This weekend I took my daughter to her swim class held at a school located in a suburban strip mall. While waiting for her to finish her class, I wandered around the mall to kill time.
One shop in particular caught my eye: The Army Recruiting Station. It seems our Army has improved its marketing skills over the last few years or so. This particular storefront was as compelling as any young adult retail store. So out of sheer curiosity, I meandered into the store.
I have always been moderately interested in joining the reserves, especially after September 11th. Like many though, I never could pull the trigger on enetring the service, given my other pursuits.
That being said, I continue to do this dance of interest and seeing the Army recruiting station really stoked that little fire burning inside. I wanted to learn more. Boy was I crushed that day!
It turns out that the cut-off age for enlistment is 42. I turned 43 in June. I was shocked and just didn’t get it. I’m in great physical and mental shape and clearly have many years of service to offer, and yet my country will not take me even if I manage to put signature on paper. Not even a call to a Senator could get me into the Army at this point in my life!
Anyway, something else occurred this weekend that makes as little sense. The government announced that it was finally taking over mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE).
Citing the all too familiar too big to fail, Treasury and Federal Reserve leaders decided the time has come to take action. With mortgage lending becoming more restrictive and expensive, something had to be done to solve the problems of these two big operators (see also, “Fannie Finally Gets Off Its Fanny?“).
Well, so much for free market capitalism. Equity and preferred shareholders who are already hurting, will see massive dilution as the government is poised to take a huge ownership position in the entities.
The goal is to keep the money flowing. An absence thereof exacerbates an already struggling home market in the United States. I get it. But I still have to ask: Will this stem the tide?
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What Ever Happened to Good Old-Fashioned Capitalism?
On Monday, world markets cheered and the U.S. markets followed suits. Stocks are higher across the board assuming that the government action will bring stability to the credit markets.
Can I ask a dumb question? Does anyone else remember what happened to state-sponsored economies like communism? They failed. So I ask, how can this action be positive for stocks?
At the end of the day, the real estate market will stabilize when there is a balance of buyers and sellers. At the moment, we have far too many sellers. That causes prices to fall and they will continue to fall until supply dwindles (see also, “A Healthy Dose of Reality“).
Yes, it is true that FNM and FRE have created a market that is too big to fail. These entities facilitate a lending market that lowers rates and provides greater access to more borrowers. In their absence, we would see chaos and most likely, higher rates. That means fewer buyers, and the continuing malaise in real estate. The problem now is that we really don’t know if this would be the reaction in the market should FNM and FRE fail.
We may find that other lenders step up to the plate. Assuming a profit can be made in making home ownership available to the largest market rates should be the same or lower than what we see now. Of course, nobody wants to take the risk of seeing what happens by letting FNM and FRE fail. However, with the government stepping in we will never know.
The market may be higher in the immediate aftermath of this historic intervention, but in reality I’m not sure what, if anything, has really changed. The market is still all about supply and demand and this action may or may not help in that regard. What it does do is protect those that lend money to FNM and FRE. Maybe it is they that we are protecting by acting this way. Who knows? None of this makes sense to me and my Rational world.
The good news is that inflationary pressures are abating and the economy is building a base for future growth. Let this nonsensical move pass and focus on what is really important: Corporate profits!
Forget about the banks and the homebuilders–they’re going to be in rough shape for a long time. You need to focus on the great secular growth areas of the economy where investors can make some nice profits in ’08. Want in? Now is the perfect time! Sign up today and get Louis Navellier’s Blue Chip Growth half-off PLUS 6 months FREE! Subscribe to to Louis Navellier’s Blue Chip Growth today!
