The Gathering Of the Gloom

Yet another fear-mongering article in the NY Times has investors worried about the viability of Freddie and Fannie. If the agenda-laden Times was not so biased against the investor class (which, in reality, includes nearly every working and retired person), one may be apt to take the Times seriously. Unfortunately, even though the article makes some valid points, it is as much hype as substance.

Investors, especially equity investors, should be concerned about the GSEs. Preferred holders probably should not worry as much as some pundits advise. When companies are taken over or taken private, preferred shares are not taken out as are equity shares. Since such shares are usually non-voting vehicles, there is no reason to take preferred holders out. Usually, the preferreds either pay out on their normal schedule, are called if they have reached their first call date and it makes economic sense to do so, or they are tendered for, again if it makes economic sense to do so. The same could (should) be true if the GSEs are nationalized. I say should, not because that is likely to happen, but it is consistent with the private sector and is the right thing to do for investors who do not vote and are, in essence, very junior creditors and not owners of the GSEs.

Although there are reasons to worry over the GSEs, I have made a list of more important things about which to worry.

1) Any local or regional bank. Not only are they exposed to bad mortgages and loans to builders. Many are loaded up on GSE preferreds. This is not to say that the preferreds are not any good, but the price depreciation depletes the banks' balance sheet capital.

2) The entire high-yield bond market. Corporate defaults usually run about 5.00% during "normal" times. They can run over 10.00% during recessions. Currently, they are just over 1.00%. Look for that number to increase.

3) The Detroit Three. All three U.S. automakers are in DEEP trouble, far worse than the GSEs. Their current economic importance (or lack thereof) does not warrant a government bailout. Owning the Detroit three is adventuresome to say the least.

4) Speculating in energy. Is oil going up or is oil going down? The answer to both questions is, yes. The question is when. Don't speculate in commodities unless your convictions are strong.

5) Worry if all of your money is on he short end of the curve. The Fed will be on hold, possibly until this time next year or beyond. Do not count on rolling into higher yields.

6) Hedge Funds: Enough said.

7) Managed accounts, especially fixed income. You are paying 3.00% annually for what?

8) Worry about foolishly selling high-quality munis for fear of the bond insurers. Most munis which were insured never needed to be from an investor standpoint. However, it permitted municipalities to over dramatically lower yields. That's right, insured munis are beneficial to issuers and not investors. The same is true for call features.

9) Worry about getting to and from work safely. All else is moot if you are dead.

10) Finally and most importantly; Spend time with those you love. Rich or poor, employed or not, family is what life is really about. Money can be replaced. The love of one's family cannot.