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January 5, 2006

Fannie Pack

One of the reasons I've shied away from shorting Fannie Mae throughout its difficulties last year was my suspicion over the excessive delay in its financial reporting. My suspicion was not that there were serious problems or deficiencies in Fannie's finances. We already knew such issues existed. My suspicion was that reporting was being delayed to cover up a bailout. Why should the Fed wait for a crisis to exercise its misguided policies when it could clean things up before the difficult questions even arose?

Naturally, I have no proof, nor does anyone else at the moment, that such a bailout has taken place. However, given the depth of the accounting problems in combination with the impact our economy would have suffered if FNM were to become illiquid, any prudent trader must consider the possibility that a bailout has already occurred. Can anyone seriously believe that a commission took more than a year of probing to determine that "nothing new and alarming" is on the books? What we may have here is the fine cuisine of cooked books using Executive Chef Greenspan's favorite ingredient: freshly harvested U.S. Dollars. The bigger question is how to trade FNM, if at all. Until I have more information, I will continue to sit on my hands.

Readers of my daily missive were certainly not shocked by the numbers reported by retailers today. As expected, results were on the low end of stated ranges. Wal-Mart lead the parade by more or less reiterating what they told us a few days ago. WMT shares were nevertheless hit again, and performance for all retail stocks was on the weak side. JC Penney saw its shares hit for about 3%. Bed, Bath & Beyond, whose shares hit serious trouble after an earnings miss last month, was down another 2% today.

Silver took a lashing today, with the March contract down 4%. The dollar showed its first signs of strength for the year, but silver's slip was more likely a bout of profit-taking. The miners performed fairly well considering the size of the drop. I have not changed my mind about the prospects for a large spike ensuing in the near future… Such moves are always riddled with intense volatility.

Disclosure: Long WMT Puts


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