inflationary forces are going to unleash with a fury in the years to come. We still believe that individuals all over the world, especially in the developed countries are going to experience a shock in the next 2-3 years. We have spoken of this many times in the past 12 months. The economic pain right now is being masked by the gains in the stock market.

Interest rates are slowly rising and the long term charts are indicating that they have nowhere to go but up. We also believe that the bond market is going to experience a crash as rates soar to eventually match those of the 1980’s. For those who have no positions in bullion, use pull backs to establish a position and use strong pull backs to add to your position.

Under normal circumstances Gold would have mounted a stunning correction given that the dollar has mounted a very strong rally over the past few months. This is not the case this time around and Gold has only mounted a mediocre correction and now appears to be putting higher lows instead of lower lows in the face of a strong dollar. A weekly close above $1175 will most likely result in a test of the old highs. A test of the old highs if not confirmed by our technical indicators could then result in a rapid move down to the 990-1040 ranges.

Gold is still expected to consolidate for a few more months. If the consolidation remains in a tight range (1000-1200), then expect Gold to explode upwards once a new weekly buy is generated.

Traders, who want to take advantage of a dollar rally, can use pull backs in the dollar to establish positions In UUP. Consequently, they can also short the Euro via EUO; use rallies in the Euro to open up positions in EUO. For those who want to use ETF’s to play the precious metal's sector, the following ETF’s should be considered PALL, SLV, and GLD.

It doesn't work to leap a twenty-foot chasm in two ten-foot jumps.
American proverb

 

Housing Debacle

Ultimate futures Timing Service

Bond Market nowhere to go but Down

It is better to do thine own duty, however lacking in merit, than to do that of another, even though efficiently. It is better to die doing one's own duty, for to do the duty of another is fraught with danger.
Bhagavad Gita, BC 400-, Sanskrit Poem Incorporated Into the Mahabharata

 

A lot of noise is being about the economy improving and even things do continue to get better, there is a rather strong head wind building in the horizon. Interest rates have been slowly but surely rising over the past few months and given the current trend, it appears that the bond market has nowhere to go but down.

Our ballooning debt and inflation are labelled as the main culprits.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The housing market which experts state has just started to recover (our personal opinion is that it’s a long way from mounting a sustainable recovery) is going to be the first one to get knocked down and dragged down for years to come. Mortgages rates are trading close to 52 week new highs and given that the Fed has its $1.25 trillion program to purchase mortgage debt, rates will be subject to even more upward pressure.

The above chart clearly illustrates that bond yields have been rising for quite some time and one can quite confidently state that mortgage rates have bottomed. The Green circle represents the madness that hit the bond markets when investors panicked and flocked into bonds in the late 2008 to the early 2009 period. If rates can stay above the 4.75-4.90 ranges for 12 days in a row or close above this level twice on a weekly basis, it will mark the beginning of a new bull market in rates and long bear in bonds.

Christopher J. Mayer, a professor of finance and economics at Columbia Business School goes on to state “Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home”. Thus any hope of a long term recovery in the housing sector is going to be short lived as higher rates will effectively lock out more and more individuals from purchasing a home.

Factors that will create further pressure on bonds and the economy

Auto loans are going to become more expensive; in fact, rates have already been rising. Higher rates here will in turn have a negative impact on the auto industry and this short lived spurt of higher sales could soon be followed with a prolonged drought.

The credit card industry is another sector that is going to take a hit. Rising rates are going to make already skittish consumers even more reluctant to take on new debt. As our economic growth is based on consumers taking on more debt, this will knock the fragile recovery right of its feet.

Washington will soon have to pony up more when it tries to borrow the money it needs for the social programs it has in mind. The outflow of funds from the bond into other investments is also contributing to the rise in rates. If bond investors were to panic and run out of bonds as they dove into them back in the 2008-2009 time period, it could have a massive impact on rates. China has been a net seller of late, and if China started to aggressively unload its holdings, it could result in a complete meltdown.

