Dow Jones Reprints: This copy is for your personal, non-commerical use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool on any article or visit www.djreprints.com
During the latter days of the war in Viet Nam, one suggestion to end the American involvement was for the U.S. to declare victory and pull out. That way it could withdraw without admitting defeat.
Two seemingly disconnected news events brought that sardonic notion from decades ago to mind.
The Treasury announced plans Monday to begin selling off its portfolio of mortgage-backed securities issued by Fannie Mae and Freddie Mac after Uncle Sam rescued his wayward niece and nephew during the credit crisis of 2008.
Meanwhile, the National Association of Realtors also reported Monday existing-home sales plunged 9.6% in February, to a 4.88 million-unit annual rate, while the inventory of unsold homes rose to 8.6 months' supply from 7.6 months. The median sales price also was down 5.2% from a year earlier, a decline from the 4.2% year-on-year drop recorded in January.
History is repeating on a small scale. The Treasury is withdrawing its support before the mortgage market has recovered fully, which is apparent in the existing-home sales report.
Fully one-third of previously occupied houses and condominiums purchased in February were for cash, a record. No mortgage at all, which is positively un-American.
Bargains are there, if you've got the scratch. Distressed sales accounted for 39% of the total; for those sufficiently well-off to write a check for a deeply discounted abode, you're in luck. But the record number of cash buyers, who are eschewing the opportunity to take advantage of mortgage rates that still are close to the lowest in history, suggests something's still amiss in housing finance.
One assumes these cash buyers aren't all drug dealers or involved in other businesses that are usually are conducted in stacks of Benjamins. For those cash buyers who came by their earnings honestly and reported them all to Uncle Sam, their ability to put down 100% of the purchase price speaks to their solid credit. And they are about as different as could be from the nothing-down ne'er-do-wells who snapped up houses during the bubble.
In any case, the Treasury said it will gradually sell off its $142 billion of agency MBS at a rate of about $10 billion a month. The department emphasized the asset sales weren't part of a ploy to deal with the politically contentious question of an increase in the debt ceiling, which the federal government will bump against in April or May. One should be willing to take the Treasury at its word, given the MBS sales are the equivalent of digging for change in the couch cushions in terms of funding a $1.6 trillion deficit.
Even so, the bond market was roiled by the Treasury's announcement of MBS sales. Not so much for its size, but for its timing. The Treasury's sales could be seen as a precursor for the liquidation of the Federal Reserve's holdings of mortgage paper.
Not only is the Fed's MBS portfolio substantially bigger -- $944 billion as of last Wednesday versus $142 billion for the Treasury -- but sales by the central bank would represent an actual tightening of monetary policy. An increase in the federal-funds rate target -- the Fed's traditional policy tool -- presumably would accompany a shrinkage of its balance sheet.
The financial-futures markets are pricing in a hike in the fed-funds target to 0.5% about a year from now, from the nearly rock-bottom 0-0.25% peg that the Fed has maintained for more than two years.
The Treasury announcement of its plans to sell off its MBS holdings would clear the deck for the Fed to wind down its mortgage portfolio. That served as a reminder that 2012 isn't so far away.
Even as the Fed continues to buy Treasury securities as part of its $600 billion QE2 monetary expansion, part of the purchases of Treasury notes and bonds has been to offset the normal paydown of Fannie and Freddie MBS. In the past 12 months, the Fed's holdings of MBS have shrunk by $119 billion, largely because of principal payments.
One wonders, however, if the withdrawal of federal support for the mortgage market smacks of "Mission Accomplished." That also would be an unfortunate allusion to recent U.S. military history.
Comments? E-mail: randall.forsyth@barrons.com
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com
Yahoo! Buzz
MySpace
Digg
del.icio.us
NewsVine
StumbleUpon
Mixx
AT&T's $39 billion acquisition of T-Mobile USA has sent shares of Sprint tumbling. However, we think Sprint will reward investors.
AT&T and OptionsXpress rose. Sprint and SBA fell.
Apple, Alcatel-Lucent, Cisco and Juniper will benefit in the transaction.
The bank removed a major uncertainty with a capital raise.
Credit Suisse downgraded AutoNation, but reiterated Lithia at Outperform.
The outdoor-ad firm will be boosted by shorter display times.
J.C. Mays sold 55,000 shares of the auto giant.
While weak quarterly results have investors booting shares from their portfolios, we'd be buying on today's weakness.
Disclosures in the lending firm's filings mean lower earnings.
Credit Suisse likes Anadarko, Suncor, Talisman and several others.
Pressure on commodity costs will continue, but worst my abver. (At SmartMoney.com.)
After suffering an unimaginable series of catastrophes, Japan will demonstrate its resilience.
Amid the gigantic effects of the quake and tsunami, the impact may affect global policies. But one economist, at least, sees recovery.
A Nobel Prize-winning economist says the West hasn't learned much from Japan's long slump or the struggles of Hoovernomics.
The yen soared as traders anticipated a surge of demand for the currency. Treasuries benefited from a flight to safety after Japan's triple disaster.
Supervalu's stock may finally live up to the giant grocer's name, thanks to a smart corporate restructuring. What it will take to boost sales.
U.S. stock market dips briefly into the red for the year amid fears of slower global growth. Higher oil prices are here to stay.
What should investors do about their utility holdings amid Japan's nuclear disaster and possible new scrutiny in the U.S.?
Consumer-staples stocks have underperformed as investors chased more speculative stuff. In a crisis-ridden world, these Steady Eddies suddenly look a lot more appealing.
Read Full Article »