The Daily Reckoning
Weekend Edition
January 15-16, 2005
Baltimore, Maryland
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.
The stock market as a whole was weaker last week, but not much. The Nasdaq and the S&P lost 1 and 2 points respectively, to trade at 2,088 and 1,185. The Dow lost 46 to 10,558.
Commodities were strong, especially in the energy sector. Crude was up nearly $3 last week and now trades at $48.38. This year, crude is already up 11.3%. Gold and silver gained too. Gold gained $3.50 to $422.50 and silver 17 cents to $6.60 an ounce.
"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...
Regards,
Tom Dyson,
The Daily Reckoning
P.S. Want to listen to Eric Fry and Addison talking on the radio? Yesterday they were interviewed by Al Korelin of the Korelin Economics Report. This link takes you directly to the page. Turn up your speakers, and you are ready to go...
Korelin Economics Report
http://www.kereport.com
P.P.S. Dan Denning is right on the money. He has been predicting a crisis at Fannie Mae for years. In fact, very few people understand this credit bubble - and the huge role Fannie plays - better than Dan. He follows the share prices of all the REITs, home builders, and the mortgage giants themselves. He analyzes their charts. He dredges up every story he can find in the news about them, and he crunches A LOT of numbers. He ponders, he muses and he discusses until every angle has been covered. Then he figures out how to make money from it.
Finally, he tells his subscribers everything. This is independent research at its best. If you are interested in reading more about the mortgage-backed bubble, follow the link...
Crash and Burn
http://www.agora-inc.com/reports/DRI/housing512/
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THIS WEEK in THE DAILY RECKONING
THE MONEY PIT 1/14/05
By Bill Bonner
"We bought our first one ten years ago. It was an ideal investment, we
discovered. Unlike stocks, or real estate, or gold - a chateau in France is
a sure thing. Your stocks might go up, or down.
Real estate, too. And gold...who knows what the gold price will be a year from
now? But a chateau - a huge, old stone house - is much more reliable. It is
practically guaranteed; there is almost no way you can win."
http://www.dailyreckoning.com/body_index3.cfm?id=11266
UNIVERSAL DISDAIN 1/13/05
By Steve Sjuggerud
"I find that my biggest winners are often the most "uncomfortable" trades...
I started in this business as a broker specializing in international stocks
and bonds. My dad was kind enough to
be one of my first and biggest accounts. (To this day, I don't know if he had
faith in me, even as a newbie, or if he just plain didn't have any better place
to put that money.)"
http://www.dailyreckoning.com/body_index3.cfm?id=11257
RISKY BUSINESS 1/12/05
By Porter Stansberry
"I've come to believe that buying expensive stocks is simply the wrong thing to do - regardless. It might feel good. It might be exciting. But it leads you where you don't really want to go. And, what's worse is that by spending time with risky investments, you end up missing the truly great stocks to buy."
http://www.dailyreckoning.com/body_index3.cfm?id=11248
THE DOLLAR'S QUESTIONABLE FUTURE 1/11/05
By Hans Sennholz
"It is a road on which the fall in dollar value has inflicted losses
on all foreign dollar holders each in proportion to the amount of dollars held.
It is the political road of debt default the magnitude
of which amounts to trillions of dollars, undoubtedly the largest in the history
of international relations. It will be remembered for generations to come."
http://www.dailyreckoning.com/body_index3.cfm?id=11239
LAUGHING TO KEEP FROM CRYING 1/10/05
By The Mogambo Guru
"The coming fall in the dollar is going to make you go berserk, and you
will doubtlessly then go online to order a Mogambo Flaming Torch, a Mogambo
Pitchfork, maybe a Mogambo Baseball Bat With Wicked Imbedded Nails In It, and
a copy of The Mogambo's new bestseller book,
Currency Destruction and Resultant Inflation: Angry Drunken Mobs And What They
Can Do About It."
----------------------
HEADLINE, NEWS And INSIGHT:
Mac Attack
by Dr. Steve Sjuggerud
"The typical difference (specifically, the median) has been for Big Macs in Britain to be 19% more expensive than in the States. So the fact that a Big Mac costs 20% more in Britain right now doesn't mean Britain's pound is 20% overvalued. It's about in line with history - which is NOT what most experts would tell you right now."
http://www.dailyreckoning.com/body_headline.cfm?id=4409
The Falling Dollar vs. An American in Paris
by Rick Barnard
"You see, I like to assume my mother is better off than a typical American... Upper middle-class, well educated. Rock-solid job, a good grasp of politics and a working knowledge of world affairs. But she didn't know about the euro. And she didn't seem to know the dollar was losing value. Or, at the very least, she didn't care."
http://www.dailyreckoning.com/body_headline.cfm?id=4402
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