Bill Gross the bond king has reduced US bond holdings by a significant amount; 9 months ago PIMCO total return fund had invested over 50% of its assets in US debt, today the ratio has dropped to roughly 30%. This is the lowest level in the fund’s 23 year history.

2 weeks ago the treasury auctioned of $82 billion in debt at a rate of roughly 4%. This is twice as much as they paid towards the end of 2008 and early 2009 when investors flocked into Bonds looking for safety.

Mortgage rates peaked in 1981 at 18.2%; this works out to a monthly payment of roughly $3100 in comparison the current payment of 1100 on a $200,000 mortgage.

Total household debt is almost 10 times what is back in the early 80’s and yet the percentage of disposable income that goes to servicing ones debt has not increased much over this time period? The current household debt is $13.8 trillion and disposable income is roughly $11 trillion; a deficit of roughly $2.8 trillion.

Gross debt by the end of the first quarter was almost 88% of GDP. Our gross debt has increased at a rate of roughly $500 billion every year since 2003, and then it went ballistic in 2008 and 2009 where $1 trillion and $1.9 trillion were added respectively.

Richard Fisher The president of the Dallas Federal reserve stated in May 2008 that the National debt was close to $100 trillion; an excerpt of the full speech is pasted below.

Why is the Medicare figure so large? There is a mix of reasons, really. In part, it is due to the same birthrate and life-expectancy issues that affect Social Security. In part, it is due to ever-costlier advances in medical technology and the willingness of Medicare to pay for them. And in part, it is due to expanded benefits—the new drug benefit program’s unfunded liability is by itself one-third greater than all of Social Security’s.

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.

I want to remind you that I am only talking about the unfunded portions of Social Security and Medicare. It is what the current payment scheme of Social Security payroll taxes, Medicare payroll taxes, membership fees for Medicare B, copays, deductibles and all other revenue currently channeled to our entitlement system will not cover under current rules. These existing revenue streams must remain in place in perpetuity to handle the “funded” entitlement liabilities. Reduce or eliminate this income and the unfunded liability grows. Increase benefits and the liability grows as well. Full Story

One should definitely pay attention when one of the Fed heads starts to talk especially when what they have to say actually makes sense. It is now 2010, so the figure is now definitely well above $100 Trillion. Add in the $1 trillion health package, and all the other social programs announced since and the number goes up even more.

Conclusion

Bonds have only one place to go and if one is kind one will use the word down, but the fact is that the bond market is a disaster waiting to happen. At some point in time it is going to experience a horrific correction/crash as the only way this government will be able to borrow the billions and trillions of dollars it will need one day is by paying huge interest rates to bond holders.

Long term players can use rallies in the bond market to short bonds via TBT. Precious metals perform very well in a high rate environment so an even better option would be to have a position in Gold and Silver bullion. One must also seriously consider the possibility of hyperinflation; under this scenario having a stake in precious metals is an absolute must, for they will at least prevent you from ending up in the dog house.

 

If I had a formula for bypassing trouble, I would not pass it around. Trouble creates a capacity to handle it. I don't embrace trouble; that's as bad as treating it as an enemy. But I do say: meet it as a friend, for you'll see a lot of it, and had better be on speaking terms with it.
Oliver Wendell Holmes, 1809-1894, American Author, Wit, Poet

 

Tactical Investor, Stock market timing service

 

Ultimate Futures Timing System

Anatomy of a Housing Crisis

A fool despises good counsel, but a wise man takes it to heart.
Confucius, BC 551-479, Chinese Ethical Teacher, Philosopher

Freddie and Fannie certainly had a large role to play in the housing crisis and many may claim that they were the main contributors of the housing crisis which eventually resulted in a market meltdown. Before we proceed let’s get some background info on these two chaps.

