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Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like Citigroup (NYSE: C) continue to weaken -- Merrill Lynch (NYSE: MER) reduced Citi's outlook -- Fed head Ben Bernanke sends the market indication that we are not yet near the end of the mortgage debacle, and he is looking for a "vigorous response" to address it.
According to an AP article, Bernanke, in an address to a banking group, stated that the mortgage crisis was not done, and that more relief would be necessary for homeowners who simply are unable to balance their books. This isn't what anyone on Wall Street wanted to hear, and certainly not what an individual investor like myself was looking for, either; I have ample financial exposure in the form of MFA Mortgage (NYSE: MFA) and Newcastle Investment Corp. (NYSE: NCT).
Further, Bernanke made a suggestion that bankers would obviously find tough to implement -- he said that a reduction in loan principal might be an appropriate way to relieve a struggling owner of real estate. Hmmm, that might not go over too well, especially with the crowd that isn't happy with government intervention -- now Bernanke is calling for lenders to be more lenient? But, what should one expect? This is the Fed, after all, and it's the institution's job to promote some economic homeostasis in times of need. Bernanke believes more foreclosures are coming, and he wants to get ideas out there that will save as much home equity as possible. He brings up a good point, implying that lenders will benefit from loan-principal reductions simply because the rate of foreclosures would, in theory, decline as a result of such a tactic.
What does all this tell us as investors? Well, more reductions in the Fed Funds rate are on the horizon. Yes, it will be tricky to balance this with inflationary concerns, but they are coming. The recession -- count me in, I believe we are in a recession -- is going to get worse before it gets better. And, we are in for more volatility vis a vis swings in stock-index values. I don't believe we're done going down yet, but at the same time, I think this is a great time to look for values and for stocks that will go up in this environment. The aforementioned MFA is a great way to play Fed rate cuts, in my opinion, and you can always look around for defensive plays in the consumer-products area for some safer bets -- Kraft (NYSE: KFT), PepsiCo (NYSE: PEP), stocks like that. One thing I am not taking away from this article is that we are nearing any sort of bottom -- my gut tells me this is not the case. So, if you're buying low, prepare to buy lower.
Disclosure: Steven Mallas own shares of MFA and Newcastle; positions can change at any time.
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Reader Comments (Page 1 of 1)
3-04-2008 @ 8:12PM
dogmeat said...
I think Bernanke and other members of the fed are going to have to be honest and tell the public and the government that you can't have both guns and butter and unless we stop spending hundreds of billions on warfare we will not have domestic prosperity.
3-07-2008 @ 10:13AM
Ciolajr said...
The mortage situation is not good, and the government needs to step in, much the same way FDR did during the Great Depression. We cannot and should not allow people to lose everything. The mortgages should be frozen and not be permitted to escalate and those homeowners who are in trouble should be permitted to make arrangements to have a temporary reduction in interest rates to lower their payments until they get on their feet.
The lenders are making a killing on all the interest they charge. It is far better to accept a reduced interest rate than to foreclose on millions of houses.
3-18-2008 @ 3:58PM
marie said...
Bernanke,
Have you lost your mind. The seniors are going into poverty since they depend on the interest from CD's. Of course, what do you care, because you are all rich. You could care less about the struggling seniors.
3-18-2008 @ 4:41PM
Marie said...
Mr. Bernanke
Have you gone out of your mind. How do you think we seniors are going to survive since we depend on our interest to live on. Cost of living has gone up atrociously thanks to Bush and also you having a field day with the interest rate. I do not feel sorry for people losing their homes, they should have thought twice before they purchased the home on the ARMS deal. I am confirming this comment.
Marie