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The Financials Pit Review

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For the week of September 8th, 2008

Tue, Sep 9 2008, 05:19 GMT
by Kalvin O’Brian

Pit Guru

U.S. Economy

The government takeover of Fannie and Freddie has now become a reality. This is clearly the largest step the US government has taken to thwart the largest surge in mortgage defaults in almost 30 years and the more than $500 billion of losses and write downs it has created. It was clear six months ago that the government was more than willing to step in after the Federal Reserve provided $29 billion of financing to prevent Bear Stearns’ collapse. Under this latest plan, the treasury receives $1 billion of senior preferred stock, with warrants representing ownership stakes of 79.9% of Fannie and Freddie. They will also receive annual interest of 10% on the initial investments. I would look for this market to be favorable towards the move but this doesn’t fix the problem it just transfers it. Some partially good news for the auto industry, the annual selling rate for autos in the US increased to 13.7 million in August up from a 16 year low. However, this acceleration was partially attributed to the heavy discounts and incentives dealerships have been offering. So we have the now routine mix of good news, bad outlook that we have been seeing these several months past. Look for the initial high to come smacking down to earth towards the end of the week.

Currencies

The euro has continued its slide against the dollar for seven of the past eight weeks. The growth outlook has changed since the central bank held the main refinancing rate at a seven year high of 4.25. The euro has fallen more than 10% from the all time high set on July 15th. I expect the decline in the euro to continue as the situation overseas continues to feel the impact of the credit and housing issues that plagued the US. The yen has been just the opposite, gaining against the dollar for a third week. It also climbed to a one-year high versus the euro as the U.S. lost jobs for an eighth month and investors sold higher-yielding assets funded in Japan. Statistics Canada said that the unemployment rate remained at 6.1% in August with a gain of 15,200 jobs, more than expected. So far in 2008, the economy has added 87,000 jobs. The September Canadian dollar finished up a little higher on Friday and will be steady to higher through the week.

Published on  Tue, Sep 9 2008, 05:21 GMT