Since my Sunday post, the stock market has rallied by almost 700 Dow points and 70 S&P points. I thought the rally would need to come from some mark-to-market news, but we didn’t really get that. The House hearing was today, but all that came of that were some threats by Congress to do something and a vague commitment from the FASB Chairman to issue new guidance in about three weeks. That seemed to be enough to keep hope alive!
Of course the rally started Tuesday on the “leaked” Citibank memo about earning money so far this year. Bank of America’s Ken Lewis told reporters today, “Me Too!” So, great. For the first two months of the year, these two banks are making money – as long as you don’t look at loan losses. Yippee!
I’m not totally convinced the bear market rally has truly begun in earnest, but let’s assume it has. Where will it go? If it matches the last rally off new lows that started last November, the Dow should reach at least 8000 and the S&P 800. That would be a 24% rally from the lows, roughly speaking.
But don’t lose sight of the following: 1. The future of the financial system is still unknown. Geithner is merely stalling. 2. There are no signs job losses are near a turnaround. 3. Foreclosures are not abating even with moratoriums in place. 4. And, global economic conditions are worsening.
But, I don’t want to spoil the party. As you know my theme for the next 10 years or so is that we have to be willing to trade the market for some bigger trend moves. This is a fun rally and playable, but I’m looking for something from new lows and something that could last at least two months or longer. I could be dead wrong, but I don’t think this is it. It’s pretty and fun, but I don’t want to marry this one.
Finally a quick rant. Fannie and Freddie have roughly 3 trillion in outstanding agency debenture debt (this does not include the mortgage securities they guarantee). I’m not sure how much of that has matured and will mature over the next few months, but it is considerable. They have been issuing huge size recently to rollover maturities and raise new money to fund their growing balance sheets. Since these are still “private” companies, they pay a premium of roughly 50 basis points over treasuries. Today, Freddie Mac issued a 7-year maturity at 90 over. The point is this. The Treasury is playing this pretend game that someday Fannie and Freddie could be private again. And, by not putting them on the Treasury’s balance sheet, we can pretend the taxpayer is not on the hook for this debt. Does the Treasury think we’re stupid? Apparently so. Investors certainly like this arrangement, because they get the same government guarantee but at a higher rate. In the meantime, the government (taxpayers) get to eat the cost for the additional, totally unnecessary interest premium. There’s one form of government waste I have a quick and easy solution for.
