Market's Troubles: Commodites, Freddie And Fannie

This is a day with a lot of vicious cross-currents, and like many days in the last six months these cross-currents are making it very difficult to trade. There are two major problems:

1) financials, which were flirting with bottoms last week, and which opened strong, sold right off late morning. Sell Into Any Financial Rally is the main mantra of the market, but in this case notable weakness in Freddie Mac and Fannie Mae has caused considerable confusion.

Some pointed to a Lehman analyst reported, noting that if a pending FASB (Financial Accounting Standards Board, which develops generally accepted accounting principles for U.S. firms) rule came into effect, it could require Fannie to add $46B of capital and Freddie to add $29B.

The problem with this argument is: 1) it came out at 1 am this morning, and 2) the FASB rule change has been floated for a long time, 3) there's a good chance the rule will not come into effect.

So what's going on? There have been concerns about Fannie and Freddie for several months. Simply put: Freddie is undercapitalized and they need to raise money, and it's tough to shore up a $500 billion balance sheet with a $10 billion market cap (now below $8 billion), and money raising is getting more expensive...and balance sheets are deteriorating. And they are grossly exposed to mortgages when they are taking on additional risks.

That concern makes some sense, but it is not new. Most likely explanation: fast money guys are again taking the tape down to the lows again on very light volume, using this "report" and other vague worries as an excuse to raise questions. Sound familiar?

2) the other problem is a vicious reversal in commodities, which started weaker on a stronger dollar (helping stocks initially), then reversed as the dollar got weaker midday. Energy stocks started strong, then sold off, and have not yet recovered.

These kind of vicious reversals is why traders find it so difficult to make money, even on an intra-day basis.

Questions? Comments?