Bernanke delivers more bad news, wants ‘vigorous response’ to crisis
Posted by: in HousingFiled under: PepsiCo (PEP), Citigroup Inc. (C), Merrill Lynch (MER), Kraft Foods’A’ (KFT), Housing, Federal Reserve, Newcastle Investment (NCT)
Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like Citigroup (NYSE: C) continue to weaken — Merrill Lynch (NYSE: MER) reduced Citi’s outlook — Fed head Ben Bernanke sends the market indication that we’re not yet near the end of the mortgage debacle, and he’s looking for a “vigorous response” to address it.
According to an AP article, Bernanke, in an address to a banking group, said that the mortgage crisis wasn’t done, and that more relief would be necessary for homeowners who simply are unable to balance their books. This isn’t what anyone on Wall Street wanted to hear, and certainly not what an individual investor like myself was looking for, either; I’ve ample financial exposure in the form of MFA Mortgage (NYSE: MFA) and Newcastle Investment Corp. (NYSE: NCT).
Further, Bernanke made a suggestion that bankers would obviously find tough to implement — he said that a reduction in loan principal might be an appropriate way to relieve a struggling owner of real estate. Hmmm, that might not go over too well, especially with the crowd that isn’t happy with government intervention — now Bernanke is calling for lenders to be more lenient? But, what should one anticipate? This is the Fed, after all, and it’s the institution’s job to promote some economic homeostasis in times of need. Bernanke believes more foreclosures are coming, and he wants to get ideas out there that’ll save as much home equity as possible. He brings up a good point, implying that lenders will benefit from loan-principal reductions simply because the rate of foreclosures would, in theory, decline as a result of such a tactic.
What does all this tell us as investors? Well, more reductions in the Fed Funds rate are on the horizon. Yes, it will be tricky to balance this with inflationary concerns, but they are coming. The recession — count me in, I believe we are in a recession — is going to get worse before it gets better. And, we’re in for more volatility vis a vis swings in stock-index values. I don’t believe we’re done going down yet, but at the same time, I think this is a great time to look for values and for stocks that’ll go up in this environment. The aforementioned MFA is a great way to play Fed rate cuts, in my view, and you can always look around for defensive plays in the consumer-products area for some safer bets — Kraft (NYSE: KFT), PepsiCo (NYSE: PEP), stocks like that. One thing I am not taking away from this article is that we are nearing any sort of bottom — my gut tells me this is not the case. So, if you’re buying low, prepare to buy lower.
Disclosure: Steven Mallas own shares of MFA and Newcastle; positions can change at any time.
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