Farrell: Be Skeptical of This Rally
The markets will like the government actions regarding Fannie and Freddie. The stock market will rally, the Treasury market will sell off as money is switched back into agency (paper that will carry a yield premium to Treasuries with the same backing.) The dollar will continue its rally and all looks OK with the world.
I would be skeptical of any rally, however. We still have the problems of a glut of unsold homes and what appears to be a deteriorating job environment. There was an article in the Wall Street Journal that said for every 100,000 lost jobs (we have lost 600,000 so far this year), consumer spending gets nicked by about $3 billion. Also, we will have to see if the decline in jobs leads to a further deterioration in the loss ratios on auto loans and consumer credit card portfolios.
The government takeover of F and F was a needed step, but it doesn't end the cycle. We entered into bear market territory a while ago and while it looks like the lows of July could prove to be the lows of this market, a continuation of the volatile trading range is the likely outcome after today's initial reaction on the upside.
Let's enjoy the rally, but I'm skeptical.