Plunging Dollar Drives Oil to New High.. Stocks Crumble on Freddie Mac and Fannie Mae Near Collapse

By: Richard_Gorton

The US Dollar, $USD, plunged below 72.00 to close at at 71.79 as oil rose intraday to $146 a barrel on worries that Israel may attack Iran, renewed militant activities in Nigeria and a strike in Brazil next week.

Stocks fell lower on troubled mortgage GSEs, Fannie Mae, FNM and Freddie Mac, FRE. Today was an epic day a watershed day: the mortgage securitization infrastructure of the US collapsed. The two companies have lost $11 billion in recent months, and their shares have plunged to 1991 levels; they own or guarantee more than $5 trillion in mortgages, MarketWatch reports.

The chart of Freddie Mac, FRE , is provided courtesy of Kevin's Market Blog

Biotechs, XBI , have been showing tremendous relative strength during the stock market decline, chart is courtesy of Kevin's Market Blog.

The Euro, FXE, the Yen, FXY, and the Aussie, FXA, all rose; and gold, GLD, moved 1.7% higher.

Energy services shares, OIH , closed at 205. I believe that a systemic risk event failure of some sort is imminent, when it occurs, the energy shares are likely going to fall very hard, possibly harder than most other sectors, because they are priced so high in relation to the financial sector ; the underlying reason for the risk comes from the extreme overvaluation of the overall market relative to the financial sector, VTI:IYF .

Either one thing is going to happen next week, either the financial shares are going to rally a bit or they are going to cut loose and fall lower yet, as the chart of the Proshares 200% inverse of the fianancial sector ETF, SKF , is really overbought.

The chart of the financial shares, IYF , shows a waterfall loss of value since May when institutional investors sold out of the high dividend paying stocks, and went long with the yen carry trade investors to invest in indexed commodity ETFs and mutual funds.

The chart of Gold, $GOLD, shows a close at $964.10.

Here are the charts of gold in Euros , gold in Aussies , gold in Yen

Stock Deflate, Stagflation Settles In, Currencies And Commodities Inflate
Mike Mish Sheldon contends Deflationary Hurricanes are coming to asset values. An example being the Bob Ivry Bloomberg report that: "Home values fell in 23 of 25 U.S. metropolitan areas in April, according to Radar Logic Inc., as sales of a record number of foreclosed homes pushed prices down. The Sacramento, California, region saw the biggest drop, with prices falling 31.7% from April 2007. Sacramento was followed by the Las Vegas area (29.9%), San Diego (28.1%), Phoenix (25.5%) and Los Angeles (23.4%) ... 'Prices are going down so fast they can't go down much longer,' said Christopher Thornberg, president of Beacon Economics LLC ... 'We've never seen prices fall like this.'"

And shopping center occupancy is deflating Daniel Taub of Bloomberg reports: "Vacancies at U.S. neighborhood and community shopping centers rose in the second quarter to a 13-year high, while vacancies at larger, regional malls were at their highest level since 2002, research firm Reis Inc. said. The average vacancy rate at neighborhood and community malls rose to 8.2%, up from 7.3% a year earlier and the highest level since 1995."

The overall US Stock Market, VTI , fell 1.44% this week.

Kyung Bok Cho of Bloomberg reports that: "Asian companies outside Japan will face a 'perfect storm' of rising commodities costs and slowing growth in export volumes, triggering earnings-estimate downgrades by analysts, Citigroup Inc. said. Materials and industrials stocks ... have 'lofty' valuations and should be avoided."

Brian Swint of Bloomberg reports that stagflation is setting in: "Sales of services and manufactured goods in the U.K. fell in the second quarter, posing 'serious risks' that the economy will tumble into a recession, the British Chambers of Commerce said ... 'We are now facing serious risks of recession,' David Kern, economic adviser to the BCC, said ... 'The outlook is grim, and we believe that the correction period is likely to be longer and nastier than anticipated.'"

Today's rise in the price of oil popped all commodities, $CRB, higher. The corresponding ETF charts, commodities, RJI , oil, USO, gold, GLD weekly , GLD daily , industrial metals, JJM, and agricultural products, DBA, all closed higher.

The HUI indexed precious metal mining shares, GDX , closed 4.4% higher at 46.71. While up more on a percentage basis than gold today, I expect these to really disconnect from the price of gold soon and fall awesomely lower with the rest of the stock market.

Based upon oil's lollipop hanging man candlestick, these may be "just a pop" to be followed by a fall lower soon. However,Kevin relates that Crude Oil Is Holding Its Channel .

In a deflationary world, people will be seeking the financial stability of hard assets, particularly gold; and Kevin suggests Gold's First Upside Objective is $1,000 .

