The Government to the Rescue!/ Market Rally Already Fading

Well the playbook was executed today. Paulson threw his support behind Fannie and Freddie which gave the market enough confidence to buy the $3 billion in Freddie paper this morning.

Whats interesting here is the market doesn't seem all of that enthusiastic about the news. Stocks as expected were up 130 points on the DOW at the open but have since settled down to about +85 points.

Here was the Paulson pump this morning regarding Fannie and Freddie:

"July 14 (Bloomberg) -- Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank. Fannie and Freddie shares surged in Frankfurt trading.

The steps would bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies. That reflects a need for the government to bail out an economy that's been rocked by the worst housing recession in 25 years, the credit crisis, and soaring energy costs.

``They appear to be crossing the Rubicon,'' Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar's invasion of Rome to set up a dictatorship."

Quick Take:

With such drastic action, one might have assumed a much more enthusiastic bounce this morning. Gee you think investors might realize that the announcement of the government potentially taking on an additional $5 trillion dollars in debt isn't a good thing? Duh!

By the way we are now +42 on the DOW. Will we see red by the time I finish this post? Quite possible!

Jim Rogers speaks out against the Fed's actions

Its always interesting to hear Jim Rogers opinions when we have major policy announcements. He calls this move by the Fed an "unmitigated disaster". Gee Jim, tell us how you really feel!

Here are Jim's comments on Bloomberg this morning:

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. The chairman of Rogers Holdings, who in 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go.''

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt,'' Rogers, 65, said from Singapore.

Rogers said he had not covered his so-called short positions in Fannie Mae. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said. He advised buying agricultural commodities because the bull market in raw materials has ``a long way to go.''

Final Take:

We are now only +31 on the DOW and I am close to finishing this post. Red is still a possibility!

Seriously, watch the bond market today, specifically the 10 year. If the bond market doesn't buy this move by the Fed, yields will rise and stocks are going to fall. The dollar has been all over the place today. Oil is up slightly.

A bond market dislocation is very possible here folks. This means the bond market takes rates higher as investors could potentially stop buying treasuries if they fear they are no longer a pure "safe haven".

The reason why investors may lose this confidence in treasuries is because the Fed basically just opened the door to taking on an additional $5 trillion in debt. Investors see this as a huge risk! If China and the Middle East stop buying our debt, interest rates are going to soar.

Bottom Line:

This bounce is not a surprise. The problem now is the Fed's balance sheet is rapidly shrinking. This move to shore up Freddie and Fannie means there is less money available to save the financials. With private buyers now sitting on the sidelines after being burned, the banks are going to find it almost impossible to raise capital.

As a result, the banks are going to start dropping like flies very shortly IMO. One quick fact on the IndyMac Failure that came out on CNBC this morning. The Fed has a "Watch List" of 90 banks that they feel are in deep trouble and may fail. IndyMac was not on that list of 90 banks!!

This surely doen't bode well for the health of the banking system when banks that aren't even on the hit list are going under.

This may be the last major Fed bounce because they are running out of cash and options. Enjoy it while it lasts.

The way things are deteriorating, this bounce won't last long. +2.8 on the DOW now. Well at least the bounce lasted until the end of my post! We'll see if it makes it to the close.

Stay tuned. Today could be a wild day!