Investors take an opportunistic approach as economy improves

The US economy is expected to strengthen this year, with consensus around 2.6 percent growth. Global business confidence continues to improve with manufacturing in the lead.  With both consumers and businesses more optimistic heading into the new year, the combined strength in shipments could lead to a rise in equipment investment which bodes well for a rebound in global business activity. Consumption growth also rose in November, with core retail sales reflecting better than expected holiday spending despite some concerns about budget priorities in the lower-income group. The general backdrop suggests that investors could continue to seek higher returns in riskier assets that are more economically sensitive as the focus returns to fundamentals.

Allocation still favors equities
Fund managers are increasing weightings in developed market equities: Europe, Japan, and the US being the most favorable markets. There is still the chance for a pull-back in equities this year. The S&P 500 started 2014 in the red, and Asian shares followed lower as the Nikkei moved below 16,000. This could reflect some positioning amid lower volume, but some analysts suggest that this could be another buying opportunity.

For now, there is still room to extend margin debt as traditional bond outflows continue. Historically, investors have been extraordinarily leveraged during market rallies such as the tech bubble in 2000. Times are different now as fundamentals improve and central banks continue to support a stimulative environment. The case is stronger in Europe where valuations are still relatively cheap and in Japan where more easing from the BoJ coupled with large pension funds shifting allocation to equities could prove attractive from a global perspective.

Economic slack remains
Despite the optimistic outlook for 2014, there are still some concerns in the real economy. The lower income group tends to be hit the hardest during budget issues which leads to political dithering. Wage growth has improved, but labor productivity has risen by only 0.3 percent on year, but the rise to 3 percent during the third quarter of 2013 was impressive given the solid GDP report and non-farm payrolls during the same period. Andrew Smithers of Smithers & Co states that bad news on productivity could lead to signs of realism that will continue to make the case for a low rate environment. If the market outlook is premature, higher inflationary expectations without the true fundamental backdrop could be a problem.

An opportunistic approach
After a period of lower interest rates and soft demand for loans, US large cap banks could benefit from an improving economy especially as the yield curve steepens. Profit margins expand as banks borrow at lower short-term rates and lend at higher long-term interest rates. The rebound in housing and auto demand suggests that consumers are more comfortable with taking out loans as the economy improves.

Industrial strength is leading demand for non-residential construction where wages are higher and supply is limited. This will be an important year which will test the true strength of the economy. We are still in a stimulative environment, and even as the Fed reduces its pace of asset purchases, rates could find some comfort around 3.5 percent on the 10-year this year. Financing conditions are still favorable for many sectors which could support expansion. For example, US airlines are posting stronger gains as nominal GDP is upwardly biased, but we will need to see capacity expand as demand picks up to confirm further strength into the next year.

Asia Focus: AUDUSD up on Australian CPI but pares gains in Asia

Australia's housing sector helped boost Q3 figures. Photo: Shutterstock

Australia’s third-quarter CPI report was impressive despite remaining subdued on the headline print at 2.2 percent on year from 2.4 percent in Q2, which is still at the lower range of the Reserve Bank of Australia’s target of two to three percent for annual inflation.

The market was expecting slower CPI in Q3, but the trimmed mean figure beat consensus at 2.3 percent on year. The Reserve Bank of Australia (RBA) places more weight on trimmed mean CPI, so the recent rise could sustain the RBA’s more favourable tone on the economy.

Furthermore, the Q3 Aussie CPI report showed a greater contribution from the housing group, which suggests that recent data are starting to reflect the low rate environment. The RBA is now watching the higher AUD. 

Also, top China banks tripled debt-write offs as investors fear default. The seven day repo rate rose 42 basis points in Asia which; lingering fears on banking -- China's weak-spot, was behind the sudden AUDJPY drop during the Asia session. Key China PMI data ahead on Thursday to watch for as well. 

