08/07/13   Bye, Bye, Fannie and Freddie

Editor’s Corner

Ron Rowland

Home prices jumped 11.9% in June from a year earlier, according to real estate data provider CoreLogic.  Prices rose in 48 states, with only Mississippi and Delaware recording declines.  Additionally, all but one of the 100 largest cities registered price increases.  Recent fears have focused on rising mortgage rates and the negative impact they will have on the housing market.  So far, those fears have not been realized.  Even though the 10-year Treasury yield recently popped its head above 2.7% and 30-year fixed mortgage rates moved up to 4.4%, interest rates remain quite low on a historical basis.

With the housing market showing signs of improvement, the time is ripe to focus on the future of the Federal National Mortgage Association (FNMA), aka “Fannie Mae”, and the Federal Home Loan Mortgage Corporation (FMCC), aka “Freddie Mac”.  These two quasi-government institutions, along with the FHA, make the U.S. government the guarantor on more than 80% of all home mortgages.

President Obama has previously indicated support for an overhaul of Fannie and Freddie, and yesterday he essentially endorsed bipartisan efforts to wind them both down, ending their implicit guarantee of a federal bailout.  The goal is to shift the risk off the government and onto private investors.  The unknown at this time is whether all the risk or just a portion of the 80% will shift.

If the housing market is doing well, then many think the economy must be doing better too.  The July unemployment report, as long as you don’t look at the details, also suggests an improving economy with the headline unemployment rate falling to 7.4%.  If that is truly the case, then perhaps the Fed might begin tapering sooner than expected, and that is making investors nervous once again.

The Bank of England borrowed a page out of the U.S. Federal Reserve’s playbook earlier today by pegging its monetary accommodation to the unemployment rate.  The bank announced it intends to keep the benchmark interest rate at 0.5% and maintain its current bond-buying program until the U.K. unemployment rate falls to 7% or lower.  It currently sits at 7.8%.  The British Pound is up more than 1% against the U.S. dollar today.

Investor Heat Map: 8/7/13


Our Sector relative strength rankings have been steady the past month, with only minor shifts occurring within the upper and lower halves.  Today, there is some crossover activity, most notably with Technology leaving the laggards behind and moving into the upper tier.  Consumer Discretionary and Health Care traded places at the top, an exercise they have performed numerous times the past few months.  Industrials climbed two spots to third, boosted by gains in the defense & aerospace industry.  Financials slipped a notch to fourth while remaining strongly entrenched in the upper tier.  With Technology’s move into the upper half, something had to fall, and that something was Telecom.  Telecom made a big jump in mid-July on takeover news.  However, it has been unable to follow-through and is now losing momentum.  Consumer Staples added strength and is poised to overtake Telecom.  Utilities gave up ground, and the sector now finds itself bunched with Energy and Materials near the bottom.  Last week, we accurately anticipated Real Estate would be registering a negative trend today.  However, the degree of its weakness, with 30 points separating it from Materials, caught us by surprise.


Small Cap Growth claimed the top spot in our Style rankings today.  It unseated Micro Cap in the process, which held that position throughout June and July.  Mid Cap Growth moved up two notches to fourth, and its performance combined with Small Cap Growth’s new leadership role indicates the market’s preference for Growth over Value.  Large Cap Growth also registered a gain in momentum, but it was not enough to move it out of its next-to-last-place position.  Two of the Value categories lost ground.  Large Cap Value dropped from fifth to seventh, and Small Cap Value gave up two spots to land in sixth.  Mega Cap is on the bottom, although its momentum score is strong enough to put it ahead of four Sector categories and all but three Global categories.


Europe holds on to its top ranking after surging from sixth to first in last week’s update.  Investors are encouraged that the Euro zone economy may finally be exiting from its recession.  The U.S. maintains its second place position after strong gains in July.  EAFE jumped from sixth to third, while Japan improved its momentum score by 19 and moved up two spots.  Since Japan has the largest country allocation in the EAFE benchmark, its strong move helped EAFE’s climb.  The U.K. turned in good performance for the week, although the strength in Japan and EAFE pushed the U.K. down to sixth on a relative basis.  Canada fell hard in the rankings due to weakness in both its currency and stock markets, putting the country in danger of flipping over to a negative trend.  China managed to post its first positive momentum reading in about three months, but its recent rally is already showing signs of fading.  Three categories remain in negative trends as Pacific ex-Japan, Emerging Markets, and Latin America have not been successful in joining the equity rally other regions are enjoying.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“The current housing finance system, where the government guarantees more than 80 percent of all mortgages through Fannie Mae and Freddie Mac and FHA, is unsustainable.”

Senior Obama administration official who declined to be identified, Aug 2013


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