Quick Links/Merry X-mas and a happy new Year!!

Merry Christmas and I wish the best for you and your families. I was out of town and taking my mind off the markets for a while. I will also be out for 2 weeks in January. On to some links that I thought were interesting.

This is a very contentious situation.  Now with reports of the taxpayer backstopping Freddie and Fannie for the next 3 years, if these issues of gov’t support on the taxpayers’ dollar gain traction with the general public, look for even more adverse pressure on Obama’s rating.  I have been in respectful disagreement with the administration’s strategy for getting us out of this nightmare for a while (read my previous articles), but this is getting ridiculous. In terms of Fannie and Freddie, it maybe very good for the short term as gov’t guarantees against bankruptcy will produce a strong underlying bid as investors know the companies will be protected. Both stocks were up 20% today. But in the longer term it only serves to show that the gov’t is traveling down the wrong path in attempting to continue the real estate bubble. One thing I did see as a positive was the possibility of “principal write-downs” as a possible step from here, but essentially it will also give a free pass to many homeowners to “strategically default” knowing the the gov’t will come in to rescue them, in other words the ultimate example of “moral hazard”.

This is starting to support my mini-thesis that we are having diminishing returns of enacting these consumption based policies now for Real Estate.  Not a good sign. The latest Mortgage Application numbers shows a sharp decrease in purchase applications. People do not view real estate as a viable investment anymore. The Real Estate Market continues to be very sick. 

I’m not the only one that sees that asset prices have gone too far and have been induced by liquidity from free money. This is an international phenomenon.

The low Interest rate thesis due to deflation might be taking an unexpected turn.  Could rates actually spike due to this?  As being bullish on Treasuries, I am making a note of this development as it certainly could cause me to amend my treasury thesis. It calls for domestic demand to pick up the slack led by baby boomers (to secure their retirement) and banks (to strengthen their balance sheets). We are seeing reports of baby boomers doing their part as bond funds have been getting most of the cash instead of equity funds. They are tired of taking risks that have promptly backfired on them for the last 10 yrs .  As Treasury rates rise, we will probably see strong demand.  I would see this as a buying opportunity for the time being.  

More reports of liquidity withdrawal.  I expect bad economic news come Q1,Q2 of 2010 as the effects of the stimulus wane and liquidity gets withdrawn from the system.  

On the good news side though initial reports show that holiday spending improved YoY. I figure that it was on the back of deep discounts which I observed in many stores this holiday season. The question is, will this prompt enough confidence to expand operations and thus the meager recovery we’ve had thus far? While Q4 numbers may come in very strong due to inventory drawdowns ending, the effect is transitory and we will need end demand to come in more strongly in order to keep the positive prints coming in.

Finally, lets throw some humor courtesy of the comically venerable David Barry.

Have a safe and happy holiday season.

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