Continue reading at Saxo Bank's TradingFloor.com

Trade Idea: Buy-the-dip opportunity in AUDUSD

Economic Update - Rise in yields puts economy to the test

As the Fed struggles to clearly communicate its plan for tapering, or lack thereof, rising yields continue to linger as the US economy is put to the test. Forecasts for economic growth in the latter part of this year remain, but with the possibility of drifting monetary support, the market is increasingly nervous about the true state of the economy. A good headline figure, but a weak underlying trend is the usual case now, but many remain positive on the housing recovery. Regional expansion continues to show some bright spots thanks to the Shale Boom, but rising rates are making a significant impact on the local level. Finally, with little progress on the fiscal front, all eyes are on the Fed for its next major move.

Divided Fed

Tim Duy's latest "Fed Watch" post argues that the Fed is deeply divided and that Bernanke is essentially pulling the strings. Half are for and half are against tapering, but Bernanke had to be the deciding force to lay out the plan for eventual tapering as the cost of continuing QE are too high. In doing so, the 7% unemployment target and inflation pickup to 2% (economists predict somewhere around 1.4% by Q3 2013) should also be met. We assume that the FOMC is on board with this, but Bullard stated that these thresholds were not voted or approved by the board, so it's just a reasonable outlook to help guide future policy decisions. This makes the overall message confusing to those wanting a definite answer, but there are many factors to consider before a decision is made to taper.

Inflation data looks promising with producer prices at 2.5% y/y for June, and CPI inflation rate at 1.4% in May (June figure posted on 7/16/2013). Consumer inflation expectations are at 3.3% over the next 12 months, up from the June projection of 3% according to the U.Michigan Consumer Sentiment Survey. However, the growth side faces some hurdles after the IMF issued a lower outlook on global growth that could hit home.

US growth expectations are at a 2.3% pace for Q3, to 2.6% for Q4. With China and Europe posting slower growth, will the US rise above or coincide with global pressure? UPS lowered its forward looking guidance and expects a slowdown in the US industrial economy. Nevertheless, economists are still positive on the second half of 2013, but a lot still rests on the Fed.

The market needs greater clarity, and if the message is not clear, then perhaps the board is a bit uncertain about timing. The scare factor will remain present in the market as investors price in the fact that tapering will eventually occur. The recent USD sell-off after Bernanke's "dovish comments" - which was just a jolt back to reality - is another sign of over-reaction. Better data are supporting yields, but the real question is whether or not the economy is ready perform on its own feet. The first real test will be how well the housing market performs as rates rise.

Higher rates sparking fear in housing?

As the 30yr fixed mortgage rate climbed to 4.51% this week - currently at a two year high - the total number of mortgage applications fell 23% from the prior week, according to data from the Mortgage Banker's Association. The refinance index slipped 4% as higher rates are becoming less appealing, but are still historically low! This is still a lax environment that will keep the housing market afloat. We could see activity picking up to lock in these historically low rates.

Refinance applications still represent about 64% of existing mortgages, with about 35% coming from the HAMP program. Generally, foreclosures are way below 2009 peak levels, and there is a noticeable lag between judicial and non-judicial states - factoring in the process of going through state courts to finalize a foreclosure. The extra steps involved in foreclosures could spur auction activity. Remember that cash buyers are out there and investors are fueling the housing recovery. People who have accumulated wealth and saved up during the down times, are returning on the backs of an improving economy. On the basic level, the picture is still not structurally sound. Employment figures are still stuck near that 3 month average, and first time homeowners are lagging in the lost generation facing increasing debt; resulting from the student loan crisis which will create a greater economic strain down the line. The market is ripe for the come-back household and market investors. Housing activity is directly tied to the local level where states are slowly entering recovery mode.

Rate impact on the local level

The 10yr yield continued to rise near 2 year highs when yields topped near 2.74% in 2011. Improving economic data and the bond sell-off on fears of Fed tapering contributed to the recent 10yr performance. Yields have since declined off the 2.70% level to around 2.60% after Bernanke's dovish comments. It's interesting to see the impact of rising yields on the local level.

