Fed Actions Have Produced Goose Eggs

Remember that game we used to play as children? Now the Fed is playing: Cut, Cut, Cut, Cut, GOOSE, Cut, Cut - GOOSE!

Below is a great chart from Investor’s Business Daily that illustrates how the recent actions, policies and interventions have helped(?) the equity markets. While the Fed’s primary goal has been to restore liquidity to the credit markets, the collateral damage from the sub-prime and housing malignancy has negatively effected the dollar and equity markets. Nothing new here.

If we were grading the Fed on originality: A-
If we were to give a grade on effectiveness: D-

So far, as far as the market is concerned, the Fed Plan(s) have come up as Big Fat Goose Eggs - click to enlarge:

Remarks from the March 4, Independent Community Bankers of America Annual Convention in Orlando, Florida that are rather frightening:

A recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50 percent of the principal balance, with legal, sales, and maintenance expenses alone amounting to more than 10 percent of principal.

50%? 50%? So, they are showing a 40% reduction in value for the subprime debt and another 10% for the miscellaneous administration.

With the time period between the last mortgage payment and REO liquidation lengthening in recent months, this loss rate will likely grow even larger. Moreover, as the time to liquidation increases, the uncertainty about the losses increases as well. The low prices offered for subprime-related securities in secondary markets support the impression that the potential for recovery through foreclosure is limited.

The loss rate will likely grow larger? The loss rate will likely grow larger? How much larger? 55%? 70%? If that is not enough, he states that, “the potential for recovery through foreclosure is limited,” which will effectively create a widespread outbreak of insomnia for everyone homeowner as they watch their property value free-fall due to get-it-sold-at-any-price by lenders that do not have the financial ability to carry their newly inherited/foreclosed properties.

The magnitude of, and uncertainty about, expected losses in a foreclosure suggest considerable scope for negotiating a mutually beneficial outcome if the borrower wants to stay in the home.

Interpret this as: Borrowers who are underwater and want to reduce payments may soon find it easier to negotiate a better payment plan. Or, from another angle; lenders will be forced to accept whatever they can get as the situation worsens. In the end, some type of governmental lending pool (like the state-insurance pools) will likely be created to handle subprime and non-performing loans. The first step of this has already been conceived by the Federal Credit-Swap plan of March 11. (If it is any consolation, it may help to create a few in-sourced jobs)

Hmmm….Now that Spitzer is out of the way, and Fannie (FNM) and Freddie (FRE) are bleeding out….

One small step backwards for private-lending…One giant leap ahead for socialized-housing.

(See: FNM/FRE Burnt Offerings)

Disclosure: Horowitz & Company clients do not hold positions in stocks mentioned as of the publish date.

Comments

[Tony Soprano:]

It took us a good while to get into this mess and it will take a while to get us out of it.

The internet has made us impatient. How can you give the game a score before the game is not over?

The bears are over breeding and their cubs are running wild. THIS IS BULLISH!!!

S&P says the end of the write downs are in site. THIS IS BULLISH!!!

Repeated world downturns falter. The world can only cry wolf so many times. THIS IS BULLISH!!!

2008 Mar 13 01:36 PM

[sbenard:]

I'm not sure why everyone in the market thinks they have to PREDICT the future. What is it? Ego? Don't do that. Just give the market what it wants! One of the reasons that I like this article is that it doesn't prognosticate. It just tells the Fed record the way it is, based upon past history. The charts don't lie! Our biases and opinions do -- they often deceive us into taking market positions that hurt us based upon our opinions and biases. I have also noticed over the past several months this same pattern. Fed actions cause a short-term rally, followed by a market realization that things really are that bad, and that the Fed just can't provide a quick fix. Then, the longer-term bear calmly walks back in and starts feeding on the bulls again. When the market really turns, I'll be there. Until then, I'll continue to give the market what it wants.

2008 Mar 13 02:30 PM

[Tony Soprano:]

Mr.Sbenard,

We are having FUN! All this palaver kills time. But seriously, it gives us time to collect our thoughts and see and even feel what others are doing and saying. Right now the sentiment on this sight is very bearish. This is good news for the bulls. The markets have tested a bottom three times. So far they have not broken down to new lows maybe its because the sentiment is so negative.

2008 Mar 13 03:04 PM

[Fat Arby:]

sentiment is but a summation of what persons are doing - buying or selling. If there aren't enough buyers, prices will drop. That simple.

If the Romans built beautiful palaces in , say, Segovia, but they ran out of gold, they had to import the gold from somewhere else.
If someone, then, gave them some gold in exchange for those palaces, they would likely bid low.

The US ran out of gold a long time ago but continued issuing credit for a long time. Now, we've run out of gold - and credit.

Look for prices to come down some more.
I'd say for another 20 years

2008 Mar 13 05:17 PM

[Bela Ghoulashi:]

So according to Tony the extreme negativity on this "sight" is all that stands between the market and new lows...

I guess he doesn't know a good thing when he sees it.

2008 Mar 13 08:05 PM

[Kevin Kennedy:]

Tony, I think you're right. Jump all over that Bear Stearns action :)

Kevin Kennedy
Publisher
CoolcatReport.com
Now publisher of 5 great investment newsletters!
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2008 Mar 14 01:28 PM