Fannie And Freddie At ZERO - Good For The Market?

NEWS: The major indices were bounce above and below the flat line all day until a rally into the close helped all three finish in the green. The Dow put together a gain of 68 points or 0.6%. The S&P 500 added 7 points or 0.6% and the NASDAQ squeaked out a gain of 4 points or 0.2%. The small-cap indices followed the NASDAQ with a gain of 0.2%.

THE BOTTOMLINE: Today was driven by the financials, which were weak early on due to negative news regarding Freddie and Fannie, but by the end of the day they shrugged off the fears and buyers stepped in. The big winners today were the commodity stocks as oil gained over $1 and gold finished with a minimal increase. Commodity-related stocks have been beaten down the last two months are many are sitting on support and at the same time are very oversold. Today’s rally could continue for a few days as the shorts exit and swing traders look for a bounce. Longer term I am torn on whether investors should sell into the rally or hold. I do believe you should have some exposure to the commodity stocks, but most investors are too heavily weighted towards the sector. If you are one of the investors with an over allocation in the commodity stocks, this rally could be a time to raise some cash.

Another sector having a solid day was Chemical stocks. The agricultural chemicals have been hit hard with the selling in the commodity arena and were able to catch a big higher today. Other than the agricultural chemical stocks, which can be played with the Market Vectors Agribusiness ETF (MOO), there are a handful of specialty chemical firms that are attractive. One of the larger chemical companies is Air Products & Chemicals (APD), which focuses on different types of gases. The stock recently bounced off support at $88 and has a great long-term uptrend.

FANNIE MAE WORTHLESS WILL HELP STOCKS!

NEWS: Both Fannie (FNM) and Freddie (FRE) fell over 20% today and the financial stocks rose. How can that be? Maybe investors would rather see the common shareholders wiped out and have the two companies nationalized.

THE BOTTOMLINE: The action today leads me to believe that the market would prefer to have Fannie and Freddie run by the government and taken off the market with common shareholders receiving ZERO! That is right, Fannie who started the year at $40 would be worthless if the government stepped in and “rescued” the firm. This will not make many investors happy, but if you still own Fannie after falling 89% this year, you have nobody to blame but the person in the mirror. I am not advocating the bailout or lack thereof, but simply stating to you what I saw today and the fact that the market is pricing in both stocks going to zero and it not being the end of the world if it takes place. I spoke with a colleague of mine earlier this week and he made a comment that alluded to the fact that we all know Freddie and Fannie will end up nationalized. And I said yes you are right and who would be buying the stock on that assumption? His answer nobody. And that is exactly why the stocks are falling off a cliff. But his point of everyone knowing is that even if the bailout occurs, it will not affect the other financials because it is already priced in to the market. I did not agree with him at the time, but after today I believe he was right.

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