Tuesday, August 11, 2009

Stocks: The latest Fed bubble (FRE; FNM)

You may have noticed the posts focused on what used to be called "Government Sponsered Entities", now more accurately referred to as Taxpayer Owned.
Fannie and Freddie are interesting not just for their trading appeal (FRE up 128% yesterday) but because the actual underlying companies are on life-support. Politically motivated life-support. As such they can give us a measure of the frothiness of the market as well as a direct read on the politically connected crapola sector of the economy. To see the recent FRE/FNM post, scroll down or use the blog search box.
From Fortune:

Are the government programs supporting the financial sector reinflating global stock markets even as economies stumble?

The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create. But along the way it may have pumped up another bubble, this time in stocks.

To head off the worst downturn since the Great Depression, the central bank has slashed interest rates while funneling money to banks.

The Fed has mostly won praise for its efforts. The pace of job losses has slowed, and there has been a modest recovery in output.

At the same time, stocks have bounced back with startling speed. Since global markets hit their bottom in March, the S&P 500 has jumped 51% -- even as the outlook for economic recovery remains dim.

"This is the most speculative momentum-driven equity market since the early 1930s," Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday.

Of course, stocks have rallied in part because investors perceive the worst-case scenario -- a 1930s-style Depression -- is off the table. And while the gains have been remarkable, they come after an even bigger decline. The S&P is still down 16% since Lehman Brothers collapsed in September.

But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout.

Recent weeks have brought huge rallies in some of the lowest-quality stocks -- including firms such as AIG (AIG, Fortune 500), Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) that are being propped up by the government and are unlikely to return to health any time soon....MORE