Financial Sense Online Market WrapUp with Rob Kirby 07/14/2008

First, let’s slip out the back, Jack, and try to wrap our heads around the unfolding situation. Last week, spooked investors, ‘got off the bus, Gus,’ sending the share prices of Fannie Mae [FNM] and Freddie Mac [FRE] down more than 45% on the week and more than 75% on the year.

Fannie Mae and Freddy Mac play a central role in the U.S. housing finance industry because they provide a crucial source of funding for banks and other home lenders, especially since the advent of the sub-prime credit market crisis that appeared last summer.

Just last week, Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Hank Paulson sat before law makers and, without discussing much, in their most convincing and affirmative voices attempted to sooth financial markets.

Then on Sunday, the Treasury Department and Federal Reserve outlined a comprehensive government plan to prop up Fannie Mae and Freddie Mac.

Treasury Secretary Henry Paulson said the Bush administration plans to ask Congress to enact legislation to temporarily increase the line of credit that the companies have with the Treasury. It would also allow the Treasury to buy stock in the companies.
Paulson also said the Federal Reserve should be given a greater role supervising the finances of Fannie and Freddie.
In addition, the Federal Reserve announced Sunday that the mortgage finance companies can turn to the Federal Reserve Bank of New York for funds. The move gives Fannie and Freddie the same access to the funds as commercial banks and Wall Street firms.

Without being coy, Roy, the reason for so much concern in these two publicly traded companies is that together they own or back $5 trillion in home mortgages and are counted on to play a central role in the recovery of the battered housing market.

Will the Fed and Treasury’s plans to bolster Fannie and Freddy’s balance sheets enough for them to maintain their credit ratings? The financing that these institutions provide is only possible so long as they have access to ‘cheap’ funding.
Will the potential ‘draw’ at the discount window by these companies critically impair the Federal Reserve’s balance sheet [which has already taken a beating]?
If the Federal Reserve’s eroding financial position is seen to be “too dire” - how seriously could this impact the dollar and the U.S. Treasury Bond Market

Needless to say, folks, what must be at the forefront of both Paulson’s and Bernanke’s minds is whether or not Jane and Joe Sixpack continue to “drop off their keys – to get themselves free.”

It’s been said in this space in the past but it bears repeating: Historically, ownership of precious metals has helped insulate investors from the VERY type of systemic financial mishaps we are experiencing right now.

Overseas equity markets began the week on a quiet note with Japan’s Nikkei Index losing 29 points to 13,010. North American markets slipped with the DOW off 45.3 to 11,055.20, the NASDAQ falling 26.21 to 2,212.87 and the S & P giving up 11.20 to close at 1,228.30. NYMEX crude oil futures gained .12 to close at 145.20 per barrel.

On foreign exchange markets the U.S. Dollar Index dropped .13 to finish the day at 71.93.

Interest rates eased across the curve with the benchmark 5 yr. bond ending the day at 3.17% and the 10 yr. bond finishing the day at 3.86%.

Precious metals powered higher with COMEX gold futures adding 7.90 to 973.30 per ounce while COMEX silver futures gained .29 to 19.16 per ounce. The XAU Index added 6.20 to 201.13 while the HUI Index gained 15.03 to 469.33.

On tap for tomorrow, at 8:30 a.m. June PPI data is due – Headline expected +1.3% vs. prior +1.4%, Core expected +.3% vs. prior +.2%. Also at 8:30 a.m. June Retail Sales data is due – Headline expected +.5% vs. prior +1.0% - Ex-Autos expected +1.0% vs. prior + 1.2%. Also at 8:30 a.m. the N.Y. Empire State Index data is due – expected -5 vs. prior -8.7. Finally, at 10:00 a.m. May Business Inventories data is due – expected +.5% vs. prior +.5%.