OptionPundit

Tag: FRE

  • U.S. Bailout for Mortgage Giants

    The U.S. government plans to put government sponsored mortgage finance companies Fannie Mae and Freddie Mac under federal control, the New York Timesand Washington Post newspapers reported late Friday, in what could be the largest financial bailout in the nation’s history. According to the same report, Analysts at Citigroup, Merrill Lynch, and Goldman Sachs since mid-August have issued reports saying the companies had plenty of capital to operate for the near term, and both companies have successfully rolled over debt on schedule in the meantime. Also wasn’t it just a few weeks ago when both said they had plenty of capital? Welcome to Wall Street!

    The two government sponsored enterprises (GSEs) own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt. The value of the company’s common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares, would be protected by the government, the Washington Post said. Isn’t that equivalent to bankruptcy I mentioned in Dec last year, from shareholder’s perspective.

    The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

    The executives were told that the government had been planning to announce the decision as early as Sunday, before the Asian markets reopen, the officials said.

    Was this the reason behind a sharp u-turn, massive 200 points recovery, on Friday afternoon (something similar happened few months back when Fed had announced another massive bail-out plan)… We’re likely to see a large stock market rally on this news on Monday, But mind this, in spite of the bail-out plans if rally doesn’t happen, too bad for the markets.

    After stock markets closed on Friday, the shares of Fannie (FNM) and Freddie (FRE) plummeted. Fannie was trading around $5.50, down from $70 a year ago. Freddie was trading at about $4, down from about $65 a year ago.

    Read more interesting conversation and comments on this issue here.

    Profitable trading, OP

  • Fed, Gold and Markets

    Fed decided to keep interest rates flat, what’s the big deal? Markets staged a huge rally, Dow over 300 points; was that big deal? Gold dropped almost closed to support point $85 and Oil, metal and commodities were crushed, was that a big deal? These are not easy questions to answer but if we are invested, we need to draw hypothesis, find supporting data and move ahead for if everyone knows the answer, that is not the answer to invest in.

    Commodities and metals all together have been hurt badly over the past few days, Oil is nearly 20% down. Has the demand changed that dramatically? Not so much. What’s changed? Bernanke gave his testimony in early July and indicated (that’s my take away) tough actions. It was clear he will come after oil and commodities (as well as traders aka speculators). Recession or deflation is his biggest nightmare. He can’t afford to increase rates due to fragile state of economy but that will lead to inflationary pressure. It’s a complex yet simple situation, he needs to contain inflation without increasing rates. I, at least, so far have not found any other major insight that convinces me of such a sudden correction across the board. I however, shared my bearishness on commodities on Jun 21st, just a few days before the correction started. These are oversold now and we may see short term bounce.

    Attached a chart that relates FOMC announcements, Gold Prices and S&P500 movements. You’ll notice that except in one instance gold prices rose almost after every FOMC announcement and markets fell in a few days time post FOMC decision to either cut rates or keep it steady. Read my post on gold dating back in Oct’07, just before its current trend began. It is still to be seen whether or not this will happen again now as fed is done with it’s rates decision. The only other factor that may influence is earnings. So what’s my take on gold? Unless we break down to 83 or lower, or break-out to $102, gold is trading in a range no matter what the experts say.

    For Markets, before you read into rallies and huge optimism, pls note we are in times when short interests are record high. The rally wasn’t an impressive one. These rallies simply can be short covering for their positions.The big names who are beating estimates, they are doing so to beat their already lowered guidances. Almost every industry bellwethers is lowering guidance for next few quarters. For more on earnings, check this out. I haven’t seen any major convincing data or trends that support a higher markets, at least for now. Agreed that we are seeing metal, commodities and oil correcting, transport refusing to break lower but here is the big picture-

    • Inflation jumping at decades high levels
    • Wages stagnating & unemployment rising
    • GDP flat or negative (Ignore stimulus checks)
    • Housing and credit crisis accelerating
    • Consumer credit card defaults are rising (AXP, MA, etc)
    • Global economy are showing sign for slowing down

    AIG just reported huge losses, in fact they have lost nearly $11billions in last 3 quarter. The company said it is doing an evaluation of all of its businesses and will report its findings in September. Freddie reports losses and cut dividend and more to come.

    And btw, i don’t find good reasons for strong dollar as well (at least for the moment)? Commodities exports are doing good, but a strong dollar will hurt them and so it will for the US corporations that are drawing signicant earnings from outside of US and massive spending is needed, interest rates can’t go higher for the moment. So how a strong $$ will be supported?

    Now you connect the dots I mentioned above, hopefully you get the picture and can draw your own hypothesis. These are just a few points to kick start thinking and create hypothesis before you go long on equity or any other asset class.

    Oh by the way, the stocks list I shared for earnings, most so far had huge movement. Congratulations to those who played for large moves and IV crash.

    Trade carefully, Trade profitably, OP

  • Fed’s Plan is Not The Panacea

    There was big weekened news before markets opened, Fed will rescue Fannie(FNM) and Freddie and stock futures just shot-up and so were FNM, FRE and Lehman (LEH).

    According to Market watch story, the White House and Federal Reserve moved to give the mortgage giants the capital they need to survive the depression in the housing market and turmoil in financial markets that had left them dangling over a cliff. Of most immediate importance, the Fed’s board of governors voted to open up its emergency discount window to Fannie and Freddie. In addition, Treasury Secretary Henry Paulson announced that he will seek congressional authorization to buy stock in the two companies and increase the government’s credit line. At the moment, each company may borrow only $2.25 billion. In return for the capital, Paulson said that the Bush administration would ask Congress to grant the Fed a “consultative” role in the capital standards of the companies.

    Yes, it did provide initial jump to the market, but guess what, by the time I am writing this, the rally has lost all the steam. And after opening at huge gains, LEH, FRE and FNM all have lost their gains.

    Here is what I wrote to OPN subscribers-

    Markets seems to “trying” to find a reason to rally..I am not sure if this is just a “oversold” bounce or really a reaction to fed’s plan to save FNM and FRE. I don’t find anything new over the weekend, this rumor was already in the market place on Friday, net I am not confident of this rally…so if you do decide to play long, be cautious….

    And as it appears, this is not good for other financial troubled companies as government is not expected to help others.. Read more…and it may not be a good news for Lehman.

    This is not an easy market, Trade Carefully, Trade Profitably, OP

  • Fannie, Freddie Insolvent, Anybody hears that?

    Mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) are “insolvent” and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg. Guess what, this is what I wrote on 10 December’07

    Delta Financials (DFC) just filed for Bankruptcy. My third encounter with a bankrupt  (Enron and worldcom were the earlier two and still have there shares teaching me lessons everyday). Is countrywide (CFC) too far from Bankruptcy? My bet it’s not but let’s see. Ok forget countrywide, what about Fannie Mae (FNM) which backs mortgages. If a homeowner defaults, FNM is required to buyback these loans at the original price, not the current value. They backed bad loans and must now buy them back. Just look at the current balance sheet:  $600 billions in long-term debt out of $760billions debt. Yeah, you may show $782 billions in Assets, but where is the bulk of investment? You guess it right. So how do you find money to buy back those loans? do you get the picture? The picture is not so much different for Freddie Mac (FRE) either. Have fun exploring their balance sheet and fine prints and I am sure you are about to decode interesting insights. Don’t tell me I am being too pessimist and too early, etc. Subprime is the talk of the town these days, but didn’t OP talked about BKUNA, NDE, NEW, Lend in Feb/Mar’07.

    Profitable trading, OP