Wednesday, May 14, 2008

Freddie aka Fraudie Mac / Market Sentiment

It´s always the reaction to the news that is important....And sending the stock higher almost 10 percent on the following news is a clear sign that the complacency has taken over again....A look at the VIX is confirming this view. On top of this Doug Kasshas observed this: "Investors Intelligence bulls are back up to 46, as bears drop to 29.9 -- at respective highs and lows since January". I think this headline via FT Alphaville sums it up nicely Not as bad as feared’ is the new code for ‘buy, buy, buy’ Here are More Reasuring Facts On Phony Mae aka Fannie Mae

Eine der wichtigsten Regeln für Anleger und Trader ist jeweils zu beachten wie der Markt auf bestimmte Nachrichten reagiert. Und wenn man nach den folgenden Neuigkeiten die Aktie fast 10 % nach oben katapultiert ist das für mich ein klares Zeichen das wir uns einem Level nähern der doch langsam wieder bedenklich wird.....Der sich rapide beruhigende VIX unterstreicht diesen Trend. Doug Kass hat diese Statistik die wunderbar zum Gesamtbild passt. "Investors Intelligence bulls are back up to 46, as bears drop to 29.9 -- at respective highs and lows since January" . Diese Schlagzeile via FT Alphaville fasst es ziemlich gut zusammen Not as bad as feared’ is the new code for ‘buy, buy, buy’ Hier gibt es mehr More Reasuring Facts On Phony Mae aka Fannie Mae

Parsing Freddie's Profit Report WSJ
Freddie Mac's earnings report more clearly than ever defined the battle lines between the company's shareholders and the government, which sees it as one of its main tools to bolster the housing market.

The report the mortgage giant issued Wednesday shows that the company's cushion for losses fell sharply in the quarter, giving it one of the weakest balance sheets in the financial sector and leaving it more vulnerable to future hits from the housing crunch.

This weakening in Freddie Mac's financial footing will unnerve politicians keen to see Freddie buy and guarantee even more mortgages to alleviate the credit crunch.

And investors sniffing around Freddie's shares may also want to pay heed to the enervated balance sheet. That is because the company likely will have to sell a large amount of new stock, diluting existing shareholders, to strengthen its balance sheet.

Freddie said Wednesday that it planned to sell $5.5 billion of common and preferred stock. "I think they'll continue to raise capital," said Paul Miller, an analyst at FBR Capital Markets.

The company's weakened state was lost on investors who rejoiced that the loss was smaller than expected and drove its shares up 9%. But the smaller-than-expected loss was primarily the result of accounting changes made in the quarter that allowed the company to book certain gains in earnings and exclude certain losses.

Freddie reclassified $90 billion in securities, boosting profit by about $1 billion compared with the fourth quarter.

Hat tip Calculated Risk

Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?

Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three. We were still using the mean pricing that we were getting from the dealers. So we’re not using a model price. That is all that is. It has nothing to do with the trading portfolio

Another change -- related to its mortgage guarantees -- reduced a potential hit to profit by about $1 billion compared with the fourth quarter. A maneuver that delays taking credit losses also allowed the company to avoid losses in the quarter.

Excluding these and some other accounting changes, Freddie's modest $151 million loss would have been a more worrisome $2 billion.

More insights via Calculated Risk On Freddie Mac Accounting Change

One way to cut through the earnings noise is to go to the balance sheet and zero in on its leverage -- the amount of shareholders' equity Freddie has supporting its $803 billion of assets, which are the loans it has retained.

In the first quarter, Freddie's assets exceeded its $16 billion of shareholders' equity -- its leverage ratio -- by 50.2 times. Fannie's first-quarter leverage ratio was 21.7 times, while the first-quarter average for the 20 largest U.S. lenders was just under 12 times, according to data from SNL Financial.

A Freddie spokesman declined to comment on its leverage specifically. And to be fair to Freddie, some of the market losses that are driving down Freddie's equity may one day be recovered. For instance, equity plunged to $16 billion from $26.7 billion in the fourth quarter, in part because of unrealized losses on securities backed by subprime mortgages.

But if Freddie were a regular bank, its regulator wouldn't let leverage get anywhere close to 50 times. At a nosebleed level like that, the regulator would push Freddie to keep raising capital, even if some of its losses in equity might be fleeting.

Shareholders could sputter about the continued dilution, but the government won't be very sympathetic.

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2 Comments:

Anonymous eh said...

Nice post J-M.

But as you've no doubt seen over the last few months, 'investors' seem largely immune to bad news -- 'priced in', some would say.

Which makes trading even more difficult, since following the trend for many companies means going against what you see as solid fundamental analysis. Which I find emotionally exhausting.

So I won't short FRE (or FNM) right now; but I will keep an eye on them.

Dollar turnaround has bears on the run

Decent growth was reported today in Frankreich und Deutschland, so I cannot see how the dollar can continue to climb...but it may.

I like this glib sentence:

There is no good supply/demand reason for oil to be trading at $125 a barrel, so a stronger dollar should, at least in part, help deflate some of that speculative trading.

Maybe someone should ask him to explain how "speculative trading" is related to a weak dollar's impact on oil prices.

2:36 AM  
Blogger jmf said...

Moin Eh,

i am also only willing to short something when i have some long exposure to solid companies.

This has worked best for me. Not in $ terms but it relaxes and you can also smile when the market is running amok......

The $ might have hit the top against the € but i´m pretty sure that i will slump further against other currencies and especially gold. No matter how manipulated the data will get.... :-)

3:38 AM  

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