Monday, July 07, 2008

Fannie Mae Getting Her Fannie Kicked

Top Line: Monday gave us another very volatile stock trading session with a jump at the open and then a fall into the afternoon but then a big rally after that and another fall into the close. These types of moves occur, we think, at times when the market really doesn't know what to do and could be ready for a short term change of pace. We still think the Dow will be higher in two weeks than now.

There is a large bear on the front of Barron's this week with the title "The Bear's Back"; and, there has been a lot of chatter about a 20% correction being a bear market. These types of obvious statements give us contrarians a real chill. With that big bear on the cover, Barron's does have an article that says something we thought seemed pretty reasonable. In his Streetwise column entitled "Falling Markets' Nastiest Habit", Michael Santoli reminds us that the "outsized focus last week on the Dow's reaching 'official' bear-market status with a 20% decline from a recent high is a bit like fixating on the moment that storm winds go from 73 to 74 mph to formally become a hurricane." [The link is a pay site but you may be able to read it or you can dig up this week's Barron's somewhere to read it, page 7.]

Monday's big news was a Lehman analyst's remarks about Fannie Mae and Freddie Mac. The analyst said the two Cse's (government sponsored enterprises) would need to add a total of $75 billion in capital. We're not really surprised by this news but several of the current owners of the two companies decided they didn't want to be anymore and sold their shares. These stocks closed down over 15% on Monday even after having been beaten down for the better part of the past year. The prices have dropped about 80% since the October highs and have both become the poster children of the mortgage disaster and this 20% correction, defining a bear market in some minds. These prices have not been seen since the mid-90s.

The focus here this evening is the potential for a stock market rally. As we write this evening, the Asian markets are getting hit to the tune of 3% and we speak of Hong Kong and Japan. In what appears to be a sympathy move, the US futures are fading into the darkness, too. Both the SP 500 and the NDX futures are down about 0.75% looking at fair value so there is the potential for a weak opening on Tuesday morning. That may finally bring us some buying.

On Monday morning, the price of oil dropped back under $140 which caused the bulls to come in and buy in the early morning; but, in the end, that was not enough to hold up the Dow. Oil did close down about $4 on the day. We think this may also finally be the beginning/continuation of the commodity sell off. Most think inflation is going to run wild and commodities will continue to be on fire. What do you think that means to the contrarian here? Correct, we are bearish most commodities. Gold has failed to get back up to $1000 even as oil has continued to move up even though that move has been more moderate lately. Meanwhile, the dollar continues to hold its own putting further downward pressure on the commodities, especially oil.

FSI: 88.10 (the speculation index has been firm for the past few sessions)

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