Federal Home Loan Bank System

I've become recently intrigued with an institution that I rarely hear anything about: The Federal Home Loan Bank (FHLB). With the implosion the credit markets involving all things related to home financing, this agency came under the purview of the FHFA along with Fannie and Freddie. My objective is not to go into any exhaustive analysis or even cultivate an opinion. Rather, I'm just reminding you of this banking system that we does not get much press--and to hit a few high points. I've no special knowledge on any of this, and everything that I present here is from 'stuff' easily found on the internet.

Here's an overview from their website that you can find here. The emphasis added is mine.

The Federal Housing Finance Agency (FHFA) was created on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of 2008. The Act created a world-class, empowered regulator with all of the authorities necessary to oversee vital components of our country’s secondary mortgage markets – Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, this law combined the staffs of the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), and the GSE mission office at the Department of Housing and Urban Development (HUD). With a very turbulent market facing our nation, the strengthening of the regulatory and supervisory oversight of the 14 housing-related GSEs is imperative. The establishment of FHFA will promote a stronger, safer U.S. housing finance system. As of June 2008, the combined debt and obligations of these GSEs totaled $6.6 trillion, exceeding the total publicly held debt of the USA by $1.3 trillion. The GSEs also purchased or guaranteed 84% of new mortgages. Considering the impact of these GSEs on the U.S. economy and mortgage market, it is critical that we intensify our focus on oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

I thought the highlighted text to be an eye-popping fact. There are two other GSE's: Farmer Mac (AGM) and the Farm Credit Administration--both serving agriculture. Readers may remember the lonely trade that I did not take--shorting AGM. Here's the post. Let it serve as a reminder that there are many jewels of ideas for trading that are not in mainstream media.

The FHLB is a collection of 12 banks (with links to their websites):

Boston | New York | Pittsburgh | Atlanta | Cincinnati |Indianapolis | Chicago
Des Moines | Dallas | Topeka | San Franciso | Seattle

Each of the above are wholesale banks serving as a cooperative within the geographic areas that they serve. As a cooperative, they have members

FHLBank members include thrift institutions, commercial banks, credit unions, and insurance companies. A financial institution joins the FHLBank district that serves the state where the institution's home office or principal place of business is located.

From website.

which purchase stock from the FHLB that serves that geographic area of the member.

The FHLB system allows member banks access to affordable financing for their lending operations. The member banks, in exchange for these loans, pledge collateral. Accordingly, the FHLB debt issuances are supported by collateral. The quality of this collateral is derivative--meaning that the value is ultimately derived from: (1) credit quality of the end borrowers and (2) valuation of the collateral. You see where I'm going with this, right?


The table below is taken from the July 2009 Report on Federal Home Loan Bank Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products This table shows the concentration of Subprime and Non-traditional Mortgage Collateral.
(Click image to view)

The next table shows the loan to collateral ratio

(Click image to view)
Source: July 2009 Report on Federal Home Loan Bank Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products


The higlighted data point is FHLB-Seattle which was recently cited by the FHFA as being under capitalized. The last column is the system wide coverage ratio of 160% which increased from 152% in 2007. Also it is important to note that each FHLB is jointly and severally liable for the obligations of the others.

The collateral offered may also include mortgage backed securities that the member banks might hold. It is a reminder of the cyclical nature of of this 'stuff'. Fannie Mae, Freddie Mac and Ginnie Mae securities that many conservative institutions bought due to their perceived safety. It is important to note that ONLY Ginnie Mae Securities are backed by the full faith and credit of the United States. Freddie and Fannie are 'wards of the state' as the are in conservatorship. But the domino effect of an implosion is evident as these balance sheet holdings served as collateral and supported capital of the institutions that held them.

For any of you who read financial statements, the next graphic Taken from

First Federal of Northern Michigan Bancorp, Inc.

press release shows where you see the stock purchased from FHLB as well as the advances.
                                
                                (Click image to view)

If any of this whetted your appetite to learn more, I'd encourage you to seek out the following resources and perhaps appropriate counseling!

