Money & Investing - Banks.com

Fannie Mae reported a stunning loss for Quarter 2. The company insists that it will not need the bailout approved in the recently passed housing relief bill. Despite all that Fannie execs can say with regard to avoiding the need for taxpayer money, I’m not sure that this is reality.

BloggingStocks reports on the plan that Fannie Mae claims will prevent the company from needing government (read: taxpayer) help:

What to do? Mudd — whose name is mud in my book — says Fannie Mae will reduce its dividend from 35 cents a share to 5 cents a share and stop buying Alt-a mortgages — those “made to borrowers with solid credit but little proof of their income, or small or no down payments.”

This is a severe blow for those who rely on dividends for part of their income stream. Additionally, it’s a bit of a letdown for those with Alt-A loans facing foreclosure. Alt-A loans are likely to comprise a large number of the next wave of foreclosures, and that could be a serious issue down the road.

However, the stock market still managed to open ahead this morning, with major indexes up. The news that oil prices continue to decline, along with some surprising economic data, have added a bit of confidence to the stock market.

BusinessWeek offers some insight into some of the stock performances today:

Among other stocks in the news Friday, McDonald’s Corp. (MCD) posted an 8% increase in July global comparable-store sales and a 16% increase in its systemwide sales for its worldwide restaurants. The company posted a 6.7% rise in July U.S. comp-sales.

Hormel Foods (HRL) expects third-quarter EPS to be in the range of 37-39 cents, citing higher than expected feed and fuel input costs at its Jennie-O Turkey Store segment. The meat processor adjusted its 2008 EPS guidance to $2.22-$2.28, vs. previous guidance of $2.30-$2.40.

Live Nation (LYV) reported better-than-expected second-quarter EPS of 2 cents, vs. 15 cents one year earlier, as higher costs offset an 18% revenue rise. Wall Street was looking for a 20-cent loss.

Sprint Nextel (S) says it is no longer pursuing the private placement of cumulative perpetual convertible preferred stock, and remains committed to paying down debt and strengthening its balance sheet. The company reiterated its forecast for free cash flow to improve substantially in the second half.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, stock market news, investing blog, Fannie Mae,
economy, investments, dividends

For the second day in a row, oil prices have been dropping. Now they are below $120 a barrel, and many stocks on the market are beginning to take heart from the situation.

Why are oil prices dropping?

One of the big reasons that oil prices are dropping is to do with global demand. Demand for oil is slowing as prices cause inflation. Even in the United States, drivers have been cutting back in order to save money on transportation costs. In developing nations — nations that are expected to use increasing amounts of oil in the next few years, oil prices are preventing the commodity from being affordable. This is causing a drop in demand as well.

Oil prices and the stock market

For the stock market, falling oil prices are a good sign. Oil is necessary for many businesses, and in several sectors (airline stocks especially are seeing some gains) lower oil prices mean that profit margins are likely to increase, since the cost of energy is lower.

However, it is important to note that oil prices are volatile, and that they could spike upward again. Predictions that oil will drop to below $100 a barrel, now that it has started its slide, may be premature (though such a drop is certainly possible). Even if it doesn’t, the current drop is certain fueling a great deal of optimism. If oil price increases are arrested for a while, it might provide some breathing room to get the economy on the road to recovery.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

Tags: stock market, stock market news, investing blog, oil prices,
economy, investments, oil prices stock market

One of the many solutions being put into play to help the mortgage market is the encouraged issuance of covered bonds. Covered bonds, issued to large banks, are supposed to add liquidity to the credit market, and help make it easier for mortgage lending to take place. Treasury Secretary Henry Paulson considers covered bonds essential to his plans to ease the mortgage market crisis.

What are covered bonds?

Covered bonds are mortgage back securities that stay on banks’ balance sheets (rather than being moved off, like their riskier cousins). The bonds use a pool of higher quality mortgages as collateral. The mortgages in the pool are often those that are made to people who can afford them. They are often prime mortgages on which regular payments are being made. Another feature of covered bonds is that the issuer must cover losses if the mortgage borrower defaults.

Investing in covered bonds

Covered bonds are not likely to offer huge returns, but they are considered somewhat “safe” (although no investment is really safe). Here is what Felix Salmon says about covered bonds on Portfolio.com:

And as it happens, covered bonds tend to be very safe things. What’s more, because they’re collateralized, a bank failure doesn’t necessarily imply that there’s going to be a taxpayer-financed bailout of covered bonds as well as senior unsecured debt, since the bondholders should be able to rely on their collateral.

Adding another layer of protection is the fact that the government is encouraging and enabling covered bonds from large institutions — institutions like Bank of America and Citi that are often thought of as too big to be allowed to fail, similar to Bear Stearns. The assumption is that the government would arrange a bailout like what it arranged for Bear Stearns should things go further south.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: covered bonds, mortgage market, investing blog, mortgage market crisis,
economy, investments, Henry Paulson