General Conditions --

States are working to close budget gaps and many have improving outlooks. Problems still remain with pension obligations and other liability short-falls, but the regional recovery is starting to shape the US economy. Many opportunities that can easily get lost in the macro fray are occurring locally, and the trend is moving inward. The Shale Boom pushed North Dakota out of 38th place in real GDP terms in 2011 to #1 in growth from 2011-2012, with 10.84% in per capita real GDP according to the US Bureau of Economic Analysis. However, a Pew Stateline article stated that other states are not faring too well. Alaska's production is significantly lower, and Wyoming's tax revenue is down almost 17% from its pre-recession peak. With supply exiting Cushing to refineries on the Gulf coast, many are starting to question whether expanding railroad infrastructure instead of pipeline growth will keep up with the Shale Boom. Generally, we are seeing more public/private partnerships in transportation and infrastructure funding, and overall visible supply in the muni market is still low for the summer.

Capturing Yield --

With economic opportunity present, and some problems still needing a fix, investors are keeping a close eye on yields. Much of the focus is on protection; Morgan Stanley's Municipal Bond Monthly report put it best: "yield pickup on the longer end remains relatively flat...are investors adequately compensated for additional interest rate risk?" We could expect investors to either limit duration in muni portfolios or demand greater yield on the long end.

Markets show focus on Fed after employment report

*May NFP: 175k vs 163k, downward revision by 12k for previous 2 months

*May Unemployment Rate: 7.6% vs 7.5% exp

Despite the US economy adding more jobs than expected for the month of May, the breakdown and trend are still meager. We're not out of the woods yet, and at this pace, the Fed is less likely to back down without significant labor market improvements.

There was not much excitement on the headline figures, but it does show that the trend in payrolls is broadly flat. The breakdown shows consistent gains in the service sector with low wage jobs capturing a larger share of the labor market. After looking at the employment reports from the past few months, the May report provides further proof that QE efforts are providing little help to boost employment. The Fed is clearly looking for significant improvement to break above trend in labor growth; unfortunately the monthly change in nonfarm payrolls is not enough to sustain a recovery. We will need to see consistent gains above the 200k level supported by wage growth and other economic improvements for the Fed to send a clear signal of optimism. Even so, the worry still remains that monetary stimulus has gone too far and perhaps we will need stronger fiscal policy to help speed up a recovery.

The markets believe that the Fed is less likely to ease off the pedal given recent data. FX markets were choppy with the USD given a modest boost with most pairs. Treasuries pared earlier gains as yeilds moved higher with the 10yr up 3 basis points to around 2.12% following the employment report. Yields have bounced off 1.60% support to show a firm rise for May as the bond sell-off leaves many in question. It's really all about the Fed at this point, and the summer FOMC meetings will be very important for any sway or persistence on the scale of asset purchases. Remember the weak ISM report sparked an initial safety run to treasuries, but the rise was short lived as the markets remain weary over an indecisive Fed. Stocks opened firmly in NY, giving a clear signal for the Fed to remain in action.

We still have a recovering housing market, but pay attention to 30yr mortgage rates nearing the 4% mark which could slow the recovery. Many investors are driving the demand for new homes, so the underlying picture of broader economic growth is still in question. Consumer spending is picking up, but we still have some fiscal problems looming with sequester cuts having a negative impact as well.

Canada - Hold your applause

The employment picture looks a lot better north of the border as Canada added 95k jobs in May, mostly full-time. Unemployment inched down to 7.1% with construction adding 43k jobs in May, marking a 5.8% rise y/y.

Although this is a stellar report, worries still remain about the housing bubble, especially given the rapid growth in construction jobs. Construction has been the main driver of these good headline prints, and we have to wonder about what this means for future supply of new homes as the demand side grows a little skeptic.

