Sam Collins

Bears Abound

by Sam Collins   09/09/08

Higher-quality stocks and financials rallied Monday on the news that the Federal government seized the assets of Fannie Mae (FNM) and Freddie Mac (FRE). The move was made to provide more capital to the mortgage markets and remove another of the potential crises following the subprime problem.

Banks and mortgage companies benefited from the Fed's weekend takeover and so did many homebuilders.

Centex (CTX) was up 10.3%, KB Homes (KBH) rose 14.2%, and Lennar (LEN) was up 1.3%. Bank of America (BAC), up 7.76%, Citigroup (C), up 6.55%, and JPMorgan (JPM), up 4.92%, led the Dow Jones Industrial Average (DJI) to surge after a week of losses.

But the takeover created some serious casualties for the holders of FNM and FRE common and preferred stocks.

Fannie's common stock fell more than 89% and Freddie's dropped more than 82%. And the preferred shareholders fared even worse as their dividends were seized by the government and the many classes of preferreds fell 80% or more. However, bondholders of the two mortgage giants found that prices improved on their holdings and Freddie was able to sell short-term notes at a much cheaper level than last week.

The fallout of Fannie and Freddie didn't help the technology sector at all, though.

While the Dow Jones Industrials (DJI) surged to a gain of 2.59%, the Nasdaq (NASD) was up just 0.62%. Some of the biggest techs were hit by selling including Apple (AAPL), Google (GOOG) and Oracle (ORCL).

The Nasdaq was also hurt by an 11.2% drop in the shares of UAL Corp. (UAUA) following a later-denied report that the airline was filing for bankruptcy.

At the close, the Dow Jones Industrial Average (DJI) had gained 290 points to 11,511, the S&P 500 (SPX) was up 25 points to 1,268 and the Nasdaq (NASD) rose 14 points, ending at 2,270.

On the New York Stock Exchange, volume increased after weeks of averaging under 1.3 billion shares. Yesterday, the Big Board traded 1.7 billion shares, with advancers ahead of decliners by just over 2-to-1. The Nasdaq crossed almost 1.1 billion shares and there advancers were ahead by about 9-to-5.

The October crude oil contract inched higher, up 11 cents to $106.34. The Amex Energy SPDR (XLE) fell 47 cents to $67.95.

The December gold contract fell 30 cents to $802.50. The PHLX Gold/Silver Index (XAU) fell $5.35 to $124.29 and finally appears to be extremely oversold.

What the Markets Are Saying

After the big breakdown on Thursday and the meek rebound on Friday, the bears were all set for a real sell-off that would challenge or even break the lows of July 15. But the Feds had a surprise in store that was rumored late on Friday: the takeover of Freddie Mac (FRE) and Fannie Mae (FNM). With that, an almost perfect bear trap was sprung as shorts were forced to cover as the Dow (DJI) surged.

But "almost" is not good enough, so even though an upside reversal on the Dow Industrials was "confirmed" by Monday's blue-chip rally, it was not confirmed by completed reversals on either the Dow Transportation (DJT) or Utility (DJU) averages.

And while the Industrial Average (DJI) rallied for much of the day, the Nasdaq (NASD) was in the red and only closed higher as a result of some tepid buying in the last 15 minutes of trading.

However, Monday's rally did seem to attract heavy buying into the better-quality financials and the Dow 30 (DJI). This rebound could continue for several more days with upside targets of 11,800 on the Dow, 1,245 on the S&P 500, and 2,360 on Nasdaq, but the bear market is still with us.

Bear-market lows are usually made with a final surge of selling that exhausts even the most avid bull. So far, I haven't yet seen evidence of that extreme capitulation. The defense is still on the field.

Today's Trading Landscape

Earnings to be reported include: AEP Industries (AEP), AeroVironment (AVAV), Animal Health Int'l (AHII), Arcsight (ARST), Ashworth (ASHW), G-III Apparel Group (GIII), Global Traffic Network (GNET), Investors Real Estate (IRET) and Lakeland Industries (LAKE).

Metalink (MTLK), Nobel Learning Communities (NLCI), Ocean Power Technologies (OPTT), Oxford Industries (OXM), Pep Boys (PBY), Peregrine Pharmaceuticals (PPHM), Rex Stores Corp (RSC), RG Barry Corp (DFZ), Shuffle Master (SHFL), Thermogenesis (KOOL) and VeriFone Holdings (PAY).

Several economic reports are due today including: the International Council of Shopping Centers (ICSC) Chain Store Sales Index for Sept. 6, the Redbook Retail Sales Index for Sept. 6, July Wholesale Trade (the consensus expects 0.6%), July Pending Home Sales (the consensus expects negative 2.1%), and the ABC/Washington Post Consumer Confidence for Sept. 7.

The Wall Street Journal reports: "Yields on 30-year agency-backed mortgage bonds dropped 0.41 points, reducing the spread over comparable Treasury bonds to 1.87 percentage points, the largest daily move since 1990, according to FTN Financial. … At PNC Financial Services Group Inc. on Monday, rates on 30-year fixed-rate mortgages fell to 5.875% from 6.125% at the beginning of the day, according to a company spokesman."

The result could mean that the average 30-year mortgage rate could come down a quarter to a half of a percentage point in the weeks ahead.

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