Rhody Trader

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I know I complained before about having to be on earnings release conference calls. I’m not changing my view. For the most part they are pretty dull - at least to me. Yesterday, though, I was sitting in on Fannie Mae’s (FNM) call, and it was pretty interesting. Well, parts of it were, anyway.

The thing that really grabbed my attention was the forecast for the eventual decline in housing prices. Firstly, they said that US home prices have a long-term price trend which basically matches GDP growth. When you think about it, that seems quite reasonable.

Having first made that statement, the Fannie officers then outlined their forecast that when the dust finally settles, housing prices will likely have dropped 15%-19% peak to trough. This is a revision after things accelerated in Q1. That would translate to more than 25% on the Case-Shiller index. Right now Case-Shiller is down just about 15% from it’s peak, so it look’s like we’ve got a ways to go yet if the Fannie folks are right. And of course there could be an overshoot to go below the GDP trendline.

A 25% drop in home prices means even traditional 20% down mortgages could start going into negative equity.

That no doubt plays into why Fannie has raised it’s loss provisions for 2008 and expects them to be even higher in 2009. In other words, the folks who know the US housing and mortgage market as well as anyone see a lot of ugly water ahead.

The CME has announced a new futures contract based on the monthly Non-Farm Payrolls data release. That should be very interesting.

Here’s some stuff from the press release:

CME Group, the world’s largest and most diverse derivatives exchange, announced today that futures and options on futures on the U.S. Bureau of Labor Statistics’ (BLS) Nonfarm Payroll data are scheduled to launch Sunday, April 27, 2008, in anticipation of the Friday, May 2, release of the April economic data.

The contracts, based on the monthly BLS Establishment Survey of 375,000 businesses that is usually released on the first Friday of each month, will allow customers to directly manage their exposure to the government labor number or to offset positions in financial markets. The Nonfarm Payroll report is typically the first major economic release of each month and speaks to the condition of employment from the prior month. It is closely followed as a way to gauge how the Federal Open Markets Committee perceives economic growth.

“There is a strong correlation between the Nonfarm Payroll report and CME Group financial futures contracts as well as other financial instruments,” said Rick Redding, CME Group Managing Director of Products and Services. “Listed futures and options on futures on the Nonfarm Payroll are a transparent, straightforward and accessible way for our customers to offset unexpected financial market moves that often occur when this number comes out.”

The Nonfarm Payroll contracts will be listed exclusively on the CME Globex(R) electronic trading platform, Sunday through Thursday from 5:00 p.m. to 4:00 p.m. Chicago time. One contract will be listed at a time and each contract will be listed on the Monday after the previous month’s release. Trading in the expiring contract concludes at 7:25 a.m. on the day that the BLS releases its Nonfarm Payroll report. Each contract is valued at $25 times the change in the Nonfarm Payroll number from the previous month.

The CME is running an info and education session on April 9th. You can get more details at www.cmegroup.com/NFP.

A broker contact of mine thinks this will take some of the volatility out of the market due to the hedging that will inevitably take place. He’s probably right. This could influence NFP news traders.