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December 28, 2009

Brief Holiday Update

John P. Hussman, Ph.D.
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With Congress and the nation preoccupied with the holidays, the Treasury announced on Thursday that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years, thus providing the end-game that accompanies the Federal Reserve's massive purchase of the securities of these agencies. The Treasury's press release notes:

“At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years.”

After a long deliberation, I've decided to defer my remarks about this until after the holidays. The implications are likely to be sufficiently long-term in nature that we can wait until then, and my impression is that none of us really want to contemplate their full impact just now. Beyond noting my deep concern, I don't intend to dampen anyone's holiday.

Stocks remain overvalued, overbought, overbullish and face rising yield pressures - a combination that has typically been associated with increased risk of abrupt market losses. The Treasury policy announcement does not change that intermediate-term dynamic, but it does - if not recognized for the unconstitutional breach that it is - lend itself to difficult long-term outcomes. Likewise, the intermediate-term dynamic for the credit markets continues to suggest fresh credit risk moving into 2010, and not much near-term inflation pressure, so the upward push in Treasury yields provides some opportunity for modest accumulation, though with an intermediate horizon, not in the expectation of holding to maturity. That's another way of saying that Treasury bonds appear somewhat oversold, with the likelihood of favorable intermediate-term pressures on the basis of fresh credit risks, but are not priced to deliver satisfactory returns (or even positive real returns) to maturity. We are inclined to remain relatively defensive in our overall investment posture in any event.

Wishing you a very happy New Year.

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