As of mid afternoon Thursday, the two agencies have been enjoying a substantial two-day rally--thanks to several factors that have been conspiring in their favor, Frederic Ruffy, the senior options strategist at WhatsTrading.com, a New York City-based provider of options market analysis, tells GlobeSt.com.
The first, of course, was the plan the Treasury Department hastily put together over the weekend. This set of measures includes a temporary increase in the GSEs' line of credit with Treasury, the ability for the department to purchase equity into the company, and legislation to provide the Treasury department with an increased role in overseeing and regulating GSEs.
Perhaps most importantly, Ruffy says, this was not a full-blown government bailout--which could have been a negative for shareholders.
Then the Securities and Exchange Commission issued rules to limit short selling in some of the financials including Fannie and Freddie. "The moves were intended to stop the spread of rumors that had sometimes sent shares of financial companies reeling to the advantage of short sellers," Ruffy says. "These rules might reduce some of the volatility in shares of the GSEs over the near term, which could motivate some buyers to take new positions. In other words, very few investors are willing to 'catch falling knives', but if the stocks are holding steady or moving higher, they might be more inclined to buy."
It was this measure that was the tipping point, Peter Cohan, a principal with the consulting firm Peter S. Cohan & Associates in Marlborough, MA, tells GlobeSt.com. "If the SEC hadn't done that, I think Fannie and Freddie's stock would have collapsed." Fannie and Freddie are also riding on the tailwinds of a surprisingly good--or at least, better than expected--earnings quarter, Ruffy also notes. "Pessimism was high heading into the earnings reporting season and the bar was set very low. Consequently, as the reports turn out a bit better than feared, some of the financials are seeing big gains on the news."
The longer-term prospects for Fannie and Freddie, though, are still unclear. Cohan notes that Congress must approve Treasury's plan. "I am not sure what appetite Congress has for such a measure. The general take-away from the plan is that the government will bail out bondholders but leave shareholders hanging. We will have to see how this plays out."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
