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Fannie, Freddie Rescue Not a Cure-All


Plan for the worst, hope for the best.


Being Right or Making Money

I recall reading a book back in 2000 written by Ned Davis of Ned Davis Research entitled Being Right or Making Money. The title sticks with me daily of late as the market takes on a serious of seemingly random movements that seem to be occurring more often and with greater ferocity each time.

Take last week, for example. Most folks came in positioned for a weak September only to be greeted with a 250 point rally that was later erased to a small loss. As the week moved along, a sense of calm took over, only to be replaced with a sense of dread on Thursday with a gut-wrenching 350 point drop that day. My belief is that the catalyst was the world slowly waking up to the fact that the credit market is and was closed to even the finest financial companies, as Wells Fargo (WFC) was forced to pay 9.75% for $1.75 billion of hybrid (fixed to floating rate) securities. Even for someone that has been cautious on credit for quite a while, 9.75% got my attention.

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Then, on Friday morning, the BLS announced a greater than expected rise in lost jobs and a greater than expected rise in the unemployment rate to 6.1%. One would think that the one-two punch of higher credit spreads and higher unemployment would lead to a lower market, which, in fact, we did witness.

To be honest, I turned to my partners and said "I wonder if we will see 'them' come in and defend the market again" as has become so commonplace of late. It seems that the worse the economic data, the more powerful a futures-led rally materializes, one that we actually partially hedged our short positions in front of.

And lo and behold! The magical rally materialized, led by none other than the large banks such as Wells Fargo. I must admit that the market has a way of squashing one's ego, but the "I don't care what I pay for futures in the face of incredibly lousy economic statistics" has become a bit insulting of late. I could go on and on and tell you who I think it is buying these futures without a fear of loss, but I shall leave it up to your imagination who I feel it might be (Hint: Who is spending other people's money and doesn't have to answer to anyone or have a 'P & L'?).

A couple of other odd things happened last Friday. Around 11 AM, as Europe's markets were closing deep in the red, as the futures buyer showed up, one-by-one, the major bank stocks on my screen started turning green. JPMorgan (JPM), then Citigroup (C), then Wells, then Wachovia (WB), all companies with deteriorating fundamentals, higher credit costs and a struggling consumer.

I hate to say this, but it was almost as if someone was tipped off that there was some major news coming in the not-too-distant future.

Just like the futures buyers that appear out of nowhere, I have seen this move before only to be followed by a major positive announcement the day after. No, I am not a conspiracy theorist: I can just detect obvious patterns after many years. And voila! At 4:15:15 PM (15 seconds after the close of futures for the week), The Wall Street Journal reports the Treasury's intent to "back stop Fannie Mae (FNM) and Freddie Mac (FRE)."

The timing was curious, to say the least, but it's something I have become accustomed to. Whether Greenspan's intra-day Fed Funds rate cuts in 1998 and 2001 or Bernanke's surprise rate cuts, surprise use of the Discount Window and new lending facilities (usually during options expiration week to have the largest impact) for their buddies at the largest banks and brokers, or the change to short selling rules just as banks and brokers were collapsing in mid-July, I suppose I've been conditioned to "being right and losing money" on occasion.

Longer term, I'm very comfortable with my views and understanding of markets, but constant interference with free markets and intra-day market intervention by most all of the authorities will be, in my view, a negative longer term.

However, as Ned Davis said, it's more important to make money than be "right," but when markets are played with in a way that frustrates those that have done their homework to reward those that have little to no understanding of the integral workings of the markets, it's a bit annoying. But so be it. I don't make the rules, I just have to play by them.

One other interesting tidbit about late Friday: I was watching an interview of a famous bond manager after the headlines came out about Fannie/Freddie and the manager was asked if he had been consulted on the structure of the Fannie/Freddie deal.

His response was "No comment," so I gather that he was consulted on the structure of the deal or he has a Ouiji board. After all, is it luck that he said "I think we will see a super-senior preferred stock deal with warrants attached"? Is it clairvoyance or was he simply tipped off and then allowed to be positioned for it?

I happen to know what is, and more importantly, what is not in his portfolio, and either he is really smart, really lucky, has some really good information, or a combination of one or all three. I am leaning towards really good information, without acrimony is all. The one thing I do know is that if I were privy to that sort of information, I would end up in jail for insider trading. So is being 'right' about being the brightest or the one that 'gets the phone call'? Again, I will leave it up to you.

So Do We Cheer or Jeer?

I suppose it all depends on one's perspective, as does everything, you know?

I've been concerned for years now that the consumer would be in deep trouble and that financial institutions (banks, brokers, mortgage companies but not GSE's) would have trouble finding financing.

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No positions in stocks mentioned.

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