A report by the OECD labels Canada as the third most overvalued real estate market in the developed world - no surprise there. Look back at April 2013 building permits which shows that Canadian municipalities issuance was up by 10.5% from March due to higher construction intentions for multi-family dwellings. The total value of permits is now back above trend. Meanwhile, declines in institutional and industrial construction remain. Household debt and expenditures are troubling, yet there is more housing supply on tap. You can keep building, but home buyers are aware that prices are just too high to enter right now, and will eventually force that much needed correction in housing prices.

Economic Update - Are we in transition mode?

There is still an air of economic uncertainty in the US, but there is hope. Hope that this year will mark the start of a recovery. The struggle to reach that point places an emphasis on the string of economic indicators and the reality behind them. We know that the Fed is keeping a close watch and is considering its options should the economy show signs of strength later this year.

March FOMC Minutes

The latest minutes were released early to several high ranking officials and the joke goes that if they can't get an email right, what makes us so sure that they can get the timing of a QE exit correct. Nevertheless, the minutes for March were released to the public during the morning hours EST instead of the usual afternoon time. It showed the evident discourse among FOMC members about when the phase out of the controversial and much extended QE program (reaching a record $3.22 trillion) will occur. We get a feeling that the consensus is for later this year when some economists expect a pick-up in the US economy.

Even still, members said that if labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and eventually stop by year-end. There is still the possibility of returning to QE-lite because uncertainty still lingers, and the Fed might feel the need for continued support.

The debate over when to put a nail in the QE coffin is nothing new. The past few minutes have brought to light the concerning nature about balance sheet risk and the economy's ability to continue growth without the artificial push. The first mention of this was back in Q4 of 2012 which sparked an immediate stock market sell-off. Now, investors are aware of the ageing QE program, to the point where recent attention shifted to negative news from Cyprus which then caused a plunge in treasury yields.

The Breakdown

We can't ignore the healthy rise in equities. Some wonder if it is inspired by QE or just last minute bids on a general fear of missing out on some good gains. The fact is that QE has shifted asset allocation away from the usual safe-havens and stimulated a risk-on investment environment. But we have to take a step back and remember the fundamentals behind the recent low from early this year in which equities used as support for a rally. Stock market gains are not matching earnings and economic data, which suggests that a mix of sentiment and the quest for yield is the driving force. The stock market was bogged down with debt ceiling and fiscal cliff bickering at the start of 2013 which created a good buying opportunity. Technicals looked right and investors took advantage of the dip.

A deeper look into the economic fundamentals display some evidence of a transition to recovery. We see wealth gains mainly in the form of equities and a pick-up in housing construction and building activity. Consumers are still deleveraging which allows for spending. For example, refinancing could mean that savings are free to be allocated to more productive areas such as home improvement. A deeper look into the data gives us an understanding of how consumers are economizing during the economic transition.

Consumer debt has dropped to more comfortable levels, and credit can pick-up to reflect some confidence in the consumer's ability to borrow. However, the employment picture looks bleak. With a significant decline in labor force participation and a stagnant low-wage environment, there is little evidence to support a healthy labor market. Most of the activity is coming from the capital side of the growth equation. The fact is that most are under-employed and we are seeing households stick together - income sharing to phase out the negative in anticipation of a return to normalcy in which every member of the household is fully employed and self sufficient. Until we get there, a lot of the data might reflect only a half-truth.

We also have a demographic battle in which economic activity is missing the matriculation of first time buyers and the fresh labor pool of earners and spenders. The stark reality is that student debt is holding back the younger population resulting in higher defaults and the lack of entry level opportunity that is commensurate to the cost of study. Close attention to the Northeast housing and consumer market will be an important indicator to track this, as a great share of college graduates populate that region.