Although gold may fall lower with oil, the investment demand for gold, which is seen the chart of gold relative to world stock, GLD:VEU , as well in the chart of gold relative to oil, GLD:USO , will continue and will grow; soon gold will become more valuable than oil and rise sharply in price as stocks continue to deflate rapidly in price as presented in suggested reading below.

Mortgage GSEs Collapse
One of the most important questions ever asked and that one can ask is "what is truth"? ... I once saw an interview with Bill Clinton, who remarked "We will not know truth till we reach the next life" ... Truth is that which is reliable for belief or that which is a trust worthy promise. Truth is evidenced by facts and established by the testimony of credible and hopefully disinterested people.

The two mortgage GSEs that underwrite and securitize homeowner loans are toast, they are goners, relics of the former age of prosperity; image: Fannie Mae and Freddie Mac rest in peace .

Mike Mish Sheldon relates in article U.S. Taxpayer Bailout of China Over Fannie Mae that If the US bails out Fannie Mae bonds as suggested in 'We're All Homeowners Now, Nationalization of Fannie, Freddie Unavoidable', inquiring mind just might be wondering "Who is the biggest beneficiary?". It's a good question too. Please consider Chinese Government is 'Top Foreign Holder of Fannie Mae, Freddie Mac Bonds'.

And Mr. Sheldon relates that IndyMac Bank, IMB, was seized by the Federal Authorities , it was the king of financialization of the no documents and unverified home loans, that is the Alt-A loans, which are at the very epicenter of the subprime debacle.

The good news is that the FDIC covers depositors up to $100,000. The bad news is that the FDIC took a huge charge on this one, somewhere between 10-20% of Indy Mac's total balance sheet. The bad news is that there are a massive number of banks such as Downey, First Federal, Wachovia and Washington Mutual which have offered Option Arm loans. And there is going to come a point in time when depositors are going to make a run on these banks and be able to get funds; or a time when the FDIC will run out of funds to cover the defaults and make payments to depositors.

Mr. Sheldon also relates Treasury Secretary Paulson's Statement that the Treasury is working with OFHEO to contain, mop-up, and stabilize the captal collapse of the two GSEs.

And he provides a reference to the Marketwatch news service website for the Text of Paulson Statement On Fannie, Freddie where one finds comments such as:

Tomcat29: Based on what we're seeing now, Fannie and Freddie's "important public mission" would appear to be to put people in homes they can't afford so they can ultimately default on their mortgages. Bailout dead ahead.

Davidluk8: FNM and FRE don't need bailout. They need LIQUIDATION! (That's what I am thinking, there needs to be an application of the Liquidation Thesis )

Drop73: The US Gov needs to remember that FNM and FRE aren't the only ones that will need a bailout. Soon add to that LEH, BAC, WB, C, GS, ABK, MBI and whoever else you can add to the list that's in the same boat. These companies are in water way over their heads, and now they're getting tired of treading water and there is no life ring. The momentum on this great unwind of the OTC and credit-default swap derivatives markets is about to get very ugly. It's dog-eat-dog now.

Ponkap: Notice he didn't say anything about what their "primary focus" would be tomorrow...just what it is today.

Realgara: How can anyone believe a word he says! He says one thing like US has strong dollar policy over and over again... what does the dollar do? All he and the rest are doing is trying to fool the shorters into closing out and hope they will be able to prop the market up long enough so they can scratch their heads and think of a solution.

The News Flow Before The Capitulation Of The GSEe To The Short Sellers
July 9 - Dow Jones: "Mortgage financiers Freddie Mac and Fannie Mae are both 'adequately capitalized' at current levels, the head of the Office of Federal Housing Enterprise Oversight said... Ofheo Director James Lockhart... said Fannie's $15 billion capitalization is enough for the company 'to ride out the storm' in the housing market over coming months. He also said recent pledges by Freddie to seek $5.5 billion in fresh investment would help sustain that company as well."

July 9 - Bloomberg (Shannon D. Harrington and Dawn Kopecki): "Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower. Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody's... Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression."

July 10 - Bloomberg (Dawn Kopecki): "Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon. Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower... Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said... 'Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,' Poole, 71, who left the Fed in March, said..."

July 11 - Dow Jones (Michael R. Crittenden): "The regulator for Fannie Mae and Freddie Mac on Thursday afternoon took the dramatic step of publicly addressing the firms' capital position in an effort to calm jittery Wall Street investors. James Lockhart, director of the Office of Federal Housing Enterprise Oversight, repeated an assurance he made earlier this week that the two mortgage-finance firms are 'adequately capitalized.' 'They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets,' Lockhart said..."

July 11 - Bloomberg (Shannon D. Harrington): "The U.S. government should increase its $2.25 billion credit line to Fannie Mae and Freddie Mac to as much as $100 billion to bolster investor confidence that it won't allow them to fail, according to Barclays Capital. The government should expand the credit line to at least $50 billion as a 'grand gesture' to ease investor concern, Ajay Rajadhyaksha, head of U.S. fixed income strategy at Barclays Capital in New York, said..."

