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Pirate's Booty


Get ready for a September to remember.

"The Autumn Wind is a Raider, pillaging just for fun. He'll knock you around and upside down and laugh when he's conquered and won."
--Steve Sabol, NFL Films

As the boys of summer prepare for the playoffs, hardcore fans around the land are readying for an entirely more violent collision.

With football season upon us, our collective attention now turns to the metaphorical line of scrimmage in the markets. Tensions are high and the stadium packed, for the winner of the September battle could run the schedule into year-end.

The Bears unleashed an all out blitz in July, only to be caught flat-footed by Washington offensive coordinator Hank Paulson. The crafty veteran is a master of market timing patterns and he shrewdly called plays designed to punish those who over-pursued the weak side.

Following a summer when headlines trumped tan lines, starters returned to their turrets this week with game faces affixed. With one month left in the quarter and four remaining in the year, they'll leave it all on the field for fear that if they don't perform, they won't make the 2009 roster.

It's been over a year since credit scars first emerged and they were quickly dismissed as non-relevant bruises rather than potentially career threatening injuries. As more and more players-and, in some cases, entire organizations-were carted off the field, it became increasingly obvious that the game was forever changed.

The sub-prime scare morphed into arguably the worst financial contagion in history, a cumulative comeuppance born on the back of the tech bubble and exponentially magnified by experimental engineering gone awry.

After years of giving the star market drugs with hopes of masking the underlying discomfort, it's begun the unenviable yet unavoidable process of taking medicine through time and price. It's not fun-and it will take years to fully flush through the system-but it's a necessary evil that must be endured.

We've already discussed the primary time horizons with which to view financial markets and that remains a viable and valuable context to any conversation. To be sure, the destination we arrive at pales in comparison to the path that we take to get there.

Getting Credit When Credit's Due

We wrote about the potential for a rally into the election on July 16th. It was an unpopular, variant view at the time but higher lows have since been made and the trend-however ginger-is still in tact.

The twist to the current plot is the yawning disconnect between equity and credit markets. While the former storm has shown moxie in recent weeks, the latter matter is an entirely different category in terms of the potential implications.

Much has been written about the $230 billion in debt that is coming due in Fannie Mae (FNM) and Freddie Mac (FRE) by the end of the quarter. These two troubled institutions remain elephants in the room that won't go away. Well then again, perhaps they will.

There was a brief celebratory spark in the media and markets early last week when Freddie successfully financed $2 billion. As Kevin Depew mentioned on Minyanville, however, it was akin to a man finding a quarter in his pocket on the way to bankruptcy court.

Assuming the debt of Government Sponsored Entities is backed-a virtual lock given the unsettling consequences that would occur if it weren't-the resolution of their equity would have profound implications for global markets through the lens of the dollar.

But wait, there's more.

Financial institutions have $871 billion in debt coming due into year-end.

If corporate America can successfully roll those obligations and buy more time, odds are we'll see a sharp upside equity rally.

If, however, sufficient appetite doesn't emerge for that credit, the potential exists for an unmitigated equity disaster.

The boys on the Beltway know this all too well and we should expect a wave of announcements in the coming months designed to spur the herd higher.
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