China marches back, but the West still looks ill

Good China trade and industrial data caught investors by surprise. There is a renewed sense of optimism in emerging markets overall. But some concerns over China's local debt problems and demographics keep the longer term outlook on a tightrope. The hope is that the new government will be quick to address these issues.

We will need full strength of the West for a clear sign of a global pick-up. Europe still looks weak with new sprouts of headline cases like Cyprus still in the mix.

The uncertainty is still there - look at the peso's fall against the greenback on Thursday as a signal that there is some concern about the ability of the US to boost the global economy. The Americas need the demand from the US, and LatAm markets can be an important indicator for foreseeable strength in terms of trade.

Long term view relies on current policy action

At some point, we will see sustained growth. Whether it starts later this year or rolls into 2014, there is evidence of transition and signs of hope. But the real question is how will we be able to keep the economic engine going.

Take a close look at the coming budget negotiations. Approach the issue with a clear mind and hear out both sides. Compromise on a long awaited budget will pave the way. We desperately need a framework to guide us through a recovery, or else we will get more of the same out of control spending and borrowing. There is doubt that whatever deal is reached, it will not be enough to address the serious fiscal deficit issue and economic folly that is inherently structural.

Immigration should be an important focus to keep the US as the most reasonable place to innovate. Innovation is part of the global market, and we must remain competitive. Higher education is taken up by more foreign students who will be at the helm of the growth. Look at Canada's latest plan for guidance.

Lastly, there is belief in the states. Despite underfunded pensions and liability short-falls, states have been busy strengthening their fiscal position. Most states are in a good cash position and the supply of municipal debt has declined. Investors are starting to see less risk, and the latest Census data shows an increase in state tax revenues. The revenue plans are highly strategic and take advantage of areas of productivity such as drilling out West. Some regions of the US are doing far better than most, and perhaps there's a good  model out there for solid growth.

Bank of Canada dovish on Western friends, positive on China

On September 7th the Bank of Canada issued a report concerning the dutch disease; with Governor Carney's remarks intended to ease concerns about the high Canadian dollar's adverse effect on trade sensitive sectors. However, the report failed to address how policy makers will respond to Canada's growing troubles in manufacturing productivity and inflated housing sector. Instead, the report shared some insightful information on the BoC's negative outlook on the US and Europe. Canada is strategically aligning its economy to meet the long term resource demands of the emerging world, most notably from China.

Canada's global projections are on point and deserve greater attention. It is in Canada's best interest to remain well informed about the global economy.

Soft Landing Ahead for Housing Markets in Canada and Australia

Global housing prices rose steadily from 2001 to about 2008 when the bubble eventually burst in the US. The problems in the US were a special case as a growing system of over-leveraged banks fueled by government subsidized guarantees led to a hard landing. During this time, resource driven economies such as Australia and Canada experienced a minor correction. With prices continuing to rally despite global deleveraging, China's major trading partners will bear the brunt of a soft landing. However, China's desperate need for resources will stabilize the imbalance.

The chart above clearly shows Australia, Canada, and Hong Kong being stubborn to the US correction post-08. Hong Kong's prices have risen sharply due to artificial demand as part of China's economic plans. Expect a major correction soon; stabilized afterward as China undergoes more "laissez-faire" economic reform.
** Click here for full interactive chart. Look at Sweden and South Africa! Poised to pop soon. **

Canada's Banks are Well Positioned, But Worries Remain

Keystone Pipeline Delayed Until After Election Year

The Obama Administration delayed approval for the Keystone XL pipeline extension from Canada to the US Gulf Coast. Yet another move to play it safe and place political strategy ahead of real economic due diligence. The administration decided to play it safe and dismiss any decisions on moving forward until 2013, one year beyond the 2012 presidential elections.

The current Keystone pipeline starts in Hardisty Canada and extends down the US mid-west belt to St.Louis. The proposed Keystone XL pipeline project will push westward, passing through the borders of Nebraska's Ogallala aquifer to reach the southern tip of Houston Texas and Port Arthur Louisiana. The estimated $7 billion project has been in talks for decades, and the US government was supposed to follow a schedule of 12-18 months of logistic, economic, and environmental studies.

