Monday, September 08, 2008

Fannie Bailout Sparks Market Rally, But Is It Time To Buy?

The market is surging on the news of the Fannie/Freddie bailout by the Treasury. The Treasury Dept. is placing the companies under a conservatorship, and will provide up to $200 billion in capital. This sparked a big rally in the market, as investors hope it will help ease the credit crunch.

Bank stocks rallied strong, with the bank index up more than +5.5%. Housing stocks rallied even more, with that index up +6.7% on hopes that the mortgage market will start working again with capital and loans flowing more freely to people who want to take advantage of the price declines and start buying homes.

Fannie Mae (FNM) was created in 1938 (Freddie in 1970), and always had the implicit guarantee of the government. That's why it was called a "GSE" (govt.-sponsored entity). But until now, the government has never had to step up and make that implicit guarantee explicit to the markets. Of course, investors already knew these entities were too big to fail, given how many mortgages they have facilitated.

Asian markets also soared overnight, up anywhere from +3-5%. The dollar is also stronger again this morning. Bond yields are higher, with the 10-year yield at 3.76%. And oil is up, but struggling to hold the $107 level.

Every sector is now higher in the market, but the Nasdaq is lagging as many big-cap tech stocks are flat. To me, it still feels like some big funds are liquidating, and using any bounce in the market to sell. This is probably why the ARMS Index hit 2.62 this morning, even as the market was soaring.

The question now becomes, is this THE bottom? Hard to say. For now, the S&P 500 and Nasdaq aren't even above last Thursday's highs. So there is plenty of work ahead for the market to get through all of the overhead resistance from higher prices.

But on the plus side, the indexes have not violated their July lows, making for a constructive technical pattern. So the overall trend is still down, but at the margin it looks like things are improving. I have not taken off my hedges yet, and will continue to monitor the price/volume action from day to day. Also, there still is a lack or clear leadership emerging.

long SDS


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