MON. SEP. 8 - The Big Bailout of '08

Amidst the U.S. Open Finals and the Phils-Mets series and the true start of football season, something happened today (this is being written at 10:40PM Sunday night in the hopes all of you read it) which will rock the financial world tomorrow. Treasury Secretary Paulson announced today that the U.S. government has officially annexed two of the nation's largest financial companies - Fannie Mae and Freddie Mac - something openly discussed in this space several days ago. In effect, the federal government (that means you and me since it is us taxpayers footing the bill) will be taking direct responsibility for two entities which provide funding for almost 75% of new home mortgages. It is arguably the largest direct government intervention in the financial markets since the New Deal- and may bigger than that. The government will provide up to $200 BILLION of monies to shore up these sagging companies. The Treasury's vision places FNM and FRE under a conservatorship-doing this shiffts managerial control to their regulating body, the Federal Housing Finance Agency, or FHFA. In return, the govenrment gets up to $1 billion of preferred stock in both FNM and FRE.
Ostensibly, this is the federal government's way of letting the rest of us know that the housing decline is getting much much worse- worse than any of us can imagine. Prices for houses have already fallen at a rate rivaling the declines during the Great Depression. However, it is a shot in the arm for the equit markets in the immediate term. Why? Because it is tell us traders that whether the measures work or not- the federal government is aware of the problems and is doing what it feels it can do to stem the collapse. Gains may well be ephmeral; basiclaly, the opinion of the stock market at this point is one of measured cofndience- the market must believe that the government can and indeed will help or the situation could get messy. This is not political speak- free market theorem would dictate that the FNM/FRE complex should suffer whatever it is gonig to suffer. However, in stock land, we as day traders must react to what we see. Today will be one of them ost interesting trading days in recent history. The futures are soaring in overnight trade and the pre-open in particular tomorrow will be a fascinating time to trade. FNM/FRE may have their common stock vanish...or they may rebound because of confidence in the entities thrown at them by the government The market may rally more...or futures may give back all their gains. It is not our job to guess that; it is our job to trade these fluctuations in the immediate-term. Tomorrow is a day that you cannot show up late and expect to be profitable. Be ready, do your homework, and be there early in the morning.

8:15AM ET-
Padding on to last night, the foreign markets sure enough hare having their sharpest gains in months. There is a sense of confidence- ephemeral or not- that the crisis may well be over. Futures indicate a sharp rise. Best guess would be that some of these gains will erode on some profit-taking. However, if the market holds for the bulk of the morning, the rally will likely get stronger in the afternoon; this is one of the most crucial junctures for the stock market in a very long time.

Reiterating-If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 based on direction of the market unless specifiedIf something is bad, assume either a buy thru unchanged or an A-B-A2 based on direction of the market unless specified

Good-

MBI, ABK, other reinsurers- all sharply higher; these will follow market.

LEH- 3rd management shake-up in four months.

STI,ZION, other banks- all way up on the Fed/FNM news; again, will follow market in all likelihood

Bad-

SOV- own more FNM/FRE preferred stock than any other public bank. Study the action of the preferred stock because if the preferred is supported well, SOV will be a tremendous buy if it opens lower.

DSL- Feds ordered them to shore up their capital on Friday afternoon

MHK- downgraded. Not usually notable, but if it opens higher today and the market weakens, it should be one of the first stocks to decline


Not a ton of news flow; everything will trade off of FNM/FRE. Good luck today.

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