Instead, the delay will decrease optimism among US shippers and refiners, Canadian oil sands producers, and job hunters from both sides of the border. Gulf Coast refineries need certainty about their supplies; delaying their scheduled deliveries one year out (along with the time needed to build), is enough reason to forget the idea of getting oil sand crude altogether.

Aside from the fact that the US clearly does not have an energy plan, it's also puzzling as to why the government allocates so much time for review and political strategy, but does nothing in preparation for new projects. It would be logical for the US to beef up safety precautions such as engineering barriers and enhanced filtration to make way for a project that is sure to develop some ROI for the neighboring states. Issuing a municipal bond to bring the infrastructure project into fruition, while paying back those bondholders with revenue generated by industry productivity is a solution that makes sense. We need a collaborative approach to work around constraints to maximize capital, labor, and productivity resulting from the pipeline project. Canada deals with the production, the neighboring states deal with optimizing economic gain from the pathway, and Houston and Port Arthur deals with the inflow of oil sand crude and delivery to the nation.

Another year of bickering does nothing when no one is willing to get serious. Canada must be laughing in a field of oil sands right about now. We can't blame them.

The Future of Toxic Assets

Once again, a Facebook discussion inspired me to think further. The banking idustry will face many challenges ahead, as outlined in last week's Special Report in The Economist. The culprint behind it all are "toxic assets". It's not as toxic when viewed in the long run, but for now bankers and regulators are still trying to find a place for it. The US went through this, and is slowly recovering with cleaner balance sheets. Europe is starting to experience similar troubles, especially Spain with its housing bubble. The question remains, what's next for these troubled assets (troubled is a better term than toxic).
In general, it is still too early to forecast the future of the banking system. The US, the source of the financial crisis, is still in the idea phase. The Dodd-Frank Bill is essentially a long list of proposals on what regulators intend to accomplish. Once a specific action plan full of regulations is introduced, analysts will surely weigh the pros and cons. We are starting to see the plans leak out, begining with consumer protection, and regulations on small things such as debit card transaction fees. The industry as a whole will be tightened, with higher capital and reserve requirements, cutting into profits. This might also force banks to venture into new exotic investments, and spill over risk from the shadow banking system - financial dealings with investment banks and other non-deposit institutions.

The initial plan, and what remains to be the first resort, is to set up a bad bank. The government purchases troubled assets and places them in a 'bad bank' where they sit and wait to be bought at a higher value. The government also collects payments in the form of a core capital ratio from the banks. The tricky part is valuing these assets and figuring out book values. The market for troubled derivatives is essentially dead, and there is little transparency, no source of ownership, and no demand pressure to set an actual price. The government has actuaries who assume the price, and we have some faith in this value. I think that the cost of the lump sum of purchases should equal to the amount of cash desperately needed to free up the bank's balance sheet.

The underlying asset that sets the value of these derivatives such as credit default swaps and mortgage baked securities are mainly consumer debt and homes, respectively. Currently, the US housing market is sluggish, as many homes remain vacant, foreclosed, and on a tightrope amidst mortgage loan restructuring. Some banks are desperately extending loan terms to help buyers by decreasing mortgage payments, in hopes to hold on to income producing properties. Other banks have lost hope and started a wave of short-sales, accepting small losses, but still face low demand from buyers. An empty home is...an empty home, and the derivatives that are fueled through the payments of borrowers are empty too, dead, or as some like to call it - toxic.