• Report on Federal Home Loan Bank Collateral for Advances and Interagency Guidance on Nontraditional Mortgage Products
  
• The Federal Home Loan Bank System: The “Other” Housing GSE
• FHLA Website
  

In another post, I'll introduce you to the agrarian world of high finance.

DIA & SPY End of Day Look

I generally stay out of discussions regarding the PPT and other shadow money that is moving around like an invisible hand to pick the pockets of small fry investors/traders. The existence or not of such forces, any of our jobs is to swim in the waters of our choosing.

Nevertheless, I do marvel that, for those who are short the market, their failure to realize that their pain is often the rocket propellant for the moves up. I know, I've been that pain from time to time, and I've a little pain going on now--but not teeth gnashing, weeping and wailing pain. A dull ache!

You know that one of my favorite little market books is G. C. Selden's Psychology of the Stock market. It is available through Google's books on line. You can find it available for download here. It is one of my favorite books. And though with a copyright of 1914, the commentary is fresh as ever.

The main point of their argument is
that the state of mind of a man short
of the market is radically different from
the state of mind of one who is long.
Their whole study, in such a conversation,
is the mental attitude of those interested
in the market. If a majority
of the volatile class of in-and-out traders
are long, many of them will hasten
to sell on any sign of weakness and
a decline will result. If the majority
are short, they will buy on any development
of strength and an advance may
be expected.

G. C. Selden, Psychology of the Stock Market, p. 11

I pulled charts on the DIA and SPY. Simple charts as I wanted to see some of the dynamics given today's thrust on low volume:


The oscillator (I use the Ulitmate Oscillator), is divergent from the price action in both indices. I look for these divergences, and I treat them as a heads up.

Positions: long SPY DEC puts and DIA NOV puts.

GBG: Great Basin Gold

I own one gold stock---Great Basin Gold. It's an immaterial holding in my account, but I do have 2K shares @ $1.53 per share.

Here's a chart:

Click to make larger

This apex is my favorite thing to watch....the stock is fixin' to get ready to move. The news tomorrow will determine which way! Do note the volume patterns in this stock.

I'll pull a chart for you later in the week....to see how it pans (!!) out.

Position: Long GBG.

Gold Stocks Weekly Sector Chart

Gold continues to be at the forefront ofthe media. To enable your ease of review of charts in this sector, I have created this PDF.



Important note: When I create sector charts, it is for the purpose of providing readers with access to quick charts for many stocks in a sector that I feel may be broadly interesting. Because these are all-inclusive charts AND I do not mention individual stocks, I do not disclose any positions that I may have.

Transport Notes

Yesterday was a long day. I did a double run (Richmond - Springfield) for the animal transport. We had two older puppies, one cat and 6 tethered dogs. Pups, small dogs and cats are always in crates. Tethered dogs pose some interesting logistics because they are riding in passenger vehicles (sedans/SUV's) of various sizes. Temperament, then, plays a large part in who rides with whom. Abbott was an 8 month old massive boy. He needed to be in a car by himself. He appeared to my eye to have some Akita in him. We agreed that he would ride as a single tether in the other volunteer's Passat.

One of my clients, who is also a very good friend, lets me use an extra company vehicle. It is a Ford Freestyle, and is perfect, as I can fold down all of the seats to make a 'van-type' back.

Alpha dogs (male are female) have to be considered carefully. I had three females. Sapphire rode shotgun (passenger seat) with me. I had to 'humpy-boys', and I had to crate one of them, Stanley. I tried some MacGyver contraption with a gate to keep my other humpy boy, Sampson, in line. It worked until one of the girls, Dana, took a dump about 10 minutes into the trip. I had to get off the interstate. Unfortunately, my protective covering was short by 2 inches. She had a 6-inch diameter dump, and managed to hit the uncovered portion. I got up what I could and covered the spot with a towel. But there was that 'odor' wafting about the entire remaining passage.

