Hanky Panky

A few short hours ago I wrote "Now that the Republican National Convention is over the Treasury might announce their plan for Fannie and Freddie". Little did I realize that we were just a couple of hours away from an announcement. From Bloomberg:

"Treasuries fell amid speculation the U.S. is close to reaching a plan to help troubled mortgage finance companies Fannie Mae and Freddie Mac, easing the haven appeal of government debt."

Here are the first thoughts that come to mind:
  • This is definitely meant to spur the market higher into the election. In the short term the S&P futures are up 15 but will it work longer term?
  • While this does avert a disaster, does it change anything in the real economy?
  • Judging by the market action today some market players had this information in advance. That's wrong.
  • Will this be enough to get the XLF (financial spyder) to break out. In after hours the XLF is at 22.42 and flirting with a breakout.
  • If the XLF breaks out will hedge funds cause a giant short squeeze in the financials? They are very short the sector and don't have a high tolerance for pain right now.
  • Fannie and Freddie's combined market cap is 11 billion dollars. Even if the plan leaves the equity holders of Fannie and Freddie with nothing the positive liquidity effect on the financial system should dwarf the loss to shareholders.
  • The more important thing to look at will be how it effects preferred shareholders as many financial companies hold preffered stock.
  • If this does take the market higher I will want to short the market at some point.
  • The only question is when.

1 comment:

bill money said...

i have read a lot of articles about the fnm/fre situation, but your summary seems the most logical manner in which this play out. maybe the shareholders get zip, but as you said, the entire combined market cap of both is really irrelevantly small in the scheme of things. although i don't think the credit crisis is even near being finished, we probably rally big out of this "takeover" since fnm/fre exceeds in size all other insolvent financial institutions. the tell on the financials was probably when the market was down 350 and the financials didn't get killed along with the rest of the market. those short the banks, etc should be rushing to cover next week regardless of what happens to fnm/fre.
best
bill money