Stunning Reversals: Is This a Market or a Casino?

I went to bed at 4:00 AM.
At the time....

• Treasuries were absolutely getting crucified
• The Dollar was sinking vs. the Euro
• Nasdaq Futures were up 40 points
• S&P Futures were up 38 points
• Gold was soaring

At 10:30 AM

• The long bond is flat with a minor selloff on other parts of the yield curve
• The Dollar is green vs. the Euro
• Nasdaq futures are -15
• S&P futures are +16
• Gold is flat and the $HUI is getting crushed after a strong opening

I just got off the phone with the Wall Street Journal asking me for comments. This is what I said:

I went to bed thinking "This is insanity. Fannie (FNM) and Freddie (FRE) equity holders are going to be wiped out. If the Fed bails out any other financial institution equity shareholders will also be wiped out. Thus it makes no sense for financials to rally on this news."

It took the market all of the opening bell to come to this conclusion. Let's take a look at two institutions very likely to fail.

Lehman 5 Minute Chart

(Click on charts for sharper image.)

Washington Mutual 5 Minute Chart




Wachovia 5 Minute Chart



As of 11:00

• Lehman (LEH) -18%
• Fannie Mae (FNM) -85%
• Freddie Mac (FRE) -80%
• Washington Mutual (WM) - 16%
• Merrill Lynch (MER) -2%
• $HUI -3%
• Wachovia (WB) +5% and falling rapidly

Let's see how Fannie and Freddie preferreds are trading. The following two charts are courtesy of Chris Puplava at Financial Sense.

Fannie Mae Preferred

That is a chart of one Fannie Mae preferred issue. Down 13.6 points to 4. In June it was trading over 30.


 

That is a chart of one Freddie Mac preferred issue. Down 13 points to 3. In June it too was trading over 30.

Who Thought Wrong?

• Those who thought preferred shareholders would be saved thought wrong.
• Those who thought gold would rally strong on the news thought wrong.
• Those who thought the dollar would collapse on the news thought wrong.
• Those who thought treasuries would be massacred on the news thought wrong.

What an amazing day but it's not over yet. The casino is still open. In weekend action, Paulson Rolled The Dice At Taxpayer Expense. Today after a strong opening, it's looking like snake eyes for both the taxpayer and equity holders.

Comments

[Umm, yeah:]

I agree. It's a casino.

So where do I get my comps for a free buffet?

2008 Sep 08 01:43 PM

[Peter Lynch:]

And you came to all these conclusions by 10:30 am?

What happens if the market reverses course and goes up 3% tomorrow? Do you change your "conclusions" again?

2008 Sep 08 02:03 PM

[SW Richmond:]

Hey Mish,

There are so many one-liners that are apropos here:

"There's no manipulation"

"There are no markets anymore, there are only bailouts"

"Go on, take the money and run! Woo Hoo Hoo!"

"Healthy markets do not behave in this manner."

But here's my fav, from Bloomberg:
"Dollar Rises to Highest Since October on Fannie, Freddie Plan"

2008 Sep 08 02:12 PM

[fatcat:]

Mish,I just heard that the cds market declared a default event on the bailout...over 1 trillion involved.What will this mean?Thoughts anyone??

2008 Sep 08 02:25 PM

[SW Richmond:]

fatcat I'm looking for info on that as well. If you find anything linky please. I will likewise. This is why they said Bear was necessary. Either that, or it was a taxpayer-funded hostile takeover.

2008 Sep 08 02:27 PM

[fatcat:]

SW,I saw it on Marketwatch,but it was a small article...even the comments didn't add much light..

2008 Sep 08 02:29 PM

[buyitcheap:]

One day does not a result make - this will take another few weeks to noodle through, long/short - A TON of dollars or debt will be issued to... somebody who will demand a reasonable premium to 20-50 bps to treasuries, or perhaps some new XXX federal security (triple X because it would be pornographic to do so, yet there it is.)
that means either treasuries drop in price OR the dollar drops which will cause dollar denominated "stuff" to rally (commodities, etc.)

2008 Sep 08 02:39 PM

[who:]

as with all casino the house (CEOs) always wins...the punters shareholders and US taxpayers (all those live in USA will suffer from a weak dollar and inflation).

only way to win a casino is bet on the punters as they are sure to loose!

2008 Sep 08 02:56 PM

[Greg Weston:]

Another great article Mish.

I second the poster above, I'd love to hear any insight you may have on who/what/where/when sold CDS on any GSE instrument taking a haircut.

Brad Delong here suggests that the bailout is going to prevent any CDS from being triggered:
seekingalpha.com/artic...