Fast forward a decade into the future. By this time, these troubled assets will be worth something. Governments can sell them off for profit, but I feel like there is a better way for banks to deal with this on their own. Consider this:

Banks establish a bad bank of their own and bear the costs involved in doing so (no initial sale, no cash). The government is artifically valuing the assets, when given some time, these instruments can arrive at a fair market value. These bank owned 'bad banks' will be managed by a team in charge of re-structuring the assets for a gradual launch throughout the recovery years. The assets are already structured for a good economy with cash flows from income generating properties and debt accumulation. The problem that caused systemic collapse was when the economy went sour, these instruments became toxic because they were not created to yield positive results during default. No matter how many parties insured the risk of default, the process of capital payment to borrowers and faulty ratings trumped all other pre-cautionary measures. Also, the web of insurers grew to large, that a collapse was inevitable, because no one could pinpoint the source of risk.

When these assets are structured, they need boundries. These derivatives should perform similar to options. It must come with a start date, and most important, maturity. The maturity period should arrive when the economy gives signals of exhaustion. Next, the assets should be split into groups of investors so that transparancy can flow easily. This is a better alternative because it is re-structured to be sustainable. Sitting on the government's books does nothing, and will only leave the new investors in more pain.



Geitner says Government will Play Active role in the Future of Housing Finance. But still no Plan.

I'm still disappointed that it took so long to address the issues about Fannie and Freddie and the outlook on housing finance. Today, Treasure Secretary Geithner held a conference with notable folks from the department of Housing and Urban Development (HUD) and other experts of the like. His concluding speech was just plain rhetoric, again stating that something needs to be done, but whatever solution comes about, the federal government will continue to guarantee mortgages. I expected a plan, not a re-statement of the issue, but we'll deal with what we have now.

PIMCO's manager, Bill Gross, told Bloomberg News that he proposes a full nationalization of housing finance. Although, I agree with Gross to a certain extent, his proposal lacks substance just like Geithner. I too proposed that the Feds adopt Fannie and Freddie and supervise the mortgage security market that poses such systemic risk. The government can continue to guarantee mortgages; which will provide insurance and encourage affordable lending, but we must also be stern and manage our own risk as the insurer. This means setting guidelines for loans that serve borrowers who meet certain standards - as Fannie and Freddie had in place before the Community Reinvestment Act, thereby alleviating some risk on all parties in the financing scheme. Second, the government should not tolerate any political influence and get rid of the monetary incentives that act as a commission for banks to actively lend; let it be known that taking on the risk through insurance and securitization is enough of an incentive.

Message to the government: enough with the artificial masking, and do your job. Mortgage financing is a great service, but it should in no way blind the public. Decreased lending during bad times makes sense. The heart of the matter lies in the sluggish economy, which goes beyond the housing market, and in my opinion deals more with employment and production. The government has a responsibility to provide economic support to bring a healthy pool of borrowers into fruition so that bankers will realize that the new found beauty in their risk calculations and lend with the backdrop of government guarantees through a securitized insurance pool.

Currently, we must pay the price of our mistakes, but building a system that recognizes these faults is a must. The financial reform bill has done that, and I'm still waiting to see a solid plan for the housing market.

Financial Reform forgets about Fannie and Freddie, but I didn't.

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So, the financial reform bill was passed, and now we can all breathe a sigh of relief. Well, not quite, because one of the prime causes of the financial crisis - the decline of the housing market, is still up in the air in terms of regulation. To be blunt about this, I ask the US government "what the heck's up with Fannie and Freddie."

For the most part, the financial reform bill seems like it will do good at identifying systemic risks, preventing it is another story. The genius of financial innovation always finds a way to create secondary markets. Either way, this is certainly a move to applaud. Among the plan of sweeping reform and regulations, a consumer protection agency will emerge, more disclosure, and government clearing houses for credit swaps. I especially favor the move to require banks and other financial players to take on some risk; for example, issuers of mortgage backed securities must retain a minimum of 5% of the credit risk associated with the underlying asset.

So, what to do about Fannie? For starters, here's some background info.



