The Overnight Report: Fannie And Freddie Back In The Frame

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By Greg Peel

The Dow fell 180 points, or 1.6%, while the S&P fell 1.5% and the Nasdaq 1.5%.

The first thing investors need to be wary of is that we are still in the peak of the US summer holidays – January in Australia – and you could fire an Uzi through the NYSE at the moment and probably not hit anyone. Volumes are so light as to be almost imperceptible. Hence one little trigger is likely to cause quite a move, given there is hardly anyone there to either buy or sell the other way.

Last night a report came out in respected periodical Barron’s suggesting the US government may have no choice but to nationalise the two government-sponsored mortgage lenders – Fannie Mae and Freddie Mac – which are responsible for US$5trn, or half of all US mortgages. While the market was hoping this wouldn’t have to happen, it is hardly a shock.

Even less of a shock was Barron’s noting the US Treasury has no plans to “backstop” the two institutions, meaning equity holders would be left out in the cold should nationalisation occur. Go on. This one was a no-brainer from the start. Nevertheless, Fannie and Freddie shares each fell over 20% last night, creating new lows. Their bond spreads blew out as well. Attendance at regular auctions of F’n’F paper has dwindled and offshore central banks have reportedly to date sold US$11bn of their own holdings in the twins. This is becoming self-fulfilling.

Just to add fuel to the fire, the Wall Street Journal also chimed in last night and suggested struggling investment bank Lehman Bros – voted most likely to be the next Bear Stearns – will post a loss in the third quarter as opposed to the small profit suggested by its current guidance. On that basis it would have to raise new capital. Lehman shares fell 7%.

Clearly it was not a good day for any financial, and the financial index fell 4%. Shares in UnionBanCal (someone was really having a tug when they renamed that one) bucked the trend however, jumping 12% as Japanese bank Mitsubishi upped its takeover offer. When the dust settles on the credit crisis in the US, how much of the US will belong to Asia?

News of a pending nationalisation of the mortgage lenders should have sent the US dollar into a downward spiral, given any funds used by the government to save the twins will be hot off the press. But the new regime is such that a weaker world economy is now preventing any greenback slide, so the dollar remained mixed but relatively stable. The Aussie ticked up to US$0.8684.

Gold staged a bit of a comeback on the news, however, rising US$12.70 to US$798.70/oz, although if the US dollar remains resilient this may yet be another false dawn for gold in the short term.

It was all eyes on the weather in the Nymex crude pit last night, as Tropical Storm Fay came to join the party. As Fay was upgraded to a likely Category One hurricane, the oil price shot up a couple of dollars, and this did not help stocks. But when the bureau decided Fay would steer away from oil installations in the Gulf and hit the Florida Keys instead, the price fell back to finish down US90c at US$112.87/bbl. Might solve some of that Florida excess housing problem.

With the US dollar staying put there was no incentive to buy base metals, although traders are not bailing out further at this point. Hence it was mostly sideways drift in London.

The SPI Overnight lost 85 points.

The overnight reaction to the BHP ((BHP)) result saw shares up 0.5% in both London and New York.

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