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Freddie Mac

Low Rates Lose Out to Slow Growth: 06-24-10

This week's major news is that the economic recovery is under pressure, and investors are growing increasingly risk-averse.

To nobody's surprise, the Federal Reserve announced yet again yesterday that it plans to keep short-term interest rates near zero for an "extended period.” This time, the Fed cited financial conditions that are less supportive of economic growth, including the effect of developments abroad.

While the U.S. economic recovery continues to continue, the pace of the advance evidently is slowing. The headwinds include high unemployment with slower job growth; a depressed housing market; ongoing pressures on consumer spending; and the negative impact of Europe's debt woes on our economy.

The Fed said while the U.S. labor market is “improving gradually,” household spending remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.

The federal-funds rate has been between zero and 0.25 percent for 18 months. We have long advised that short-term rates would stay at current lows for a long time, at least through year-end 2010. This is now the conventional wisdom among economists, and some now even think short rates won't start to rise until 2012.

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No easy answers from technology: Market Update 06-14-10

Short-Term Key: Neutral Long-Term Key: -6 (Neutral)

I must confess that this past weekend I was a little preoccupied by my son's college graduation. Nonetheless, the sight of all those young people, some of whom may be the future leaders of our nation, getting their diplomas, reminded me how crucial it is to draw attention now to the really big problems they will face – and, as investors, how profitable it will be to focus on real solutions.

For example, yesterday the Sunday Times featured a front page article on how little benefit humanity has gained from the decoding of the human genome. Ten years since the world celebrated the first draft of DNA code, we have yet to see the promised plethora of new cures for genetic diseases.

If you read my 1999 book, Defying the Market, you may recall that in it I discussed many of the limits to our technological approach to solving the world's problems. In particular, I pointed out that large-scale, computerized enumeration of possibilities – the approach used to map DNA, identify new superconducting molecules, or search for patentable drugs – was not likely to produce the needed solutions to the problems that would unfold in the future.

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Caught Between China and Washington: 01-21-10

Sometimes stocks don't need a good reason to decline, particularly if they've been climbing for a long time and a correction is way overdue. But there have been plenty of good reasons for stocks to fall this week, and we've just had the biggest two-day sell-off since last June.

Yesterday, the immediate catalyst was news that China was tightening up on new loans because loan growth is too rapid. (Below, we explain what this means for the dollar and commodities.)

But we think China is only doing what's necessary to keep growth from getting out of hand. The China growth story is fully intact, in our view. Read more...

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The Fed's Continuing Life Support: 09-24-09

The Federal Reserve said yesterday that an economic recovery has begun. But actions speak louder than words: The Fed also signaled that it's still too soon to start withdrawing its stimulus programs, particularly for the housing market.

“Economic activity has picked up following its severe downturn,” said the Fed in its most favorable economic outlook since last year's economic and markets meltdown. While adding that activity in the housing market has increased and consumer spending seems to be stabilizing, the Fed also cautioned that the recovery will be slow, and it plans to keep its benchmark short-term interest rate at virtually zero for “an extended period.”

A key reason that short rates won't rise any time soon is the large amount of "slack" in the economy. In addition to a low level of industrial capacity utilization (less than 70 percent), the unemployment rate was 9.7 percent in September, its highest level since the early 1980s. It's generally expected that the unemployment rate will climb above 10 percent and stay high for several years.

Historically, the Fed has not even started to raise rates until well after unemployment peaks.

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WHAT THEY’RE BUYING

The three core funds recommended above only scratch the surface of what’s out there. Another noteworthy Large-Cap fund is Clipper Fund (CFIMX), a long-term champion but short-term underperformer. We don’t advise buying it now, for two reasons. First, it recently upped its investment minimum to $25,000, which may be prohibitive to many investors. Second, we’re not enamored of the fund’s largest holdings—Freddie Mac and Fannie Mae, which together account for more than 12 percent of the portfolio.

But that doesn’t mean we can’t benefit from the experience and astute value sense of Clipper’s managers by scanning their holdings list. According to their June 2003 mandatory holdings update report, their only significant new position has been HCA, the largest for-profit hospital chain in the country.

First, the caveats. HCA has had its share of problems recently. In addition to some legal problems of its own, the stock crashed when its peer Tenet Healthcare was under SEC investigation. The weak economy and rising unemployment also have hurt HCA along with all hospital operators.