If you've ever ridden with a dog in your car, you know that they are very sensitive to changes in speed. So slowing down is some sort of 'signal' to them that they need to do a 'heads-up'. In this particular instance, I was stopped, and all heads and tails were up. That's when my MacGyver contraption failed. I'll not bore you with the details on the contraption, but it took me about 8 minutes to get everyone untangled--and somehow one of the leads which was clipped on the collar also managed to get clipped onto the gate (which is made from wire). So the dog basically was hung on the pen. Thankfully, none of them panicked, and none of them snipped or snarled at the other. They placed complete trust in me. Sapphire was interested, but she stayed in her seat.

I decided that my other humpy boy, Sampson, would just have to be loose. Thankfully, he responded to my voice when I yelled at him to settle down when he had "other" ideas. Stanley in his crate was snarling (not sure why as he was a really sweet boy--probably didn't like being thwarted), and Claire snapped back at him. I yelled at her, yanked on her lead, and she stopped and came forward. 30 miles later, they were all asleep, each resting their head on the haunch of another with Sampson's head on the lip of the bed closest to the front. (He did not like my yelling at him or anyone else, and he was anxious to please).

All in all I had to drive about 260 miles round trip. It makes for a long day. Sapphire was on her way to West Virginia to an adoptive home. Because your 'shotgun' passenger is so close to you during your trip, you always bond with them during the drive. This time was no different.

Here are Dana and Sampson. I did not have pics from the shelter for Claire and Stanley.

A Watershed Week

This week has been a bit of a watershed week for me. Some time ago when I was underwater with my work schedule (and this blog was a wasteland), I received an invitation from Seeking Alpha to be a guest contributor. I put it in an "action" file, but was still mulling over it in a vague sort of noncommittal way. They recently sent me another invitation within the last week. And....I received yet another invitation to write from another source.

Another 'thing' occurred this week, that was fortuitous in that it FORCED me to address my inertia regarding the first invitation (read: introspection). An appreciative reader mentioned my blog on another another blog (where the folks are serious traders and serious technicians), and I felt embarrassed. Why? Because in that company, I feel like my small insights, or whatever they might be, are not really 'worthy'. Here I was given a supreme compliment, and my reaction (inappropriately) was embarrassment.

You'll have to understand, too, that I'm that way in my work life and my personal. But dammit, if one doesn't learn how to be gracious about getting compliments, one will not get any! Modesty is a terrific trait, but it can be taken to an extreme. It took me six months to screw up enough courage (with the generous support and encouragement of an internet friend) to link my blog to my name.

While I promise NOT to become arrogant, I'm going to dispense with this posturing. I'm going to take a risk. That's what it is, isn't it? A risk that someone is going to read something I wrote and levy some harsh judgment--deserved or not. I guess what it comes down to is that I'm thin skinned!

I've been experimenting with you guys now for 1,296 posts (soon to be 1,297) over the last three years. We have a small, quiet corner of the world here, and I like that very much. It feels comfortable and intimate. My readers may not be legion, but they sure are loyal (and bashful, too!).

Hunting for Volatility Squeezes

While I consider myself a serious student of the market, I don’t call myself a trader. But I do trade and have done so with reasonable success. This year, I incorporated a new dimension into my trading: volatility. Simply put, I’m buying when volatility is low, and I’m selling when volatility is high—and I’m doing so on charts that appear to be good candidates for long entries. I’ve not used it for short positions.

The point of this post is not to go into an in-depth analysis regarding volatility, but rather to introduce to you this concept and provide some actual examples. I think that you will have fun experimenting with it. I'll mention, too, that John Carter uses this in Mastering the Trade . But I cobbled it together for myself (after first experimenting with Donchian Channels) before reading his book. I believe it to be a book that belongs on most traders bookshelves.

Method: There are two technical indicators deployed: The Keltner Channel and Bollinger Bands. Like most indicators, both of these are measurements that are incorporating time and range of price movement that the user defines. For this method, I am specifically hunting for stocks that have the Bollinger Band nested INSIDE the Keltner Channel. Carter notes this as quiet periods..."period of reduced volatility and signals that the market is taking a significant breather, building up steam for its next move." For the Bollinger Bands, he uses 20 and 2, and for the Keltner Channels, 20 and 1.5. I started out using 10, as a parameter for both, and I've not changed it. But I wanted to share the parameters a vocational (Carter) rather than an avocational (me) trader utilized.

