If you overlay the natural gas stocks over the coal stocks, it’s the identical pattern since last Thursday, only with about half the gains… still some very nice moves for 3 days of work. Since my natural gas stake (3 positions, about 6%) is smaller than coal I am not taking any profits here, but once again just remember this the next time the ‘early cycle’, ‘it will all be fine’ folks start clucking.

Let’s compare Fannie Mae (FNM) to Cimarex Energy (XEC)

Now, in the most recent period people were so fearful of financials that any news saying they won’t be bankrupt was CHEERED – huge writeoffs? Better than expected! Take the stock up!… equity dilution? At least it’s not out of business! Take the stock up! – but at some point the longer this goes (and it won’t reverse in a quarter or two like many would have you believe) the writing will be on the wall that all these new shares that are flooding the market in financials are going to impair earnings PER share growth for years to come. And as more losses come – not just from housing, but credit cards, auto loans, student loans, personal loans – the more capital that will need to be raised – leading to even more earnings PER share impairment for years to come. The lemmings have not figured that out yet. So multiples on these stocks should degrade – for a very long time. On whatever earnings they do eventually have (because they sure aren’t profitable today).

Fannie/Freddie were once about 40% of the entire mortgage origination market, but things have degraded so much in our “transparent, efficient” financial system – they are now accounting for 80% of all mortgages. That should scare you – we are the “most innovative” and “awesome” financial arena in the world – yet the only one source of mortgages people are turning to are the 2 companies with implicit government promises (read: your tax dollars) backing it up in case they implode. Nice. So much for “private enterprise”. This is your “tradeoff” for completely ignoring any basic, sensible regulation in the mortgage market for years and letting the “free market” fix things – if not for those 2 agencies that are essentially government entities we’d have no mortgage market right now. And even as these 2 companies report terrible numbers we’ve had their regulators increase their leverage (another excellent idea by short sighted politicians and cronies) so they can take on more and more and more of the risk [Mar 19: Fannie and Freddie Layered with MORE Risk] – but since the whole mortgage market is frozen, we are forced to do that. Read on for the horror show (but don’t worry, it will all be better “in 6 months”) I continue to say that our “bright minds” in NYC do not understand the housing situation – so many people are going upside down (more by the month, week, day)… this will not be fixed “in 6 months”; and it’s not a “subprime” issue – its everyone. But I’ve been saying that since August.

• Fannie Mae (FNM) on Tuesday cut its dividend and set plans to raise $6 billion in fresh funds to weather the severe U.S. housing market slump, driving its shares and the broader U.S. stock market lower.
• The company, the largest provider of U.S. home financing, also posted a deeper-than-expected quarterly loss, its third in a row, and said it expected more trouble ahead.
• House prices, by some measures already 15 percent below their peak in mid-2006, likely will drop as much as another 9 percent this year and related credit losses will keep rising into 2009.
• Home price declines and rising foreclosures that started in the subprime market have spread to higher-quality loans that make up the bulk of business at Fannie Mae and its sister company, Freddie Mac. Freddie Mac, too, is expected to post a big loss when it reports its first-quarter results next week.
• The loss was greater than even the most pessimistic forecast and came on the heels of a record $3.6 billion loss in the fourth quarter of 2007.
• The company also plans to raise $6 billion in new capital through common and preferred stock offerings, it said. To initiate that fund-raising, Fannie Mae said starting Tuesday it will offer two issues totaling $4 billion of common stock and noncumulative mandatory convertible preferred shares. (more shares, more dilution)
• Fannie Mae on Tuesday said it expects home prices to fall another 7 percent to 9 percent on a national basis this year. (sounds accurate to me)

So again, this is going to be a long drawn out process…. all these bright eyed, bushy tailed folks in their 20s, 30s, 40s have been conditioned to everything being fixed by the Nanny State (aka Federal Reserve) with flooding of money and for all problems, slowdowns, etc to go away within 2 quarters; so that is why they keep sounding the “6 months and done” alarm (it’s already been 8 months they have been saying that). They will keep saying it. I’ll be typing the same garbage in December of this year when they continue to say it. This is a historic bubble… its epic in size, and it won’t be fixed in 6 months. Or 9. Or 12. Or 15. Housing might bottom in mid to latter 2009 but it’s going to then go into a long sideways, before any real meaningful rebound. And that’s assuming inflation does not take off or the recession itself is mild. And until people get that reality – they will continue to cluck about their “6 months”.

So I’ve been told by CNBC for months on end I should be buying these “bargain” financials… so I can get results like that above. Because the stock market is a discount mechanism and “all the bad news is priced in”. No, the only thing priced in is what people’s perception of the bad news is; not the real version of the bad news coming. That has YET to be priced in. And because the commodity bubble is dead, I should be buying retailers and restaurants, and avoiding the companies like Cimarex Energy (XEC) who report results like this. They tell me look ahead young man! Everything will be fine in 6 months! Ok ok… keep talking. Just remember, every time they say 6 months, multiply that number by 3 – and avoid JCPenney (JCP).

• Natural-gas and oil producer Cimarex Energy Co. said its first-quarter profit more than doubled, topping Wall Street forecasts, on increased production and higher commodity prices. Net income for the first three months of the year rose to $149.8 million, or $1.76 per share, compared with $64.6 million, or 77 cents per share, during the same period a year earlier.
• Revenue increased to $477.1 million from $306.9 million a year earlier. Analysts predicted revenue of $462 million, according to Thomson.
• Cimarex said average gas prices rose 25 percent to $8.38 per thousand cubic feet, while oil prices surged 71 percent to $94.38 per barrel.
• Total daily oil and gas production rose 8 percent over the same period a year earlier. Gas output was up 5 percent to an average of 339.7 million cubic feet per day, while oil production climbed 16 percent to an average of 22,757 barrels per day.

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Last 5 posts by Trader Mark

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