9.05.08

     9.5.08

            We have seen an important change in the market this week. Until now the focus has been on the dollar and the price of oil. Now that both have been moving in a positive direction for the market, the focus has shifted to the deteriorating economic conditions at home and abroad. The Prime Minister of Japan resigned over his inability to get their slowing economy moving. In London they are facing the worst economic conditions in 60 years. Here at home it isn’t rosy looking either. Freddie and Fannie are about to go into what is the equivalent of Chapter 11, Boeing workers are on strike, the August job report came in worse than expected  (now more than 500,000 so far this year), all of the major indices have dropped below their 50 and 200 day moving averages, and let’s not forget the hurricanes in the Gulf and on the East Coast.

            The Wall Street Journal reports that thanks to losses being suffered by many hedge funds, investors are demanding their money back, forcing hedge-fund managers to sell securities to raise cash. This will increase selling pressure in the market because hedge funds control huge amounts of stock.

            But the most important news is that the Treasury Dept has decided the government has to take over mortgage giants Fannie Mae and Freddie Mac, and an announcement could come as early as this weekend. It will be one of the most significant interventions in the financial system in history, and one the government has been trying desperately to avoid. 

       The Treasury Department describes the takeover as being similar to companies declaring Chapter 11 bankruptcy and continuing to operate under bankruptcy protection. One of the questions all along has been what would happen to stock-holders in Fannie and Freddie in the event of a takeover.  Rumor is that under the plan, those holding common stock will probably lose out, while holders of Preferred stock will be protected because most of the Preferred is held by banks, and the Treasury is concerned that if the banks suffer big losses on those holdings it will only create still larger losses for banks and the financial system going forward. There have already been 11 banks taken over by the FDIC and more to come. Many are in a financially weakened condition, and losing more money on the Preferred stock is a disaster waiting to happen.

       It will be an interesting week on Wall Street, but one where the best seat is definitely one on the sidelines.

We remain 100% in Cash and are happy to be there.

Until next time

The MTA Staff