For the Markets, Bailout Is Hardly a Game-Changer

The government bailout of Fannie Mae and Freddie Mac has given investors at least a short-term reason to believe the worst has begun to pass, but it's hardly a game-changer.

Market pros remain unconvinced that the rescue plan by itself will be enough to scare off the Wall Street bears.

"This is another good piece of news to help us," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "Are we going straight up from here? No. But what it does is gives us a lot of confidence."

Housing will have to stabilize, banks need to get healthy, and the consumer has to escape the headwinds of surging unemployment and still-high energy prices before anyone is willing to pronounce a full recovery.

But some Wall Street watchers were at least exhaling on signs that the government would not allow Fannie and Freddie , whose presence in the mortgage market is vital to maintain bank liquidity, to fail.

"Until the banks go through a quarter of not having to raise more capital, no real bull market is starting. The fact is I think we've put in a floor on the pessimism at this point," says Michael Cohn, head of Atlantis Asset Management.

"The bear market will not be over until the shorts get carried out on stretchers, the same way they got carried out when the Fed lowered the discount rate back in March," Cohn adds. "The path of least resistance is still downwards. Until there's the perception that it's dangerous to short stocks on rallies, the bull market can't start."

At the same time, some fear that the market is getting too hopeful that the Fannie-Freddie deal is a sign that government intervention will cure what ails the market.

"The long-term ramification is we could possibly be in stagflation--rising inflation and the slow-growth economy," says Kathy Boyle, president of Chapin Hill Advisors in New York. "I don't think this is good news. I'm not sure why the market is reacting this way. If they're taking this as a sign that the government is going to step in and save other institutions, they're wrong."

Across the Board

Stocks rallied sharply off the opening of trading Monday, with the Dow registering a gain of more than 300 points early on. But the surge quickly cooled after a rapid round of short coverings and as sentiment sunk in that the market had more work to be done.

David Karp / AP

Still, Baum thought the move sent positive signals in that it was broad-based. Financials were the most obvious beneficiary of the Fannie-Freddie bailout, but the enthusiasm spread to builders and bluechips, as well as consumer stocks, though technology still lagged.

"You want to see people going out there and spending money again," Baum says. "This market can't be really strong until you start seeing people buying houses again and the financials get on a firmer footing. There have been so many writedowns--hopefully we're in the ninth inning. This just helps the whole scenario across the board."

Overall, though, Baum is sticking to his strategy of picking banks that look strong and pay good dividends, such as Bank of America and JP Morgan Chase , as well as bluechip bellwethers AT&T and CNBC.com parent General Electric .

The bailout thus far has enjoyed bipartisan support, also boosting investor enthusiasm.

Any type of psychological edge is integral heading into the presidential election, says Cohn, who is buying preferred shares in financials.

"We're not rallying to 13,000 (on the Dow) between now and November, but the fact is I think the July lows may hold," he says. "In fact, 10,000 is off the table as far as I'm concerned."

Bears Still Lurking

Not everyone is as optimistic.

"I'd love to be able to tell you it's a game-changing move, but I'm not convinced. I think it's more a one-off short-covering event," says Matthew Tuttle, president of Tuttle Wealth Management. "It's a market that we really haven't had any good news for a long time, so anything that comes out that's good we're due for a rally. The problems still persist."

Tuttle is not so pessimistic that he's willing to move in and short the financials or the broader market, but he is taking a conservative strategy.

He said the most he would do to capitalize on the current moves would be taking a short-term position on an exchange-traded fund for the financials, but is otherwise staying put.

"At the end of the day there's just a lot of other stuff that needs to get fixed before I would feel totally comfortable saying it's the beginning of the end," Tuttle says.

Monday's trading seemed to reflect that skepticism.

Tech investors bailed out of the rally altogether, sending the Nasdaq composite into negative territory, while investors generally took a dimmer view of the market's health as the day progressed.

"I'm not really sure this is going to be the cure-all and be-all for this economy and the market," Peter Costa, of Eckhardt and Co. said on CNBC. "The next couple of days I'm still a little bit bearish."

Even someone bullish as Cohn says there are still some challenging days ahead for the market.

"Short-term a bunch of banks still have problems," he says. "I do think that the opportunity to buy things extremely cheaply is right now. You just have to have patience."

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