Published September 8, 2008
WALL STREET INSIGHT
Fannie, Freddie bailout causes uncertainty
Stocks likely to face another week of wild rides
By ANDREW MARKS NEW YORK CORRESPONDENT

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THE coming week was already shaping up to be a volatile one for investors, but after US Treasury officials confirmed that the Bush administration will be announcing on Sunday a rescue plan for mortgage-finance giants Fannie Mae and Freddie Mac, the upcoming trading sessions have been injected with an extra sense of uncertainty and drama.

Guessing game: Given the stock market's bearish mood, investors may react poorly to the rescue of Fannie Mae and Freddie Mac
By taking control of the two firms - which together hold or back more than US$5 trillion in mortgages and account for 70 per cent of the current loan market in the United States - and appointing a conservator to turn around their fortunes, the Treasury Department hopes to stem foreign central banks' increasing reluctance to buy mortgage securities issued by Freddie and Fannie, and avert an even greater crisis for American taxpayers should the mortgage companies' losses, already at more than US$12 billion, turn into a rout.
The stock market's reaction to the news is hard to anticipate, although the chances are good for a rally today as investors heave a collective sigh of relief as one very big source of uncertainty that has hung over the market for the past few months is removed.
But given the market's bearish mood - reflected in the official bear market that took hold following last Thursday's rout that sank the Dow Jones Industrials more than 20 per cent below its peak of last October - investors could react poorly to the rescue, taking it as a sign of the dire straits the financial markets and the economy face.
'The need for the government to take this step sends a signal for investors to beware of the balance-sheet problems many financial institutions are still facing,' said Paul Danvil, an equity trader at Egremont Securities.
'The need for the government to take this step sends a signal for investors to beware of the balance sheet problems many financial institutions are still facing.'
- Paul Danvil,
equity trader at Egremont Securities

Either way, US stocks were likely to be facing another week of wild rides after the volatility index rose 12 per cent and the US economy showed new signs of deterioration when unemployment hit 6.1 per cent as the jobs market continued to sag.
On Friday, US stocks finished mostly higher after falling nearly 150 points during the session. The Dow Jones Industrial Average ended up 32 points, or 0.3 per cent, to end at 11,220, although the Standard & Poor's 500 gave up 5.4 points, or 04 per cent to end at 1,242, while the Nasdaq Composite fell 3 points, or 0.1 per cent, to end at 2,255.
For the week, blue chips lost 2.8 per cent, the S&P fell 3.2 per cent and the Nasdaq slumped by 4.7 per cent.
'You can look at the glass any way you want - half full, half empty,' says Robert Johnson, associate director for economic analysis at Morningstar. 'But clearly, if oil prices continue to go down, people are going to be saying it's a problem and we're nearing recession.
Aside from the news about Fannie and Freddie, the markets could be further roiled as stocks head into confession period, when companies start issuing warnings ahead of the upcoming third-quarter profit reporting season.
Tomorrow, pending home sales data are scheduled to be released, and analysts are looking for indications that the housing slump may be nearing a bottom.
Opec's meeting that day will also draw attention, as oil prices have sunk to US$106 per barrel from a high of US$147 just two months ago.
Investors will also be watching Thursday's initial jobless claims report after last week's troubling employment report.
Friday brings the producer price index and retail sales, with the recent drop in commodities expected to bring the PPI count down, although still high.