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.

"Beware the overpriced debt markets in 2007 / economist"

very good summary on the correlation of debt and other asset classes like equities. the first sign of trouble for the stockmarket will be trouble in the debtmarket like a big default or spike in spreads.

klasse zusammenfassung über das zusammenspiel von krediten und anderen vermögenswerten. die ersten probleme im aktienmarkt werden sicher mit problemen wie ausfällen oder einem ansteig der spreads im kreditmarkt einhergehen.

GENTLEMEN prefer bonds. If you look round the world for speculative excess at the end of 2006, there are many more signs in the supposedly staid world of debt than in the stockmarkets.(unfortunately they are closely correlated, dummerweise hängen diese beide eng miteinander zusammen)

Investors are enthusiastic about buying fixed-income assets, even though yields are low by historical standards and the returns on cash (particularly in America and Britain) are as attractive.

Many investors in shares argue that the low levels of bond yields make stockmarkets look cheap. To take one example, emerging-market bond spreads (the excess yield over American Treasuries) are close to all-time lows, according to Morgan Stanley, an investment bank, whereas emerging stockmarkets trade at their usual discount to developed-world shares. In the short term, the perceived cheapness of debt is persuading private-equity groups that they can make big profits from buying quoted companies. And the prospect of such bid activity is keeping a floor under share prices.


But there may also be structural reasons why investors are favouring bonds over shares. The first is that savers have changed. Pension funds and insurance companies in the developed world have become more cautious (thanks to regulation and the bear market of 2000-02) and are increasingly buying bonds in an attempt to match their liabilities. Furthermore, savers are no longer risk-happy Americans but Asian central banks, which have traditionally put bonds at the core of their portfolios.

A second reason is the massive growth of credit derivatives, which has given investors the ability to sample the debt markets so as to get exposure to the precise risks they find attractive. Debt is no longer just plain vanilla; now there is as much variety on offer as at an Italian gelateria; credit risk can be scooped out and separated from interest-rate risk; money can be made from predicting default as well as avoiding it. Rather than investing in a few, often illiquid, corporate-bond issues, investors have a host of vehicles to choose from..... Abundant liquidity has persuaded people to accept lower yields as a result.

All this has coincided with an exceptionally favourable period for corporate-debt markets. Companies have been extremely profitable, generating more than enough cash to service their debts; as a result, the default rate has been very low. Traditionally, low default rates have been associated with low spreads.

Of course, markets are supposed to look forward. All this good news might prompt investors to believe debt markets are close to a turning point. Indeed, corporate-bond spreads did edge higher earlier this year, before taking another downward lurch in the autumn.

The debt markets seem to offer little scope to absorb bad news. As Barclays Capital, a British investment bank, neatly puts it: “The entire asset class of bonds is characterised by symptoms of overvaluation and complacency.” ( they have fallen asleep...... / sind wohl eingedöst...)


But what will puncture that complacency? The most likely cause would be a big default. If the global economy slows next year, companies will find it more difficult to service their debts. And bid fever has prompted borrowers to take on more risks; according to Standard & Poor's, a rating agency, the average purchase price for European leveraged buy-outs has reached a record level of 9.4 times earnings before stripping out the costs of interest, tax, depreciation and amortisation.

The real test will come when spreads start to widen again. Will the rapid emergence of credit derivatives and the greater role of hedge funds make markets more—or less—stable?

There had been fears that hedge funds would be less willing than banks to stump up rescue money in a crisis. But the recent case of Polestar, a British printing group, showed that companies can be refinanced smoothly even if hedge funds are involved. In addition, plenty of distressed-debt funds specialise in taking positions when things look ugly.

Another fear is liquidity. Hedge funds have actively provided credit via leveraged loans. There is a risk that, just when borrowers get into difficulty, hedge-fund clients may demand their money back......

Plenty of people believe the financial system is more secure than before, because banks are not as vulnerable to the threat of corporate failures. The markets have survived the crash of big companies, such as Enron, an energy trader, and the downgrades of motor companies, Ford and General Motors, in recent years.


But the real test of a big recession has yet to be faced. If you want to dwell on one financial worry for 2007, the corporate-debt market is the place to start.