Now for four charts. I want to give a brief preamble. While many of you are technical traders, I mix macro fundamentals and sector fundamentals into my work. It's my quirk, and it works for me because of my learning style and my background. It points me in the direction I want to look and helps me assess risk.

The first three stocks were actual positions. I've been trading Chinese stocks long before it was fashionable to do so. The floats and price range may not suit many here, but the concept can be applied to any stock. It's worth noting that because this market fell hard, there were lots of attractive candidates in these long bases. The last is a contemporary example.

Here's SNEN. I liked them because they were in the compressed natural gas space in China (engine conversion units and stations). I also knew that they had a small balance sheet problem--so I took my money and ran. This stock is an example where I entered, sold on the volatility spike. Re-entered and re-sold on the volatility spike. No third time charm on this one because of the risk on the balance sheet. They are being bought by a shareholder.


Second is AZC. This stock is again a combination of fundamental (copper--they will supply 10% of the copper when one of their Rosemont site comes on board) and TA.

HPJ is another one. This one broke out along with the other lithium-ion battery producers.


I also wanted to give you a contemporary example in a more recognized name rather than the Chinese boneyard that I pick through. Here's LLY


The current price action suggest that it is fixin' to get ready to do something........

Here's the stock screen that I use on StockFetcher:

Close is above (XX)
AND Volume is greater than (XXXX)
AND Upper Bollinger(10) is less than Upper Keltner Band(10)
AND lower Bollinger(10) is greater than Lower Keltner Band(10)
and add column Bollinger %B(10,2) (I use this to order candidates from lowest band width to highest)

To put this post together, I didn't have to cherry pick through my stock entries to provide examples for you. It has proved to be a high probably trade and a richly rewarded trade. I will tell you that the hardest thing to do is to sell into the volatility explosion. And we know that doing the hard thing is often the right thing! I'm going to employ Market Sniper's excellent advice of holding onto a vestige of a former position--particularly if the stock gaps and goes like HPJ did. Naturally, any method you deploy must fit with your time, money and risk/reward parameters.

A Good Market View

Don't forget to visit http://www.ichimokucharts.com/ for a terrific overview of several markets!

Wondering Out Loud

It's always dangerous to wonder out loud, particularly as whatever one is musing is likely to abrade against the conventional view of things.

A blog participant on another blog mentioned this story (click to be transported).


While one respondent stated "that is a sure sign of a top in the market", my particular reaction (I'm not holding my reaction out as being more insightful) was this: "It seemed like a sure sign of a top in the bond market."

There seems to be lots of speculation about the fate of interest rates. I think that I can say with some conviction that there is no place but up. However, how far up and how soon is anybody's guess. Again, the 'epic' inflationista/deflationista debate which will be waged in the media and blogosphere. I'm not stepping into that fray other than saying one side or the other is in for a big surprise. How's that for neutrality! Equivocation! Teflon!

The second thing to take to address (if not take to task) is 'money on the sideline.' There seems to be much uninformed commentary based on that. I'll not add to the fray there either. I'll state these simple Truths which I believe are not subject to much credible debate:

Truth 1: Short term interest rates cannot fall further.
Truth 2: Long term interest rates can fall further (unlikely)
Truth 3: Long term interest rates can increase (likely)
Truth 4: The bond market is a very large enchilada, and due to low interest rates is not a very filling meal.


Yeah, I know that calling these "Truths" is stretching it a bit. And I know that stating that they are not subject to 'credible debate' is sort of impugning any criticism! That's not my style, so if you have an opinion, voice it.


But the point is this.... These Four Truths, I'm holding out to be self evident that the 'money on the sideline' is really the bond market. So while many who are on the wrong side of the trade are quick to point to the PPT and other unnatural forces that seem to thwart their every move or projection (these are omnipresent market forces always in existent--our job is to outnimble them!), I'm merely pointing out that the 800lb gorilla that represents money not previously in the stock market, is that money "sidelined" in the bond market.

