Gov't Seizes Control

Sunday, September 07, 2008

The U.S. government announced plans today to take over beleagured mortgage giants, Fannie Mae and Freddie Mac. While I had stated that I did not know if the government would be able to save the market again after cutting the discount and Federal Funds rates to extremely low levels and orchestrating a bailout of Bear Sterns, I was wrong. The government has intervened again.

I anticipate that this intervention will put in a higher low in the market about 40 points above the July 15th lows. The government takeover will provide a short-term solution for some of the market's current worries. Fannie Mae and Freddie Mac had been buying 80% of all new mortgages this year but have recently struggled with higher costs of capital. While the government's implicit guarantee has always allowed these two companies to raise capital at artificially low rates recent worries about their solvency has raised costs of capital.

Now, Fannie and Freddie will be able raise captial at Treasury rates. This should allow the companies to provide a much needed jolt to the housing market. I expect the market to respond favorably to this decision by the government and calm many worries in the short-term. While I specialize in technical-based trading, major fundamental news can break technical patterns. Resistance at 1265 should still pose a problem but I will need to re-evaluate my position on the market after tomorrow's action.


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