What Kind of Sell-Off is This?

So is this the Middle-East-is-having-trouble-working-out-some-democracy-issues sell-off? Or the NAR-has-been-overestimating-home-sales + home-prices-are-still-falling + interest-rates-going-higher sell-off? Or OMG-the-Fed-is-going-to-stop-buying-the-market-in-June sell-off? Perhaps the-market-has-gone-straight-up-for-2000-points, maybe-wise-to-take-a-breather sell-off? In any event, if you were starting to wonder when on earth would've been a good day to finally initiate your short in Netflix? You should've done it on Friday.

The Budget and Zynga

The White House put out its budgetary needs for the 2011 fiscal year. Projections call for a $1.65 trillion deficit, which doesn't surprise me much. This is what happens when you spend like crazy, don't raise taxes, and finance it all buy selling yourself debt. The good news is that the White House is terrible at projections, so maybe, just maybe, it's overestimated the big black hole we're in and we still have some shot of getting out before the rioting begins.

Speaking of crazy amounts of money, the valuation explosion in social networking sites continues unabated. Zynga is wooing potential investors in an attempt to raise $250 million in new funding, which would value the three-year-old start-up at between $7 to $9 billion. Way back in April, the company was only valued at around $4 billion. But then, Facebook was a puny start-up with a mere $20 billion valuation. Whether any of these valuations fulfill investor's expectations is anybody's guess, at least until somebody goes public and we get some financials and see some real trading Gotta take advantage of the ability to raise gobs of money without having to reveal financials. But venture capitalists are certainly itching to cash out after many years of lackluster returns in the industry. Employees too want their cars, jewels, and houses. It's hard to keep a lid on that so we're gonna see some awesome IPO action.

Fannie, Freddie and Facebook

The administration has unveiled its proposal to wind down the mortgage market, I mean Fannie and Freddie, over the course of some very long and ambiguous time frame. I haven't read the white paper myself, but having read the WSJ's summary, it's abundantly clear that a few pesky details have not been addressed. Such as, who's going to buy the trillions of dollars worth of mortgages that will need to be originated in order to keep the housing market from collapsing? Or, how will the average American be able to afford to buy a house at current prices, when interest rates sky-rocket on mortgages because there is no federal subsidy anymore? Stuff like that. All minor.

Moving on to way more interesting and exciting news. According to Reuters, Facebook is mulling a $1 billion employee share sale that would value the company at $60 billion. This is not to be confused with the $1.5 billion share sale it did a month ago that valued the company at $50 billion. I'm not blaming the folks at Facebook for wanting to cash out a bit. Most 25 year old geeky programmers could really use a porsche and a 10,000 sq ft bachelor pad to get chicks at 25. But if the company is really going to tack on $10 billion in market cap per month, you might as well wait for the IPO, which is only a year away. Otherwise, you're gonna make it look like you really think your company's stock is overvalued and you've got to get out RIGHT NOW before it craters.

Good News For Housing, For Real

The WSJ reports today that home affordability has returned to pre-bubble levels in many US markets in the past year. Having prices return to a point where the average person can actually buy one is far better for the economy than any bailout, tax break or zero interest rate. It didn't stop our politicians and friends at the Fed from attempting to artificially inflate prices to keep this dreaded reality from occurring, by offering free money mostly to those who didn't need or deserve it. For there are many folks out there who were prudent, bought what they could afford, had bad timing, are underwater now, can't refi, and have had to watch the parade of hand-outs pass them by. It'd be like the government refunding everybody who bought pets.com stock on margin in 2000 at the highs, without giving a penny to those who bought Enron in their retirement accounts, even though Enron was a fraud and pets.com was just a really dumb business idea. Both of them pumped by Wall Street, of course. But back to housing...

The ratio of home prices to annual income had fallen to 1.6 by last September, below the historical average of 1.9 from 1989-2003 and down from the peak of 2.3 in late 2005. Great news for those who: a.) have a job b.) need a house and don't already own one and c.) can get a mortgage. In the bad news department, there are still: a.) lots of unemployed folks out there b.) people who bought at the highs who are underwater and might walk away if prices continue to decline, and c.) mortgage rates are marching higher.

Fannie and Freddie have been the mortgage market since all of our friendly neighborhood non-conforming specialists, ahem, got out of that market rather quickly in 2007-2008. The White House is planning to release its plans for the two mortgage behemoths on Friday. Although somebody leaked to the WSJ that the administration wants to phase out the housing-finance giants, it seems impossible to imagine. They are 90% of the market. We're talking trillions of dollars. Are banks really going to originate and hold on to all those mortgages? Cause nobody is going to buy them without government guarantees. Especially not after the CDO fiasco of 2007. We'll see what the government has to say, and then the market is just going to do what it wants to do.

China Raises Rates, US Yawns

Last I checked, our fearless Fed Chairman, Ben Bernanke, was busying himself with ZIRP + QE + QE2, oblivious to all signs of brewing inflation or bubbles. I mean, who cares about spiking food prices? And oil prices. And copper prices. Or the return of covenant-lite bonds? Or money pouring into emerging markets? Or record bonuses at US banks? None of these things have anything to do with US monetary policy. Because buying trillions in Treasuries and mortgages directly from broker dealers at any price is the best and most direct way to bring the unemployment rate down from over 9% to 5%. And it's not liable to leak out and cause distortions in other markets. Right. So that's working really well so far.

Anyhoo, at least the Chinese are paying attention. China raised its interest rates for the third time since mid-October. Admittedly, China's growth rates are a tad higher than ours and the chance of getting runaway inflation is more likely when your economy is experiencing explosive growth of 10%, rather than the anemic 3% or so we're getting in the US. Nevertheless, global markets actually respond to this kind of thing. Oil, copper, and emerging-market stocks fell across the board in response to China's interest rate move. Please make of note of that, Mr. Bernanke.

AOL Buys Huffington Post for How Much?

Nothing can revive the Rip Van Winkle of bloggers (yours truly) faster than the news of a $315 million purchase price for a blog. Mostly a blog aggregator at that. Sure, AOL's $315 million announcement to acquire the Huffington Post would be a much bigger deal if it weren't AOL doing the math on the financials, but still, pretty big news for aspiring bloggers everywhere. AOL has a history of pumped up acquisitions that wind up being worse investments than even the doubters initially imagined. Nevertheless, Tim Armstrong, AOL's fearless Chairman and CEO, has maintained his enthusiasm that maybe, just maybe, someday, one of these deals is going to turn into something other than a really nice tax write-off. "When people think about Google for search and Amazon for commerce, I think they're going to end up thinking about AOL for content" the FT quoth Mr. Armstrong. Ah, content. That's what he's going for. Identifying AOL with content. Instead of say, really slow dialup internet service, chat rooms, and enormously expensive acquisitions, which is what AOL is currently associated with. In any event, this time, for obvious reasons, I hope Mr. Armstrong hits the big time.