Friday, September 05, 2008

Nevermind...

Remeber like 4 hours ago when I said it didn't look like anything was going to happen with Fannie and Freddie? Yeah... what I meant to say is that something could happen this weekend! At least that's what the Wall Street Journal is reporting.

Anyway, we'll see what it looks like. I still think that its most likely that the companies have agreed to whatever the Treasury is about to do, so it can't wipe out shareholders. Some capitalist president this dude turned out to be...

Unfortunately, the effect is going to be Treasury rates selling off and MBS rising, which isn't how I'm set up.

Did you catch Bill Gross on CNBC just now? They asked if he had been approached by the Treasury about any government-led solution, presumably asking if PIMCO would participate. Gross said he couldn't comment, which means the answer is yes. Hmm... wonder why no one asked Accrued Interest!?!

Anyway, its possible that this turns out to be a rotation moment, because a bailout of Fannie and Freddie doesn't solve our real economy. It does help prevent it from getting worse, but it doesn't solve anything. But it should help bring mortgage rates down, creating liquidity for financial firms. Could also improve risk aversion, which would help financial firms raise capital or at least sell debt. So we could see a period where financials outperform industrials.

11 comments:

alex said...

Interesting that Gross spent the entire interview axting like he knew nothing, then refuses comment when asked if he was approached by the government to invest.
Further proof of the invisible hand behind markets.

Jesse said...

I think there is an asymmetric leaking of information to different financial media. I believe the company management agreed under duress of not having a choice. After all, they were sacked.

Or course we'll have to wait until Sunday-Monday for details, but the real issue will be on the preferred shares, because they are heavily owned by regional banks in the US. The common shareholders will be lucky to get more than a token. The Debt is the real deal.

Suspect this will be couched more in term of a reissuance, with instruments that look like convertibles and warrants. This is why Morgan Stanly got involved.

Treasury will low key their capital infusion role and try to couch it as 'as needed' to blunt the impact on the dolorous dollar.

Its in some ways a half measure that will fail in the next Administration. As everyone rightfully points out, it does not fix the problems.

Shankar said...

Not so fast. Treasury sell-off will come, but not that quickly.

Here's how it probably will unfold:

Now that they have nationalized GSEs and although we may see a sharp rally in equities for next few days, the Government finances are going to be in a tailspin. It means that the Fed will squeeze the liquidity and push everyone into bonds (and out of equities). There you have your treasury bubble. (aka Crowding Out of Investment by the Government).

And in due course (a few months to a year when foreigners realize that they are holding toilet paper instead of AAA rated bonds), that bubble will blow up and the ensuing tsunami will take down everything in its path.

Why do I think it will happen this way? Just look back at 20s/30s.

The history is being repeated and the Fed is simply following the playbook for The Great Depression again.

Enjoy.

Shankar said...

BTW, a long time ago, I had indicated that we'll see a run on the dollar. We are going to see it - maybe a year or more down the road.

You still stick to your longtime opinion that we won't see a run on the US$?

Rajesh said...

The liberal President from Texas adds to his resume:
- Biggest expansion of Federal Department of Education.
- Biggest expansion of Medicare since program was created.
- Socialized Mortgage Lending: need housing? the government will give you money to buy a house, If you can' t make the payments, no problem, the taxpayers are there for you.
The ownership society rules.

Neil said...

I think, Accrued, you are correct that there has to be a short term sell-off in Treasuries. But that will create another buying opportunity in the medium term. The long-term picture as painted by Shankar is not pretty, but then nor were the defaults in Russia and Argentina..

Did you see the mid-day action in the 2-year? We were at 2.09 in the morning and they sold off all day - surely the primary dealers had been tipped off, as a courtesy?

Vanya said...

I don't get how a government move to nationalize an industry can be good for stocks in any way, shape or form.

This move introduces massive political risk into the US stock markets -- who's to say that the government isn't going to reach in and nationalize insurance companies when they raise rates and cancel policies after the next big hurricane? After all, that would be the only way to ensure that insurance would remain affordable for all. And then, why stop there?

No matter how you may have felt about the GSE's personally, it's never good news when the government starts taking over private companies. It's a confiscation of shareholder property, and it's only going to make things worse, both in the short and long term.

JBomb said...

I was having a discussion w/ a securities lawyer about the potential lawsuits that might come out of this. For the other attorneys out there, an interesting question: do FNM and FRE shareholders have a claim against the federal government for just compensation under the takings clause (i.e., eminent domain)?

PNL4LYFE said...

I think the preferreds might be an interesting punt here. If the treasury does inject capital, my understanding is that the preferred and common won't be permanently impaired. If they are able to earn enough in the future to make the treasury whole on it's investment, presumably the dividends on the preferred could be reinstated. Perhaps this is 10 years down the road or maybe it never happens, but if it does, you're getting nearly 100% yield (on FRE.Z for example).

It may be a way out-of-the-money option, but the potential upside is huge. Anyone else consider this?

Shankar said...

First, it might be difficult to get options that far out in the future. Plus, in spite of what experts maybe saying, I think that the housing market will keep declining till 2011-2012 and add another 5-6 years for stabilization. So, you are now looking at 2018-2020 before you can expect those options to pay off.

I would rather find some other asset classes for my money.

Shankar said...

FYI. Now they are saying that housing price decline will be more than expected. Per NY Times article, bottom may not come till 2010. I am fairly certain that by 2010, they will push it out another 1-2 years.

For link to article, please visit:

www.sheridanpartners.com/market.php