Actually, the big day came yesterday. But I thought offshore drilling in the Atlantic deserved a priority mention in yesterday’s letter.
The occasion: the U.S. government will no longer be propping up the mortgage markets. Supposedly.
For over a year, the Federal Reserve has been pouring money into American mortgages. Buying “mortgage-backed securities” (MBS), financial instruments whose value is based on a pool of underlying mortgages.
When the financial crisis broke, the market for MBS dried up. Buyers feared that homeowners would default on their mortgages. Driving the value of these assets to almost nothing, or worse.
Financial institutions in America and around the world were left holding trillions of dollars worth of non-saleable MBS. It appeared these holders would be forced to mark down the value of their MBS holdings, potentially triggering another wave of bank (and pension fund, insurance provider, etc.) failures.
The Fed moved decisively to prevent this. Stepping into the MBS market and buying hundreds of billions of dollars worth of MBS weekly in early 2009. Taking these assets off the hands of financial groups.
Of course, to pay for these purchases, the Fed created new money. MBS purchases are one of the major items responsible for ballooning the U.S. monetary base by $1.2 trillion since October 2008.
And the Fed has continued buying for the past year. All told, Fed MBS purchases total nearly $1.1 trillion.
This is a massive intervention in a troubled market. One that is apparently now over.
According to previous announcements, Fed officials planned to wrap up MBS purchases by March 31, 2010. Yesterday should have been the first “Fed-free” day for the mortgage market.
This is a critical change (if in fact the Fed sticks to its plans).
Will the MBS market hold up absent government intervention? Or are there more skeletons in closet, despite the appearance that the economy is getting back on track?
A pullback in Fed buying could expose weaknesses still lingering in the system. Providing some unpleasant surprises for the economy, stock markets and investors.
Keep an eye on these numbers to see if the Fed does indeed go cold turkey. If they do, be extra vigilant on the rest of the mortgage-related data for the next few months.
Have a great holiday weekend. Meet you here next week!
Here’s to a freed market,
Dave Forest
dforest@piercepoints.com
Copyright 2009 Resource Publishers Inc.
Note:
The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.