2008 Sep 08 03:13 PM

[Rokjok777:]

Is that the real Peter Lynch who posted? If so I wonder how he's playing this casino market. Ron Chernow wrote a great book called the House of Morgan. The present day era was called The Casino Age. But true games of chance present knowable risks and rewards. This casino is rigged. Used to be that ordinary people could put their money on the black or the red. If Joe Public loses confidence in the stock market, watch out below. I got mostly out in November and am thinking about taking back a note at 9% on a small local business with steady cash flow and stable owners. Individuals will step in where irrelevant bankers and Wall St types have blown it. Go to prosper.com for peer-to-peer banking.

2008 Sep 08 05:09 PM

[madasiwannabe:]

This is an " I told you so" day. The market realized the bailout was BS and nothing really changed (except GSE investors got scalped and the taxpayers got the bill). The banks still have $7 Trillion worth of toxic CDO's that are not covered by the GSE bailout, LEH & WM are still in denial, Uncle Sam has maxed out the credit cards and no one is buying treasuries, the rising dollar is killing exports (which was the only economy strength) and dismal financial quarterlies are still coming out this week.

Welcome back to reality.

2008 Sep 08 05:17 PM

[Egodeus:]

No surprise the dollar rises, with Fanny and Freddy off of the Federal Reserves balance sheet on the liabillities side and an increase in government bonds (assets) to pay it off the difference, there is a major decline in M(oney) while demand is still high. Hence I think the dollar will appreciate even further vis-à-vis the rest of the valuta of major economies. One upside, since the capital destruction will (theoretically) cause deflation (PV=(M(t=0)-M(t=govt.b... out))*Y), assuming the drop in confidence will not drop below the point that consumer spending will stop entirely and the decelleration of the velocity of money will completely negate the capital destruction, then again retailers will have to drop their prices to get any revenue at all for consumption and thus the velocity of money to resume.

2008 Sep 08 08:19 PM

[PeteK:]

The whole stock market is a world-wide casino. Money change hand even faster than a real casino in Vegas.
Very addictive too.

2008 Sep 08 11:37 PM

[thelastpatr...:]

Great article and all excellent comments from obviously in tune investors and brilliant thinkers. Let me add this comment and correct me if I am wrong. But aren't Fannie and Freddie bond holders the real beneficiaries of the tax payer's forced generosity? And my fellow citizens doesn't that make China and middle eastern countries the ones who benefit the most? Jefferson warned us about the banks! Is their no one left with honor to rise up from this sea of corruption? The neo-cons have another five months left to completely destroy our constitutional republic. Will either of the two major candidates have the character, the lust for freedom, and the fortitude to save our union?

2008 Sep 09 12:05 AM

[Egodeus:]

NO! Fredie and Fanny are Commercial Banks. Only the Federal Reserves is allowed to write out Government Bonds Taxpayers are paying the governmnet to reduce its loss in Government Bonds, held by the Federal Reserves and Central Banks of countries. Those government institutions can lend their money at the IMF if everything gets out of hand too much...

2008 Sep 09 03:48 AM

[Egodeus:]

Oh, the Central Banks play the roll of Bondwriter for the respective countries, to avoid missunderstanding.

2008 Sep 09 03:52 AM

[Richard Col...:]

The Casino market would still be o.k. if the, so called, financial journalist were not trying to play with loaded dice.
Daniel Kowkabany

2008 Sep 09 12:40 PM

[blondino:]

doomsday scenario is good to scare the average hamburger-grown citizen, but koreans/chinese/russia... etc. investors are not stupid - koreans obviously carried out a due-diligence and were prudent enough to say nope. probably they're not lame enough to bail out a piece of crap until the asking price is appropriate. pay for the shiny name in the end at rock bottom price - that's my bet.


Breaking news:
Standard & Poor's will remove Fannie Mae and Freddie Mac from its S&P 500 Index after the close of trading Wednesday.
The minimum market capitalization a company must maintain to be eligible for the S&P 500 Index in $5 billion. At the close of trading on Tuesday, Freddie's market capitalization was $614 million and Fannie's was $1.04 billion.

Oh-oh, is LEH close to removal too???

2008 Sep 10 04:22 AM

[monday1929:]

One reason the markets "always go up over time", besides inflation, is that the dead losers are carted off and no longer drag down the survivors.
The Dow will soon lose 3,000-5,000 points, and do so quickly.

2008 Sep 10 09:18 AM

[blondino:]

not only are FRE/FNM getting dilluted but the whole friggin market!

2008 Sep 11 10:50 AM