Have stock markets run away from reality? Be mindful of Santa Claus Rally and other year-end/new-year indicators If Santa has not yet made his way to your investment portfolio, don’t despair. According to Jeffrey Hirsch (), the “Santa Claus Rally” normally occurs during the last five trading days of a year and the ensuing first two trading sessions of the new year. During this seven-day period stocks historically tend to advance (by 1.5% on average since 1950), but when recording a loss, they frequently trade much lower in the new year. Well, yesterday marked the official beginning of the Santa Claus Rally period, with the Dow Jones Industrial Index off to a 0.5% start. Another old stock market saw tells us the first five trading days of January sets the course for January (known as the “First Five Days Early Warning System” ), and if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called “January Barometer” . Every down January since 1950 has been followed by a new or continuing bear market or a flat year. “As January goes, so goes the year,” said Hirsch. Lastly, according to Hirsch, the “December Low Indicator “ says that should the Dow Jones Industrial Index close below its December low anytime during the first quarter, it is frequently an excellent warning sign of lower levels ahead. The number to watch is the low of 10,286 recorded by the Dow on December 8. Time will tell whether the year-end/new-year indicators play out according to the historical pattern. Meanwhile, we’ll have some fun tracking how it pans out.

Difficulties selling their home and obtaining credit are to blame for fewer Americans moving in 2009 compared with any other year this decade.

From Bloomberg: The U.S. government’s expanded capital backstops and portfolio limits for Fannie Mae and Freddie Mac increase “the prospect of large-scale” purchases by the companies of delinquent mortgages out of the securities they guarantee, according to Credit Suisse Group analysts. ... “This announcement increases the prospect of large-scale voluntary buyouts by removing the portfolio cap hurdle and helping funding by potentially increasing debt-investor confidence,” Mahesh Swaminathan and Qumber Hassan, the Credit Suisse debt analysts in New York, wrote in a report yesterday. Tanta this possibility a couple of years ago: Fannie Mae has always had the option to repurchase seriously delinquent loans out of its MBS at par (100% of the unpaid principal balance) plus accrued interest to the payoff date. This returns principal to the investors, so they are made whole. If Fannie Mae can work with the servicer to cure these loans, they become performing loans in Fannie Mae’s portfolio. If they cannot be cured, they are foreclosed, and Fannie Mae shows the charge-off and foreclosure expense on its portfolio’s books (these are no longer on the MBS’s books, since the loan was bought out of the MBS pool). Now, Fannie also sometimes has the obligation to buy loans out of an MBS pool. But we are—Fannie Mae made this clear both in the footnote to Table 26 of the Q and in the conference call—talking about optional repurchases. Why would Fannie Mae buy nonperforming loans it doesn’t have to buy? Because it has agreed to workout efforts on these loans, including but not necessarily limited to pursuing a modification. Under Fannie Mae MBS rules, worked out loans have to be removed from the pools (and the MBS has to receive par for them, even if their market value is much less than that). emphasis added I suspect the uncapping the losses of Fannie and Freddie is related to modifications.

After hitting an all-time low in early December, the average rate on a 30-year, fixed-rate mortgage rose to 5.05 percent this week and could climb to 6 percent by the end of 2010, if not sooner, according to giant mortgage financier Freddie Mac.

Fannie Mae and Freddie Mac continue to plague the U.S. financial system. --

Mortgage rates crossed 5% for the since the end of October, Freddie Mac said Thursday. The 30-year fixed rate averaged 5.05% with an average .7 point for the week ending Dec. 24. That’s up from last week’s average of 4.94%. While rates ticked up, they’re still below the 5.14% average a year ago. Fifteen-year loans, which are , averaged 4.45% with an average .6 point, up from last week’s 4.38%. That compares with 4.91% a year ago. As we’ve , mortgage rates have been at near-record low territory for the last couple of months, but the big question is what will happen next year, when the Federal Reserve is scheduled to end its purchase of mortgage-backed securities that has helped push rates down for much of 2009. Readers, what do you think mortgage rates will do in the next few months?

Note: Scroll down or click for As everyone knows there has been a massive government effort to support house prices. Some of this has been aimed at limiting supply (modification programs, various foreclosure moratoria), and some has been aimed at increasing demand (tax credit, lower mortgage rates, loose lending standards). Here is a quote from Secretary Geithner from a recent Newsweek by Daniel Gross: "We were very careful from the beginning ... to say that we are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people's basic sense of financial stability." To help keep this straight, here is a list of the status of a number of programs: Housing Tax Credit: Buyer must sign a contract by April 30th and close by June 30, 2010 to qualify. The supporters have promised no extension, from the LA Times: Proponents of the $8,000 credit for first-time buyers and the $6,500 credit for move-up buyers made it clear during the debate on Capitol Hill that the benefits would not be renewed when they expire. And a lobbyist for the National Assn. of Realtors confirmed that at the group's annual convention last month. Lawmakers "made us promise practically in blood that we would not come back" for another extension, Linda Goold, the Realtor group's director of tax policy, told her members. During the debate, Sen. Johnny Isakson (R-Ga.), a former real estate broker and a longtime proponent of the tax credit, promised his colleagues, "This is the last extension." Federal Reserve MBS Purchase Program: This is scheduled to end March 31, 2010, : [T]he Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates...

From ABC News: Krugman: (see link for short video) After being asked about Stiglitz suggestion that the economy might contract in the 2nd half of 2010, Paul Krugman responds: Yeah, its a reasonably high chance - its less than 50/50 odds - but we have now a recovery that ... is being driven by fiscal stimulus which is going to fade out in the 2nd half of next year, and by inventory bounce ... On the fading out of stimulus, Menzie Chinn writes: with a graph of the impact on GDP level and GDP growth from the stimulus. Professor Krugman has a good explanation too: Note: I discussed the transitory impact of changes in inventory yesterday:

Losses continue to mount at Fannie and Freddie where Obama has virtually declared no loss is too big for taxpayers to pay. Please consider . The Obama administration’s decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday. The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each. Unlimited access to bailout funds through 2012 was “necessary for preserving the continued strength and stability of the mortgage market,” the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s. “The timing of this executive order giving Fannie and Freddie a blank check is no coincidence,” said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed “to prevent the general public from taking note.” In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm. The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies. At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources. Excuse me for asking the obvious question but how in the hell can the head of human resources for a company that is losing...

Now named OneWest Bank, the former mortgage lender made a major acquisition and has emerged as Southern California's largest bank.

The U.S. is banking on participation by foreign investors, including China and Japan, in this week's auction of $118 billion of Treasury notes.