Some background info on these two companies

They were created by the Federal National Mortgage Association in the 1930’s to help speed up the home ownership process by buying mortgagees from banks. Banks would normally sell a mortgage and then put it on their books, this means that each time they did so, a certain amount of capital was tied up and this limited the number of mortgages they could issue. Now they could simply issue a mortgage and sell it to Freddie or Fannie and as a result banks could issue almost as many mortgages as they could sell.

Although they are private companies, they are government sponsored enterprises established by federal law. As GSE’s they received special privileges, the main one being that if they were threatened with failure, the federal government would come to their rescue. This gave them the best of both worlds; profits are privatised but losses are socialized. This guarantee basically encourages immoral and unconscionable behaviour because there is no downside; the downside becomes the government’s problem, which in turn becomes the tax payer’s problem.

Factors that support the claim that Fannie and Freddie had a role to play in the housing crisis

Freddie and Fannie were prevented from buying mortgages that did not meet down payment and credit requirements by law. As the structure of the mortgage market changes, so did their business model. From 2005 until the onset of the crisis most of the mortgages they purchased did not fall within the convention fixed interest rate with a 20% down payment category instead most of the loans fell within the following categories.

Fannie mae’s loans

• 62% negative amortization
• 84% interest only
• 58% subprime
• 62% required less than 10% down payment.

Freddie Mac's loans

• 72% negative amortization
• 97% interest only
• 67% subprime
• 68% required less than 10% down payment. (source about.com)

This incestuous desire to issue exotic loans and to open the market to subprime borrowers made most of their loan acquisitions extremely toxic and in doing so helped fuel the speculative real estate bubble. This is a very huge topic, and we have only just touched the tip of the iceberg. The information laid out should provide enough food for thought such that if peeks your interest further research on this topic can be conducted at your own leisure.

Now let’s examine if these GSE’s really helped the Public

Freddie Mac lost 50 billion last year but has now come begging to the government for another 31.8 billion and this comes on top of the 13.8 billion Freddie asked for last year. The government has pledged a massive 200 billion line of credit to support this disaster and based on all the talk so far, they would probably offer even more if Freddie ever needed it.

If we weigh the cost to the taxpayer and the so called savings these two mortgage giants provided, one finds that they failed miserably and have really provided no benefit at all. How can this be? The so called benefits from offering lower mortgage rates has been offsetted by the cost of all the money taxpayers have poured into these two companies. . They had access to money at a lower rate than private companies and could in turn pass these savings to the consumer; lenders provided them with lower rates because their survival was guaranteed by the Federal government. Based on the amount of money they have already asked for and the future amounts they will need to continue functioning, it is estimated that by the end of the year they will become net losers. In other words, they would have moved from providing some value to providing none at all.

Lawrence J. White an economist at the New York University (Stern School of business) states that the GSE’s could borrow money 35-40 basis points lower than the private sector. Thus if the standard rate was 6%, they paid only 5.60-5.65%.

At the end of 2008 these two companies had 31 million mortgages on their books, which were worth in excess of 5 trillion (actual figures were roughly in the 5.4-5.6 trillion ranges). Thus borrowers would have saved roughly 10 billion in 2008. According to Daniel Gross over the years, they supposedly produced savings of $100 billion.

Contrast the potential saving of $100 million against the $300 billion plus in financial support the government has pledged and one can immediately see that they have provided no real benefit at all. If they were regular business, they would have gone bankrupt long time ago, but because they are GSE’s the government sees fit to pump billions of dollars into losing cause. It is true they have not used up all the money the government has pledged to them, but at the rate, they are burning this money, it’s only a matter of time before they go through those funds before they start begging for more.

While these two GSE’s did play a role the financial crisis that hit this nation; after all they did provide banks with an incentive by virtually buying any junk that the banks were willing to throw at them.

Wall Street firms (Goldman, JP Morgan, Merrill lynch, etc) and rating agencies also had a big role and may have contributed even more to this housing crisis then Freddie and Fannie. These firms combined subprime mortgages with other mortgages that carried slightly higher ratings and sold them of as Collateralized Default Obligations (CDO).

