Today's Coffee - The Lone Ranger Rides Again

(Stocks in article: NYSE: GS, NYSE: LEH, NYSE: MER, NYSE: MS, NYSE: BSC, NASDAQ: SEIC, NASDAQ: LEND, NYSE: MHP, NASDAQ: DELL, NYSE: HPQ, NASDAQ: OPSW, NASDAQ: CPWM, NASDAQ: ADPI, NYSE: DD)

Just as Black Bart (played by William Poole in our off-Wall Street show) has scared all the town folk to lock their doors and shutter up their credit windows, and when the Federal Marshall (played by Bernanke) is nowhere to be found and the Calvary (played by the Democrat-controlled Congress) is on vacation, The Lone Ranger (George Bush) comes to the rescue to save the day with the words, "Hi-yo Silver, away!"

Do not get us wrong here, we liked what we heard from the Fed Chief in his Jackson Hole speech today. In fact, it's almost like he's reading The Greek. He covered all the bases and addressed all of our concerns in his timely speech on the topics of housing, housing finance and monetary policy. Most importantly though, he indicated that while bailing out financial market participants is not the Fed's concern, maintaining the economy is. We think that this clearly implies that he will cut the Fed funds target rate in due time. Wall Street Greek continues to foresee a 50 basis point reduction. While we can see that the Fed chief is not one to be mindful of appearances, at least not on the surface of things, a fifty point cut has a greater psychological impact than the standard quarter point trend. At the same time, it follows the Fed boss' measured nature.

We held back today's article in order to cover the President's address, and his plan to help a portion of the nation's troubled borrowers survive today's tough times. Our discussion that follows is based on the speech and our study of The White House's official document on the topic. The President outlined a plan to help homeowners who are having difficulty paying their mortgages, and to help ensure that the problems now disrupting the housing market do not recur.

In his Rose Garden speech, the President painted a picture of a healthy economy that has a localized ailment. He used the recently adjusted higher Q2 GDP growth to help support his argument. He then compassionately attempted to avoid alienating troubled borrowers by saying that while the problems of housing are modest in the overall frame of things, they are of utmost importance to those facing foreclosure.

Bush then outlined his three faceted plan:

1. He called on Congress to pass "Federal Housing Administration (FHA) Modernization Legislation." An earlier version of this legislation was passed by the House in April 2006 by 400 votes. He's pushing Congress now to act quickly in passing a clean bill. The President's proposal lowers FHA downpayment requirements, and allows for the insurance of bigger loans, while giving the FHA more pricing flexibility. At the same time, the administration is launching FHA-Secure, a program to help people with otherwise good credit, who have missed mortgage payments because of adjusted variable rates and payments. These individuals will be allowed to refinance into more manageable loans.


2. The President is asking Congress to change a key provision to the Federal Tax Code. As it stands now, the tax code counts canceled mortgage debt on primary residences as taxable income. So, if the value of a home declines, which is now the norm, and a portion of a mortgage is forgiven, that portion is considered taxable income. The President seeks to temporarily forgive that taxable income and perhaps mitigate a future burden on consumer spending in the process, as we see it. This will only apply to the primary residence. This bi-partisan legislation is already in Congress, so we do not think George should take credit here.


3. The last of the three keys to the President's plan echoes ideas we have already heard from him and others. The President is launching a new "Foreclosure Avoidance Initiative" to help identify, locate and notify borrowers who could fall victim to foreclosure, and help them refinance their loans or otherwise mitigate future problems.

Every little bit helps, and we believe the actions of the President and Congress do most for the market by showing a will to help, and thus providing confidence that if need be, more action could be taken. The same goes for the Federal Reserve. So, coming into the week following the holiday, we anticipate further market rally. We especially like the innocent victims of the recent adjustment, and though the best place to find innocence of late is probably not within the Financial Sector, we would now go to a neutral view on the huge group. In doing so, we would begin looking to handpick stock specific names for long opportunity. We would still steer clear of the I-banks like Goldman Sachs (NYSE: GS), Lehman Brothers (NYSE: LEH), Bear Stearns (NYSE: BSC), Merrill Lynch (NYSE: MER) and Morgan Stanley (NYSE: MS), as there remains risk of significant near-term losses.

One name we like is SEI Investments (NASDAQ: SEIC), despite its ties to capital market gains and losses. SEIC has shown to be a stubborn performer over the years, and holds an S&P Quality Ranking of A+ as a result. It's shares have been beaten down of late, but we suspect that's only helped add value to the company's share repurchase program.

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