After Fannie Mae announced a $2.2 billion quarterly loss and plans for a $6 billion capital boost on May 6th, the stock opened lower...but finished sharply higher.
At the time, it seemed odd that investors were buying Fannie's stock on the news, especially given that the company is "clearly going to be insolvent by the end of the year," according to Christopher Whalen, a founder of Institutional Risk Analytics, an independent research firm.
However, based on the Fannie's 10 percent price-slide since then, it now seems apparent why the stock rallied on that day. Quite simply, a lot of equity investors with large amounts of money at their disposal don't have the slightest clue about what they are doing.
Well, it looks like we've just gotten more proof of that. This afternoon, Standard & Poor's Rating Services (which I'm not a big fan of, by the way, though that fact is irrelevant in this context) announced that it was lowering the financial strength rating on MBIA Insurance to 'AA' from 'AAA' and was placing the company's ratings on CreditWatch with negative implications (S&P also downgraded the credit rating of insurer Ambac Financial) .
So what happened? MBIA's stock sold off initially, but then it squeezed higher,
finishing the day up more than seven percent. That is despite the fact that the news confirms the bond insurer's business model is completely broken and that we can now look forward with confidence to a sickeningly steady death march towards zero.
If there's any logical explanation for today's rally, I suppose it is the fact that some "investors" -- is that really the correct term to use here? -- have blindly assumed it is time to buy because the bad news is "in the price." Or they are thinking (hoping?) that some greater fool will come along and acquire the company (I guess they forgot about the fact that the days of buyout insanity are more-or-less over). Then again, maybe they believe the "authorities" are going to rescue the company (you mean like Bear Stearns?).
However, there really is a simpler explanation for this afternoon's insanity: there simply isn't a lot of intelligent life in the stock market nowadays.
Three words.
Other people's money.
Posted by: David | June 05, 2008 at 06:44 PM
I have to agree with your post. This is obviously the crystallization of an event with very negative ramifications for future writedowns in the financial services sector. For the market to rally in the face of this grim news demonstrates that people don't know what awaits.
Posted by: Ed H | June 05, 2008 at 06:55 PM
Look. i don't know why people just don't say what's going on here. Fuld came flat out and said he would "crush the shorts" the other day. it's clear to me that the IB's are taking the money they get thru the PDCF and TSLF plowing it into their own stock and the indices to prop up the market in a last ditch effort to save themselves and squeeze money from the shorts.
Posted by: idoc | June 05, 2008 at 07:24 PM
Intelligence is not information,how people (gather) & form opinions is what makes then smart or dumb 99.99% have never had an education on how to proceed & so we repeat the same horrific mistakes again & again & over again.
Posted by: roger | June 05, 2008 at 07:56 PM
The shorts have driven the stock down 50% in the past few days/weeks, and have been lightyears ahead of the rating agencies, it could very well be that they decided to take some of their bets off the table, and have gotten out of their short position, in light of the news. They have already made tidy profits from their position.
Posted by: Sergei | June 05, 2008 at 09:57 PM
Those are strong comments. Anyone with such a strong opinion should publicly put his money where his mouth is. Please divulge your winnings or loss when things settle. If things are so obvious it should be easy to make a buck by betting against all the stupid people.
Posted by: BenE | June 06, 2008 at 01:49 AM
Your post answered my question exactly. Truly absurd the way the stocks rallied.
Just shows how 'the bailout will come' mindset is corrupting and destroying the the economy, encouraging more unnecessary and greedy risk taking
Posted by: david | June 06, 2008 at 02:26 AM
imo yesterdays move was massive short covering.
those who bet on the loss of the AAA ratings finally realized profits, because after the downgrade any new catalysts (like a failed offering or a possbile bankruptcy) may take a while.
Posted by: GreenAB | June 06, 2008 at 07:56 AM