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Daily Blog -02/18/09- 1:21 P.M.

Digesting the Housing Plan

This morning the country waited for President Obama to unveil his new housing plan and the government's attempt to stem the rising foreclosure rates. Unfortunately, while investors waited they did not stop selling stocks. The S&P 500 dipped to 796, the NASDAQ fell to 1454, and the DJIA hit 7479 intraday before stocks bounced back to unchanged ahead of Obama's appearance in Arizona today. It looked like the rebound was beginning to fade during his speech but the major averages are back to very minor gains.

Investors were worried that a lack of details by President Obama might spark another sell-off similar to what happened following Treasury Secretary Geitner last week. Thus far the markets are still digesting this "Homeowner Affordability and Stability Plan". You can read the details on the treasury's website: http://www.treas.gov/press/releases/tg33.htm

Some of the high points of the plan are new standardized rules for modifying mortgage loans. The plan raises the limit on the value of mortgages that government sponsored entities FRE and FNM can own by $50 billion to $900 billion. There are two separate programs that focus on lowering homeowner payments. Here's a little excerpt discussing one program from the plan:

"the lender would first be responsible for bringing down interest rates so that the borrower's monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent." All told the plan sets aside $75 billion toward helping up to 9 million "at risk" homeowners by modifying their mortgages. Obama claims that this will cost the taxpayer zero because the less money FRE and FNM collect from modifying mortgages will be offset by the reduced number of foreclosures. I understand what he's trying to say but it doesn't quite add up. Most of that $75 billion is from TARP money, which comes from the taxpayer.

Meanwhile the Commerce Department released their January housing starts data and the results were worse than expected. Economists were expecting starts to come in at 529,000. Builders only broke ground on 466,000 in January, which is a 17% decline from the prior month and the lowest level on record.

The housing plan is not having much of an impact on homebuilders (-2.7%) or the banks (-1.4%). The rest of the market is mixed. Gold is rising and the U.S. dollar continues to rise. Normally those two move in opposite directions. Oil continues to sink. The best performing sector today is the semiconductor sector with the SOX index up 1.3%.

Chart of the S&P 500:

Chart of the NASDAQ:

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