by Andrew Houghton and Nick Atkeson 05/07/08
Editor's note: While Sam Collins is on vacation through May 15, OptionsZone.com contributors and professional traders Andrew Houghton and Nick Atkeson are taking over the Daily Market Outlook as guest columnists.
Before the market opened yesterday, Fannie Mae (FNM) announced a $2.19 billion loss for the first quarter. This pushed FNM's share price down by $2.05, or 7.24%, shortly after the open.
However, it was, as they say, "All up from there." The stock closed at $30.81 -- up $2.52, or 8.9%, on the day and $4.57, or 17.41%, from its morning lows.
FNM also announced that it will change its policies and pricing to help the country shake the housing slump. These changes include refinancing existing non-delinquent mortgages for as much as 120% of the property value as well as buying "jumbo" mortgages (i.e., those greater than $417,000) for the same price as smaller loans.
To help it in its efforts FNM will issue common stock, a non-cumulative mandatory convertible preferred stock and non-cumulative, non-convertible preferred stock totaling about $6 billion.
We usually try to keep these notes brief and touch on a number of subjects. So why, you might ask, have we just spent so much time and space on one name? Because, in many ways, what happened with FNM yesterday was representative of what happened with the entire market.
MARKETS PLAYING FOLLOW THE LEADER
Bad news was followed by good news, and then it was all followed by even better news. In Fannie Mae's case, bad earnings were followed by the announcement that it will raise enough capital to allow it to survive, which was in turn followed by the announcement that it was going to make changes that would make it easier for some of its existing borrowers to survive as well.
The S&P 500 (SPX) mirrored FNM's movements yesterday in direction, if not quite the percentages of the moves. What is interesting about this is that the latter occurred in the face of crude oil futures breaching $122 per barrel and the U.S. dollar falling for a second-consecutive day.
The strength of the overall equity market now calls into question whether the dollar versus the equity market relationship that had been working against the market moving higher has begun to break down.
This will obviously take a little more time to prove one way or the other, but the hint that the credit markets are freeing up -- and doing so in a manner that will directly help those who have been responsible participants in the real estate market -- points to the possibility of brighter days ahead.
HOW CAN YOU MAKE MONEY FROM THIS?
While the effects of yesterday's announcements regarding Fannie Mae might take a while to filter through the economy, investors should start to look for places to increase exposure to the stock market in general and financial and homebuilder names specifically.
There is still a lot of money on the sidelines, which tends to exacerbate moves on any given day so any purchases made now should be done with a 12- to 24-month time horizon.
Andrew Houghton and Nick Atkeson work together to identify unusual options trading activity on the "big money" (i.e., institutional) level and regularly contribute their findings to OptionsZone.com.
For a timely look at big-money options trades taking place under the radar and independent of the headlines, visit Andrew and Nick's full archive of Unusual Options Trading Activity by clicking here now!
