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Fannie, Freddie Rescue Not a Cure-All

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Plan for the worst, hope for the best.

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Allow me to make the following, and likely controversial comment, about Fannie and Freddie. When you take what I consider to be a poorly run entity and merge it into yet another poorly run entity, you just end up with a larger poorly run entity, right?

While switching channels this evening between the Bears/Colts game, the Weather Channel and Bloomberg TV, I could not help but think "Who was taking over whom?"

Let's be frank. The U.S. Dollar Index hasn't been sinking for decades because it's a fine-tuned financial machine. Furthermore, Fannie/Freddie were so poorly run that they could not even produce any results for several years. So when the Treasury "bails out" Fannie/Freddie, what do we really have in the long run?

As a patriotic American, I hate to say this, but we have the blind leading the blind.

Do we cheer this move, as it could be the savior of our markets? Should we cheer as it will reduce the unemployment rolls? Should we cheer when GSE preferred and common shares gap down near zero? Will credit spreads magically come down? Will mortgage delinquencies magically decrease? Will banks magically return to "business as usual"? Will retailers find their stores full of shoppers? Will gas and oil fall in price to help consumers? Will credit card debt just disappear? Will the savings rate turn positive?

I could go on. But my answer, objectively, after considering every fact I know, every concept I understand, is that we should be jeering this move, not cheering it.

An Anecdotal Lesson

I have spent many a day of late away from home and office and have had the distinct pleasure of conversing with some truly intelligent and opinionated Americans.

Speaking with them brings home to roost how unimportant 25-45 "handle" moves are to most in the US, except those of us writing about them in the wee hours of the morning. I'm pretty sure that the proprietor of the nice rest-stop in Southern Georgia where I grabbed an iced tea understands many of the details about this "bailout." What he understands, if I heard him correctly, is that his business is down 18% year-over-year and that includes gasoline.

I have yet to talk to a single American that feels like "life is good" or has been for awhile now. And Americans are tough. And so are stock and bond futures.

Let's face it. Stock futures are much more easily manipulated than the entrepreneur whose business is down 20%. Do you think many of them really understand who Fannie and Freddie are? I don't believe so.

Jeers: What is Next?

Someone once told me that living in the past isn't living at all, and that definitely applies to the markets. In the markets, we must always look forward.

If you have a negative or bearish stance, you must look forward for what you're missing, and why you should be positive. It isn't about being right in the short term. It's about making money in the long term.

So I sit and I think about all of the things I've written, the hours of tireless (and enjoyable) research, and I wonder how I can be wrong. Indeed, it is the lack of ego that allows one to proceed with caution with OPM (Other People's Money).

We need to "plan for the worst and hope for the best." So as I watch the near-term reaction to what is, in my opinion, obviously leaked "news," these are some "jeers," observations and thoughts for what may happen, that I would add.
  • GSE common and preferred shareholders are toast.
  • Holders of GSE common and preferred shares will become scared.
  • Raising common/preferred debt for impaired banks will become impossible.
  • Earnings, in a macro sense, will remain unchanged, at best.
  • U.S. Debt/GDP will not fall-in fact it mat increase.
  • Treasury supply will increase.
  • Our deficit will increase, not decrease
  • Wall Street analyst/strategist "expected" earnings will not materialize.
  • Liquidity still stinks.
  • Hedge funds still face massive liquidation.
  • Oil is still $109 per barrel.
  • Credit spreads will not likely tighten meaningfully.

The list goes on and on.

In Conclusion

I wrote about Dead Banks Walking a couple of weeks back. For a moment, imagine that you are one of these entities and now your supposed "role models," Fannie and Freddie, have been thrown unmercifully "under the bus."

In other words, the dead men walking are now walking the plank.

No positions in stocks mentioned.

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