Outcome Of The Collapse Of Freddie and Fannie
Jesse in article Fannie and Freddie are Levered Up Like Hedge Funds (or any Wall Street Bank) relates that former U.S. Treasury Secretary John Snow said that Fannie Mae and Freddie Mac have relied on leverage to fund their businesses in the same fashion as a hedge fund, and that the government should avoid taking them over.

Yes, spectacularly, unbelieveably, the GSEs are terrifically leveraged up. Karl Derringer writing in Fannie Freddie Banks And Government Debt relates: "They are levered up anywhere from 60 to more than 200:1, depending on what you include and exclude from "capital" and "credit book. So here we sit with two firms that are running with leverage ratios that make a Hedge Fund look like a convocation of the Girl Scouts. The Federal Government continues to claim that they are "well-capitalized." Uh huh. And I'm the Easter Bunny. Nobody running with a leverage ratio of 60:1 is "well-capitalized", say much less someone running with a leverage ratio of 200:1. How did this happen? Quite simple - our government allowed it and in fact prodded these firms into doing it."

Mr. Derringer presents a historical account of what has brought about the GSE mortgage embroglio, and presents outcome scenarios.

Mike Mish Sheldon presents presents his outcome scenario: covered bonds like those issued in Germany will be the nature of the Fannie Mae Bailout .

My outcome scenario: the capital collapse of Fannie and Freddie has to be solved; but it will not be. They are now processing 80% of the mortgages in the US. Without them the housing market is going to quickly grind to a halt; and housing prices will drop even beyond Gary Shilling's pessimistic views. Freddie and Fannie are going to go out of operation and a receivership set up to handle the real estate and debt.

The Chinese and the world assumed the implicit backing of the government in buying the bonds of Freddie and Fannie, I think they are going to be disappointed, and they will take economic action to express their dissatisfaction.

Rob Alford relates that Fannie Mae was established in 1938 as part of FDR's "New Deal", and its collapse and coming liquidation, and resulting systemic risk event meltdown, that is economic collapse, will mark the end of the New Deal Age, and beginning of the Age of State Corporate via enforcement of the provisions of the Security and Prosperity Partnership of North America .

Senate Passes The Dodd Frank Housing Bill In A 63 To 5 Vote
As of written in this blog this is not housing bailout it is a Bank of America bailout.

Julie Hirshfeld Davis of the Associated Press writes that the Senate passed the Dodd Frank Housing Bill in a 63-5 vote which: "provides a plan that lets homeowners buckling under mortgage payments they can't afford keep their homes and get more affordable mortgages backed by the Federal Housing Administration, FHA. Banks that agreed to take substantial losses on those distressed loans could avoid costly foreclosures and be assured of recovering at least some money. The new program would let the FHA insure as much as $300 billion in new mortgages, helping an estimated 400,000 homeowners. Representative Barney Frank, Democrat, of Mass, said he was working to find a way to shift the funds to a must-pass spending bill that would be approved before lawmakers scatter for the year in September. Dana Perino, Bush's spokeswoman, said the money should be stripped out of the measure "so that they can get a housing bill to the president that he could sign right away.""

The last two sentences relate the important funding dynamic of the proposed legislation; Democrats want the bill funded and the President does not.

Congress is totally disconnected from economic and investment reality, they are unaware of the bankrupt status of Freddie and Fannie, and disconnected from the reality that the financial marketplace has, through short selling, extinguished the two GSEs, and they are unaware of multiple systemic risk events, any one of which is going to cause a financial system collapse.

There is no money now or in the future for funding of the Dodd Frank Housing bill: its cost is two years of war in Iraq. Like I presented above we have reached Peak Debt, the market place is now extinguishing debt and will not be buying Treasuries to fund Dodd Frank. The current level of increasing deficit spending is going to be inflationary enough; and reality is that the system will not accept the inflationary input that Dodd Frank generates.

Keith at HousingPanic looks at it this way: How can I put this simply? Let's say you had an uncle who was an unemployed cocaine-using junkie. But instead of putting him in rehab, you gave him your brand new no-limit credit card, and a kilo of coke. And the keys to your car. And your kids. Yup. That about sums it up.

We Have Arrived At Peak Debt .

CreditWritedowns reports that Spain Can't Sell Its Bonds : "Spain pulled a potential sale for 15-yer bonds as the appetite for the issue just wasn't there. Before the Euro, some in the European debt capital markets, wh

By Richard Gorton

Richard Gorton
409 York St #908
Bellingham, WA 98225

http://my.opera.com/richardinbellingham/blog/

Im an investor; and my investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

© 2008 Copyright Richard Gorton - All Rights Reserved
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