Monday, September 08, 2008

Take Over Monday, US Treasury Style

Top Line: No real surprises in today's market. The Fannie/Freddie take over by the government in the form of the US Treasury dominated the trading on Monday. The opening bell ushered in the High of the day and that point now will be a ceiling for prices, in other words overhead resistance.

Here is a quote from the WSJ:

"The Treasury plan limits the size of each company's mortgage portfolios to a maximum of $850 billion as of the end of 2009. (Fannie currently owns about $758 billion of mortgages and related securities, while Freddie's total is about $798 billion.) After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company."

Read the last sentence again...shrink about 10% a year until they reach about $250 billion...

What that tells us is that the government does Not intend to "grow" the business but shrink it over time. They don't say how fast they would shrink but you can't shrink unless you don't expand... Effectively, this Take Over will take these two "companies" off the grid of future home sales, reducing their involvement in new mortgages to a bare minimum.

The mortgage business has relied on the GSE's to provide lower interest rate mortgages due to their quasi-government backing. The chatter today was how mortgage rates can now go down because the government is back in the game backing mortgages. We don't see it that way.

The market takes it to mean, and they should in our humble opinion, that the mortgages already on the books are now going to have better government backing. As with all of the actions taken by the Officials in power, this one is designed to protect the banks (and maybe to encourage foreign central banks to hold onto their mortgage backed securities rather than dump them on the market).

We can not emphasize this point enough so the market reinforces it for you. In the stock market, the biggest losers were the two GSE's, FNM and FRE. The other top two losers were Washington Mutual (WaMu as we call them) and Lehman Brothers, the two weak sisters in the mortgage game.

To round out the top ten volume leaders, we find Citigroup, Bank of America, Wachovia Bank, Wells Fargo, and JP Morgan, to mention the banks. All of these banks were up big on Monday, not surprisingly because of the perception in the market that the government has taken care of them...yes, Again.

And, while the banks were cruisin', the techs were bruisin' as GOOG was down 5% on the day helping to drag the NASDAQ 100 to a Loss on the day, see the QID below (it was up because the NASDAQ 1oo was down). A strange day indeed...

We may have further comments as the "weak" progresses but we do not believe this is a bullish event, both the jump in prices off the bell this morning, or the Government Take Over of the GSE's. The government may have needed to step in to this pile of dung but they can not stop prices of homes from continuing their journey Southward.

FSI: 76.77 (lowest close since March 20th, GOOG is five points from its March low)

VXO: 24.72 -0.72 (heading up to 50)

SDS: 66.66 -3.00
QID: 47.87 +0.57

Dow Industrials: 11,510.74 +289.78

Here are a couple of Jackson pics:

Relaxing at home and smiling at, well, Gramma.

It was Grandparents' day at Jackson's school,
so Grampa got to spend a few minutes with Jackson and his friends.

Yes, Gramma was there, too, and one of Jackson's friends took our picture :-)


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