CDO’s were nothing but a bunch of BB rated mortgages that were bundled up to create a security that carried an AAA rating. The rating agencies (Moody’s, S&P, and Fitch) all played a role in this process by putting their stamp of approval on these toxic products. By putting their stamp of approval on these products these agencies made these toxic products appear to be of investment grade.

Investors in General rely heavily on these agencies to determine risk. Thus when investors realized they could achieve superior returns with AAA, AA or A rated mortgages, like idiots they jumped in. We use the word idiots because they could have and should have spent time understanding what was behind this new product. If something is too good to be true, take time to dig for you will find out that it is usually fraught with risk. Large institutions started to jump in and buy these CDO’s left right and centre creating a huge demand for these products; demand soon overwhelmed supply. As the demand rose, it drove the borrowing costs lower and made qualifying for a loan easier and this in turn drove housing prices higher. Mortgage lenders were making huge sums of money and each player wanted to increase its share of the market. Lack of oversight, poor underwritings and outright fraud were all perpetuated as a result of this greed. It will take years for the housing and mortgage sectors to recover as a result of this greed. Investors continued to pour into CDO’s and as the supply grew so did the demand; the only way to bring this vicious cycle to an end was for the real estate and mortgages markets to crash.

Investors were given several warnings that all was not well; towards the end of 2006 home prices peaked. In 2007 home prices stopped rising and finally started to decline. Worse yet default rates start to increase and yet like drug addicts investors kept buying these securities and Wall Street like a drug dealer continued to issue these securitized instruments.

If the blame should be laid on anyone it, the biggest culprits are the banks and rating agencies.

However, we have one final culprit and that culprit is the average Joe, who jumped on the band wagon because he wanted to make a quick buck without taking a risk. Well at least that’s what he thought, for real estate seemed like a sure bet.

Every con has a conman and sucker; for the game to proceed both have to be willing participants. Thus the conmen provided the suckers with what they were looking for. The suckers did not complain as long as they were getting paid. Only when the whole house cards crumbled did they wake up and start to squeal like fat pigs being roasted alive.

The morale of this story is that one should never jump into anything that has attracted mass attention. The masses are always late to the party and usually end up leaving with a massive hangover.

Conclusion

Before one lays blame on another one must look in the mirror and be sure that one did not have a hand to play in the crisis. It takes one to cry, two to tango and 3 to have a party. Individuals wanted to party without having to do any work, and they thought they could do this without taking on any risk. If something appears too good to be true, it generally is.

The government is hell bent on pouring good money into these two completely useless companies, Freddie Mac and Fannie Mae. Ironically the Government finds it very easy to turn down individuals that really need a helping hand; for example, not approving a $250 check for senior citizens. To make matters worse they create money out of thin air to pay for these projects, thereby further devaluing our currency and indirectly imposing a silent tax on the population. This silent tax is otherwise known as inflation.

Meanwhile, taxpayers have pumped more than $125 billion into the failed firms -- and on the hook for many more after the administration promised an unlimited source of funds just before Christmas to backstop their growing losses. "We will do everything necessary to ensure these institutions have the capital they need to meet their commitments," Geithner said in response to tough questions from Rep. Scott Garrett, a New Jersey Republican. Underscoring the need for change, Geithner acknowledged that taxpayers are likely to face "very substantial" losses on the government's takeover of Fannie and Freddie.. Full Story

The best way to protect oneself against inflation is to get into hard assets; hard assets are anything that cannot be mass produced and are in finite supply. Examples are oil, timber, copper, iron, precious metals, etc. The easiest way to protect oneself against the harmful effects of inflation is by purchasing precious metals (Gold and Silver bullion). If one wants to play the ETF game one can open up positions in SLV and GLD.

Once the game is over, the king and the pawn go back in the same box
Italian Proverb

 

Disclosure: we have positions in Gold, and Silver bullion

Other articles of interest

Housing Debacle

Housing Bust

 

Links of interest

Ultimate Futures Timing Service