Fannie Mae and Freddie Mac actually provide a great benefit to homeowners and should not be fully blamed for the housing crisis. The bulk of Fannie and Freddie's portfolio holdings came from sub-prime borrowers in response to the Community Reinvestment Act. Providing affordable mortgage options to low income families who have the necessary means to qualify for such deals was able to continue because of institutions like Fannie and Freddie. Politicians wanted banks to serve the communities in which they operate, instead of taking deposits from the poor to finance the operations of the rich. However, the risk was that the residents in the community could not keep up with expensive mortgages. So, Fannie and Freddie helped to guarantee a portion of these mortgages by securitizing the asset to investors. These politicians who pushed hard for more sub-prime loans had good intentions that failed to make long term economic sense. As most loans had adjustable rates, borrowers began to struggle to make payments, and a default cycle rippled through the many markets that became the derivatives of the sub-prime investment scheme.

The systemic risk was caused by these secondary markets. Investors wanted to hedge, and sought more cash by sharing the pool of assets. With so many participants, and misleading ratings, and no real market value of these securities, the power of the home-owner is that much greater. The system was prone to collapse.

If we let Fannie and Freddie fail, a private player would have picked up the pieces, but the problem of politics will remain. For the many who sounded the alarm of regulating Fannie and Freddie by requiring reserves and oversight of their portfolio were dismissed in the Congressional chambers.



For a system so complex, I propose that the Federal Reserve adopt Fannie Mae and Freddie Mac. Now, this may receive some opposition from those who believe that the Feds have failed us. But actually, it's the fault of most politicians who place a gridlock on economic prosperity. The federal reserve is separate from politics for this reason, and for a system that provides affordability using such a complex framework, monetary experts should be involved. Home ownership and debt is crucial to our economic system, and with a grasp on this, the Federal Reserve will be better equipped on making better monetary decisions. Now, there's already a lot on the Fed's plate, but the work is best divided among their 12 regional branches. Picture a Fannie and Freddie board in each district with a specific grasp on community needs, reporting to the national Fed on the investment interest in the mortgage finance market, while adjusting the system for any type of secondary systemic risk.

The Treasury is set to hold a conference to discuss the outlook on the mortgage finance industry on August 7th. Clearly, they are undecided on what to do, so I hope some bright ideas come into play. I'll surely be listening very closely.

As for the housing markets -- the house price index posted a 4.6% increase in May, beating a forecast of a 3.9% rise. But the rise looks like a correction from the latest decline due to the expiration of home-buyer tax credits. Skeptics also say that home sellers are waiting for prices to rise, but then become desperate and offer bargains, causing a return to low home prices. There's also fears of a wave of pending defaults, certainly after 40% of home-owners dropped out of the HAMP program (government supported mortgage modification program).

The housing market got us into this mess, but a recovery can get us out.

WalMart Canada Saves Energy By Dimming Lights!

Following the previous gender discrimination law suit, WalMart attempts to stay positive with another PR push. The company's latest move is to become "green"! The new "environmentally friendly" WalMart demands smaller packaging containers and now energy efficient store lighting. The move will be better for the company's Canada stores because it will save them money and take away the negative publicity. Currently, WalMart has 240 stores in Canada and the new method of dimming lights is expected to save about 4,500 tons of carbon emissions during the summer season. I think that this is a great move for WalMart to become liked by the public. I still think that the company needs some one in charge of ethics but I'm all for the environment and agree with the project. Word on the street is that WalMart will use LED lighting in refrigerators supplied by CREE Inc. which will lower the company's energy use. WalMart states that their mission is not to save money but instead save the environment. Go WalMart!

**********STREETBLABBER APOLOGIZES FOR THE UPCOMMING LAPSE AT WHAT IS DEEMED TO BE AN EXCITING ACCOUNTING PROGRAM HELD AT PACE UNIVERSITY!!!! I WILL BE GONE FROM SUNDAY, JUNE 24TH TO THURSDAY, JUNE 28TH***************