So if you were a bond holder faced with an instrument denominated in a depreciating currency, earning a low return, subject to face value decline due to increasing interest rates what sort of repositioning would you do?

The Stinky Cheese Man

You know that, outside of some otherwise intemperate moments, that I'm a nice person. Some years ago, I was driving into town, and I decided to give an old man who I often see walking down the road a ride. It was raining, and I knew where he lived.

Unfortunately, when we get old, our olfactory senses diminish. Well, I'm not that old. He was drunk, his breath was bad, he smelled of urine and....yes, stinky cheese. I gave him a ride for about 8 miles. I thought that I was going to retch, and I wanted to be polite and not cough or make noises. The only other time I've smelled such stench on a person was when a morbidly obese woman was in the waiting room at a hospital. Anyone who has young kids will have had to make one of those late night trips to the pediatric urgent care. Clearly there were some crevices that she wasn't able to get to and the smell was worse than a dead skunk.

So what is my point? It's beginning to feel like to me that UBS is now the stinky cheese man of the banks. Here's a chart:

They were even downgraded by themselves to 'Sell' (From FINVIZ)



Here's an unflattering Bloomberg story. Click on graphic to read:

Non-stigmatized Commercial Real Estate Workouts

In my noodling around, I found this release which you can find at this link http://www.ffiec.gov/press/pr103009.htm [Edit: here's a link to the PDF (which I've not read!): http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf]

To my eye, it appears that they are trying to use motivation to facilitate loan workouts...meaning that we don't want you to NOT engage in workouts and will not penalize you for it. However, it does beg the question on transparency.

You know that my thinking is that 'they' are only trying to buy time to get this stuff worked out. Hopefully, 'they' will not run out of time.

---------------------------------------------------------------

Federal Financial Institutions Examination Council	Press Release
For Immediate Release	October 30, 2009
Financial Regulators Adopt Guidance on Prudent Commercial Real Estate Loan Workouts The Federal Financial Institutions Examination Council (FFIEC) released a policy statement today supporting prudent commercial real estate (CRE) loan workouts. This policy statement, adopted by each of the financial regulators,1 provides guidance for examiners, and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The financial regulators recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions. This policy statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision making within the framework of financial accuracy, transparency, and timely loss recognition. Financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers’ financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.2 In addition, performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral declined. The policy statement includes examples of CRE loan workouts. The examples, provided for illustrative purposes only, reflect examiners’ analytical processes for credit classifications and assessments of institutions’ accounting and reporting treatments for restructured loans. The policy statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing institutions’ risk-management practices for loan workout activities. Policy Statement on Prudent Commercial Real Estate Loan Workouts (docx) (pdf)

Various

StockCharts lets you have 100 watch lists. Yep, I've used them all. It comes in handy when I want to look at stuff...

Here's my CleanTech list....most had a very good day

There's my little HPJ....

I do own ALTI--my little spec stock.

The market had a little something for everyone. I've not strung together too many back to back days in watching the market. I forgot how tedious it could be.

Of course, the FOMC looms over the market. People I respect are calling for the market to go higher. People I respect are calling for the market to go lower. Sounds like a toss up. I felt that this week would be news driven--and the tone of that news would set the tone for the market.

I'm fairly neutrally positioned. I do have some DEC 40's puts on ED. Here's a chart:


If the broad market goes up, I believe this position will pop out of the apex. If the broad market goes down, then I think I've a pretty decent short set up.

Hmm...You know that we are all about empiricism here. Accordingly, it is time to ask the Magic Eight Ball. Remember to click!


Who knew that the market could be so easy!

Excitement on the Tracks!

No doubt you have heard the news about Berkshire buying BNI.

I created a PDF of the rails if you wish to view them here.

Already this a.m. the rails are getting a lift, and that will squeeze shorts. Here's a list of the stocks in that industry sorted by short % of o/s shares.

Finally..... here's a list of the components of the DJ Transportation Index