Guess Who’s Next on the Bailout List?

Guess who’s next on the bailout list? The Federal Housing Administration.According to an independent annual audit of the Federal Housing Administration (FHA), its cash reserves have fallen so low that there is a 50% change the FHA will need a government (or should I say taxpayer) bailout in 2012.

Mortgage payments on about 600,000 home loans insured by the FHA are three or more months past due. Rising home-loan defaults amid falling home prices are responsible for bigger losses on the sale of FHA mortgage-insured foreclosures. About one-third of the home mortgages issued in the U.S. in 2010 to buy homes were insured by the FHA. (I hear the ringing—U.S. government debt going up again!)

Our government decided to take the Keynesian approach to economics (increase the U.S. government debt) and intervened in the marketplace with taxpayer money in a big way following the 2008 credit crisis. The government censured (took over) Freddie Mac and Fannie Mae…indirectly getting into the U.S. home mortgage business.

Now the next casualty could be the FHA, an agency that may have to ask for a bailout for the first time in its three-quarter-century history. And because of how the FHA is set up, it wouldn’t need to go to Congress to get approval for a government bailout; it could simply just ask the U.S. Treasury, piling more onto the U.S. government debt.

When President Obama’s first four-year term is over, the U.S. government debt will have risen 50%, or about $5.0 trillion dollars, since he first took office. There is a huge problem with this statistic.

The U.S. government debt continues to rise at an alarming rate, as the special debt-reduction committee in Congress failed to agree on government spending cuts or raising tax revenue. The U.S. government debt will continue to rise, the U.S. economy is failing to turn around, and the Federal Reserve will need to do more to bolster the economy, resulting in a continued decline in the value of the greenback and rising gold prices (see Central Banks Back Buying Gold with a Vengeance).

Michael’s Personal Notes:

I’d like to start off by wishing all my American readers a wonderful Thanksgiving weekend. Our editorial offices will be closed until Monday, when our next editorial issue of PROFIT CONFIDENTIAL will be published. Safe travels and enjoy the time with family and friends! (Did you know this year’s typical turkey dinner will cost 13% more than last year’s, according to the American Farm Bureau Federation? That’s the biggest percentage jump in 20 years! But have no fear, our government tells us that inflation is not a problem in America.)

Back in October of 2009, I wrote a scathing editorial in the pages of PROFIT CONFIDENTIAL on my dislike for Bank of America Corporation (NYSE/BAC) stock (Why I Don’t Like the Bank Stocks). Back then, Bank of America stock was trading at $17.00; today it trades at $5.37. I still don’t like the stock.

The housing bubble has cost Bank of America about $40.0 billion so far. But its problems are far from over.

Firstly, Fannie Mae wants it to buy back some loans it sold to Fannie Mae, because Fannie says the loans have defects. If Bank of America doesn’t buy back the troubled mortgages, it could face penalties.

Secondly, regulators have taken a tough stance on the bank. Regulators want more action on the part of the bank to strengthen itself. If the bank doesn’t appease the regulators, it could face enforcement action or more penalties.

Thirdly, the executive offices at the bank have become a revolving door: two CFOs, two chief risk officers, and eight new directors in two years.

Bank of America is the second largest U.S. bank in terms of lending. If the government keeps tightening the strings at Bank of America, it could ultimately end up needing to bail out the bank. The bank is putting out fires, as opposed to focusing on operations. Bank of America’s balance sheet has been shored up by selling assets as opposed to expanding profits.

The failure of Bank of America—to me, “failure” is the government bailing them out—is a possibility. It would be a catastrophe to already damaged American consumer confidence, but it could happen. At a stock price of $5.37 and falling, the market is telling us that this bank is in trouble.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. The Dow Jones Industrial Average has risen 78.5% since March 9, 2009. For the bear market rally to be over, the Dow Jones Industrial Average would have to fall decisively below the midpoint between its March 9, 2009 low of 6,440 and its May 2, 2011 high of 12,876. That midpoint would be 9,658 on the Dow Jones Industrial Average—a number we are far from.

The number of bullish stock advisors has been increasing steadily since the recent October stock market lows, while the number of bearish stock advisors has been retreating. I would feel more comfortable about stocks if this new trend in stock advisor sentiment would start to reverse.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.