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Data from the Fed show the home-loan banks made new loans to stressed mortgage lenders in the third quarter at an annualized rate of $746 billion. The biggest borrowers from the home-loan banks as of the end of September were Citigroup (C, news, msgs), Countrywide Financial (CFC, news, msgs) and Washington Mutual (WM, news, msgs). To fund this lending binge, the home-loan banks issued $210 billion in new debt in November alone.
Banking on a guarantee
As with Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs), investors are willing to buy the Federal Home Loan Banks' debt at a lower interest rate because they think that if push comes to insolvency, the U.S. government will run its printing presses rather than see these private financial institutions go under.That belief in an ironclad guarantee against loss is what got us into this mess in the first place, of course, as buyers of mortgage-backed debt and debt derivatives decided that debt rated AA by Standard & Poor's, Fitch or Moody's (MCO, news, msgs) couldn't go into default. With a guarantee like that, investors didn't think they needed to check out the quality of the mortgages they were buying.
And with the implicit guarantee of the federal government behind them, the Federal Home Loan Banks don't seem to be doing much due diligence either. In a Monday interview with the Financial Times, Ronald Rosenfeld, the chairman of the Housing Finance Board, the agency that supposedly regulates the Federal Home Loan Banks, said, "I do not think there is anything that sets a maximum amount of potential advances."
Rosenfeld continued: "We believe after very extensive analysis that there is very minimal credit risk in the MBS (mortgage-backed securities) held by the banks." What would happen if house prices fell by 20% or 30%? "I do not know the answer, but I can tell you that I do not want to hear the news."
We're been here before, and it's not especially reassuring.
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The cash from the Federal Home Loan Banks and from other sources is still just pushing deck chairs around the Titanic. That "solution" actually makes things worse because it says to potential investors in this debt that no one else is willing to buy it at current markdowns. Meanwhile, the market stays frozen until prices fall to whatever depressed level is necessary to bring buyers back to the market.
Try patience
So what should you do? Raise cash if you can. Keep new cash on the sidelines. Be patient and wait for some solid evidence that the pessimists are wrong and that we really will see a bottom for the debt markets and the economy in mid-2008.I know that's hard. The sharp rallies and the equally sharp drops of the past seven years haven't taught investors to be patient. We're all afraid of missing the next rally by staying on the sidelines because the bulk of stock-market gains in recent years have come from catching the rally off the bottom. So heaven forbid that we should miss the bottom!
I advise patience as we move into 2008. The risk is to the downside, and there's a good chance you'll be able to buy what you want to buy at a cheaper price later in the year. No guarantee, of course. And that makes waiting tough -- and carries its own risk.
If the prospect of sitting it out for six months is too painful, here's what I advise:
Buy, for example, 25% of what you think your final position might be when your target stock hits some normally attractive entry point, such as its 50- or 200-day moving average.
Use the time after your initial buy to see whether this really is a stock you'd like to own as a major position in any post-bottom portfolio. If it sinks to a new entry level -- say, from a 2007 low to its three-year low -- add a bit more to your position. Remember, you're not trying to hit the absolute bottom but to build a position at the best possible price for an eventual recovery in the debt markets and in the economy.
5 stocks to consider
What stocks to buy? You've probably got your own favorites you've been longing to buy but that have been too expensive until recently. I've certainly got my own list. Here are five that I've mentioned in recent columns but haven't bought because the price wasn't right:Video on MSN Money
Jubak's Journal: The central banks' spin machineWhen will the central banks fess up about how bad the debt crisis is? Apparently not soon, MSN Money's Jim Jubak says. The most recent plan from the Fed and the European Central Bank to flood the financial markets with $522 billion is just another attempt to camouflage the problem.
The most interesting of these at the moment is Itron. The stock has corrected by $30 a share from its October high and is now hugging its 200-day moving average. I'd consider adding a small tracking position on this one. (Because I can't do that on Jubak's Picks, I'm going to enter a full position in Itron in that portfolio so I will have a reason to track and report on the stock as we move into 2008. Please note, I am not advising a full position in Itron at this time for investors.)
In my next column, I'll take a look at why pessimists don't think the economic turndown in 2008 will be shallow or end quickly. In that column, I'll add a second group of stocks I'd like to buy later in 2008. And finally, in my first column of the new year, I'll look at evidence that stagflation is here -- and at how to invest in that kind of economy.
Continued: Updates and developments
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