Let’s Talk Pennies and Rallies

Pennies are where FNM and FRE will most likely be trading tomorrow as both company’s common shares will be denied love as part of this bail out. They will probably be trading on the pink sheets at some point soon. Here is the full transcript.

My January puts were sold for more than a double, but if I wasn’t an impatient knuclehead……… My idiotic move of 2008. But I digress, no more wuda, cuda, shuda’s-we all have them.

The good news for the bulls is that they will most likely see a substantial short covering rally in the financials(and the market). This Fannie thing has been an albatross and a ball and chain for the financials for quite a while and that pressure has now been lifted.

How am I playing it? Specifically, I will know more in the morning, but my general view is that it is a gift from the shorting Gods. We all know the market hates uncertainty and this bail out removes that uncertainty for now, so stocks, especially financials will rally, maybe even for a couple of days. This is the tenth time I will opine about the deep seeded issues with the banks and brokers,but their revenue models are DEAD. Subprime has been their golden goose and the goose is currently being basted with a lovely orange sauce. Without M&A ( banks won’t lend for deals) the brokers are dead. Let’s not forget the coming failure in commercial real estate which is slowly making its way from the back of the financial pages to the front. We’ve all seen the movie and we have all been to the alter of hope regarding the financials. I didn’t take the bait the first five times and I certainly won’t take it now.

Hey, the market could open down tomorrow, but I doubt it. Based on after market action Friday, it was telegraphing a ” sell FNM and FRE and buy everything else” kind of reaction.

Nouriel Roubini who has been right as rain since the beginning, and who has been given the name “Dr Doom” by the conventional wisdom pundits, has this to say,

The broker/dealer business model is “inherently unstable” and the four remaining major firms will not be independent in a few years, says Nouriel Roubini, economics professor at NYU’s Stern School and chairman of RGE Monitor.

Embattled Lehman Brothers is likely to seek a buyer “within months,” Roubini says. Lehman Brothers ceasing to be independent is not such a shocking outcome, but Roubini ultimately sees a similar outcome for Goldman, Merrill Lynch, and Morgan Stanley.

The problem, he says, is that broker/dealers use the same model as banks — borrow short and lend long — only they borrow on even shorter timeframes, use more leverage, and don’t have the kind of government backstop banks enjoy.

In the wake of Bear Stearns’ demise, which showed how brokers are vulnerable to a “run on the bank” if they can’t get overnight funding, the Fed temporarily opened its discount window to brokerage firms. But making that option permanent means submitting to the same kind of regulation and capital requirements as banks; that, in turn, means a very different business model — and much lower profitability — for Wall Street firms, whose current business model is “not viable,” he says.

With U.S. financial giants like JPMorgan, Citigroup, and Bank of America dealing with internal issues, the most likely buyers are international financial firms or sovereign wealth funds, Roubini says. But unlike in 2007, foreigners are not going to settle for preferred shares, and non-voting rights next time around.

That raises the questions: Is America ready for (true) foreign ownership of major financial institutions? And do we have a choice?

Here is the video.

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