Monday, September 08, 2008

Monday is all about the financials

The US stock market was pretty green across the board, as most major market averages (with the exception of the Nasdaq 100) enjoyed gains Monday.

The positive action in the markets was spurred on by the weekend's news of a US government takeover of failed mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). Both Fannie and Freddie closed down over 80 percent on the day, as investors reacted to news of the dilution looming over common shareholders as a result of the Treasury's nationalization of the GSEs.

In contrast to Fannie and Freddie's plunging share prices, many of the other financial shares enjoyed a rally today, as did the US home builders.

More on that from Bloomberg:

"U.S. stocks climbed, adding to a rally across Europe and Asia, on speculation the government takeover of Fannie Mae and Freddie Mac will stabilize the global financial system battered by $507 billion in credit losses.

Citigroup Inc., Wachovia Corp. and Bank of America Corp. added at least 6.6 percent after Treasury Secretary Henry Paulson said the government will provide short-term funding to mortgage lenders Fannie and Freddie. KB Home and D.R. Horton Inc. jumped more than 12 percent, sending a gauge of homebuilders to a four- month high. An advance in banks from Germany to Japan sent the MSCI World Index up 2.1 percent, the most since April."

The rest of the world's stock markets didn't fare too badly either, as Asian bank shares rallied early in global trading today, followed by positive performances by many European shares.

However, banks owning preferred shares in Fannie and Freddie did not fare so well, due to the likely elimination of preferred share dividends resulting from the government's takeover. Regional banks such as Sovereign Bancorp (SOV), Gateway Financial (GBTS), and Midwest Banc Holdings (MBHI) were among those hardest hit.

Meanwhile, Schaeffer's market blog notes that JPMorgan Chase (JPM) is likely to be affected by junk ratings on Fannie and Freddie preferreds, along with European banks who hold about $5 billion worth of the agencies' preferred shares.

But to me, the most interesting financial news item of the day concerns investor John Paulson and his newfound willingness to start sifting through the wreckage of the financial industry in search of new investments, a shift he hinted at earlier in the summer.

As the FT explains in, "Paulson ready to move into recovery mode":

"Paulson & Co, last year's most successful hedge fund, has told investment bankers it is ready to consider backing rescue recapitalisations of troubled financial institutions - signalling a switch from betting against the sector to buying into it.

John Paulson, founder of the $35bn New York hedge fund, told clients on a conference call last week that he remained extremely bearish, according to two investors who took part in the call. But he is prepared to take long positions across mortgage securities, banks and finance houses as prices fall to his target levels."

I'm sure many will be watching Paulson & Co.'s moves in this sector closely. We'll be sure to keep you posted.