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Market Update 09-15-09

Yesterday was the one-year anniversary of Lehman Brothers’ collapse. While the drastic measures taken last fall and spring in response to the system-wide reaction to the firm’s demise averted Great Depression 2.0, by just looking at the major market averages today you would think that problems in our economy have mostly been solved. But the fact of the matter is the rebound in stocks owes its existence in large part to questionable accounting changes, unprecedented sums of cash being pumped into the system with no clear strategy to later remove those funds, and investors’ renewed appetite for risk.

This later point is particularly troubling. It appears that investors haven’t learned a lesson from 2008, or 2000 for that matter. Many of these investors seem eager to make up for their earlier losses and are throwing caution to the wind to achieve that goal. They’re buying lottery tickets such as Citigroup, Fannie Mae and Freddie Mac, which have risen three- to five-fold, despite being bankrupt and still in operation only by dint of the government’s intervention. With investor sentiment (always a good contrary indicator) now about as high as it gets, it’s hard to see stocks making much in the way of forward progress.Read more...

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Northern Exposure

The surging Canadian buck has given sizzle to stocks north of the border

Each issue of The Complete Investor will highlight a particular investment sector with sweet potential. This issue we spotlight opportunities in Canadian stocks.

In the past year, the major Canadian market averages climbed a shade under 10 percent. Given that the broad-based U.S. Wilshire 5000 average rose more than 14 percent in the same period, you might think that’s nothing special. But don’t write off Canada too quickly. When you take currency changes into account, investors who purchased Canadian stocks in U.S. dollars racked up a sizzling 20 percent.

Remember, when you buy a foreign stock, your returns come not just from the change in stock price but from any currency changes as well. And since 2002, despite a small correction, the Canadian dollar has been surging.

As with any market, currencies go up when demand exceeds supply.

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Market Update 09-08-09

Stocks spent much of last week in the red, although a relief rally occurred on Friday heading into the long holiday weekend and we’re getting follow through today. The trading last week was characterized by the same pattern we seen repeatedly in recent months, with a step up in volume on pullbacks and rallies taking place on light volume. This is a trend that may persist for a while, but historically such action results in a sizeable decline.

We’re seeing a noticeable change in the tone of the market, with financial stocks surrendering their leadership role. Moreover, our work indicates that these same shares are likely to be among the market’s worst performers. Typically, when a group swings from leaders to laggards it marks the beginning of the end for rallies.

We likewise have small cap shares, which had been far and above the market leaders, starting to trail the blue chips on the upside and surrender more on the downside. Again, that’s a sign of a rally that’s not only long in the tooth, but one that’s poised for a decent-sized correction.

One likely suspect for triggering the expected decline in stocks is the U.S. dollar, which has fallen through a key support level today.

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A Trillion Dollar Challenge: 02-19-09

The biggest economic spending package in history has been signed into law. The long-awaited $787 billion stimulus plan, however, has failed to revive the stock market – investors are waiting for more clarity and for some results on the banks.

Yesterday, the stimulus package was joined by another initiative – new details on a plan to help homeowners with their mortgages. We all know that housing is where most of today’s troubles started; many agree that this is where the recovery should begin as well.

The $75 billion Homeowner Stability Initiative would help to cut monthly payments for about 4 million borrowers who are in trouble today, using remaining money from the $700 billion TARP fund. The homeowners will be helped to refinance; Fannie Mae and Freddie Mac will receive up to $200 billion in order to support this initiative and buy loans.

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Big Bargains in Bonds: 12-24-08

Yes, the economy looks bleak right now. But ongoing government efforts to support the economy and the financial system will bring increasing evidence of stability and then growth.

Meanwhile, with yields on super-safe U.S. Treasury issues and cash-equivalent vehicles at absurdly low levels, we see excellent opportunities for income and even capital-appreciation potential elsewhere.

A year ago, the benchmark 10-year U.S. Treasury note was yielding about 4 percent. Now it’s at less than 2.2 percent.

Meanwhile, mortgage-backed securities issued by government agencies such as Fannie Mae, Freddie Mac and Ginnie Mae carry AAA ratings for credit safety and pay 4-5 percent.

Investment-grade corporate bonds, rated A or better, typically pay 6-7 percent or more.Read more...

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Freddie Mac

Low Rates Lose Out to Slow Growth: 06-24-10

No easy answers from technology: Market Update 06-14-10

Caught Between China and Washington: 01-21-10

The Fed's Continuing Life Support: 09-24-09

WHAT THEY’RE BUYING

Market Update 09-15-09

Northern Exposure

The surging Canadian buck has given sizzle to stocks north of the border

Market Update 09-08-09

A Trillion Dollar Challenge: 02-19-09

Big Bargains in Bonds: 12-24-08

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