Fannie/Freddie Chatter – Something Big is Brewing

Posted on August 28th, 2008 in Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research

I am hearing chatter something is about to go down soon. Who knows if this will be a bailout, but rest assured the tax payer will likely beon the hook for something.

The options market is confirming something is brewing with the XLF put-call ratio out of control. There have been approx 500k at or near the money front-month calls and 250k for next month. Put volume is a paltry 110k front month and about 45k next month. Several other indicators of ‘news pending’ are flashing.

Being the contrarian I am, I would view this action as bearish for financials. We will see soon. -Best, Mr Mortgage

Earlier today I discussed why keeping them private will be bad for housing. But who the hell knows what the solons have up their sleves.  Link below.


18 Responses to “Fannie/Freddie Chatter – Something Big is Brewing”

  1. It is not a market of fundamentals and technicals.
    It is more of “MYSTERY”.
    Except for us, few people, “branded as doom and gloomers” does the rest of Cramerica have a clue what is going on.

    The FED intentionally, on purpose, and with wrecklessness, put us in this position.

    Once a proud AMerican, but now a sad “future” AMercian.

  2. Mr. Mortgage, do you know of any place we can find data similar to how the fed breaks down alt-a mortgages by state, but instead break it down by zip code. We could then view vintage, int. only,, owner occ. vs non-owner occ.. Good info., especially if you’re planning on buying in a neighborhood, and then find out it will be exploding with forclosures at some point in the future.

  3. In terms of a GSE bailout, is we should all agree that the GSEs are like a very sick 49-year old 470-pound diabetic in need of major open heart surgery.

    All surgeons know that surgery upon a very sick and morbidly obese middle-aged diabetic patient poses dramatically increased risks that need to be managed, if at all possible, prior to surgery. Try to stabilize their weight and blood pressure beforehand, for starters.

    Surgery, by its destabilizing nature, is inherently risky for a variety of reasons.

    The regulatory authorities, some clearly less competent than others, are trying to prepare the GSEs for surgery in this way.

    They have bought a little time.

    The market for agency paper has improved a bit.

    Major executives were replaced yesterday at Fannie.

    The story of discussions of coordinated intervention to support the dollar was floated and picked up in the FT today by the ever-able Krishna Guha, to ensure that the dollar, a key vital sign, remains stable during and after the operation.

    Open heart surgery is an exceptionally complex process in its own right, but when it is performed upon a 470-pound diabetic, anything can go horribly wrong at exactly the wrong time.

    What if there is a sudden collapse of Lehman Brothers over the same weekend when the surgery is being performed? What if Israel attacks Iran with tactical nuclear weapons during the weekend surgery is performed? Or if a newly emboldened China makes a move on Taiwan, threatening to dump 90 billion of agency paper (for starters) first thing Monday morning if Dick Cheney objects?

    Cardiac surgeons will tell you of cases they have had where the heart of the patient literally dissolved in their hand (obviously fatal) merely by lifting it during surgery, because the heart was so rotten to the core. Absolutely nothing they could do.

    The GSEs are enormous bloated and very sick entities. Any person familiar with the enormous restructuring required on some of the big mergers and acquisitions knows that whatever their final form, it will take a long time to work out all the kinks.

    With a top rate surgical team, it is possible that the above-described morbidly obese diabetic patient could survive surgery and actually go on to have some productive years, assuming RADICAL lifestyle changes were immediately made after surgery.

    Our surgical team we have readied for major surgery on the GSEs is clearly mixed. Although we have some of the world’s best minds in the mix, we also have a disturbing sprinkling of fools who, if they are allowed to make key decisions, could destroy everything.

    There can be only one chief surgeon in the operating room. Should that be Dick Cheney? I’ll leave that to others to discuss.

    My informed judgment is that this surgery upon the GSEs must take place before February of next year, for a variety of reasons.

    Fortunately, we have a little time to try to stabilize this patient and prepare it for the inevitable and very dangerous surgery to come.

    Tony Buzan

  4. Tony I absolutely love your analogy!!

    My take is that the 100’s of Billions of roll overs coming due in the financials will create a wave of bankruptcies over the next year and a half. That will happen due to the lack of capital available as we move forward starting in early September. As more and more lenders are looking for capital it will increasingly become harder and harder to find. Getting in early (like Lehman should have done) may make the difference in whether or not you have a chance to survive.

    Fannie and Freddie need about 100 billion in my estimation to get righted if they wish to be around privately through next year. That can’t happen if they wait to raise it because it won’t be there to raise. Now is the time to strike when capital exist albeit at a premium. That is OK however because the pemium will only rise until it becomes cost prohibative and then your at the end game. They only will have one chance at this and that one chance is now IMO!!!

    We shall see what takes place moving forward, but I do not agree at all with this notion that due to politics they will wait to do anything until after the elections. This is too big and potentialy too damaging to our country’s survival to wait. Something will happen and happen soon I agree…

  5. re..”The options market is confirming something is brewing with the XLF put-call ratio out of control. There have been approx 500k at or near the money front-month calls and 250k for next month. Put volume is a paltry 110k front month and about 45k next month. Several other indicators of ‘news pending’ are flashing.”…whoever is piling into the XLF calls must be looking for good news on the financials..why do you think this is an indication of a bearish event?

  6. CAUTION ON PILING ONTO THE XLF!!! Mr. Mortgage’s gut reaction to this is right on. Just because a bunch of calls were overloaded to one side, the volume numbers don’t tell the WHOLE story.

    **NOTE: a large majority of those CALLS were SOLD not PURCHASED. What difference does that make, you ask? As an option trader, if I am that bullish, as just looking at the volume numbers alone indicate, I’d be outright BUYING those calls. Better profit.

    Another trade could be a call spread. Buy one strike price on the calls and sell another strike price. This LIMITS your RISK and your PROFIT. Again, if someone is that bullish, why limit your profit???

    Volatility is low, so the options are cheap. Another reason to just buy them.

    Bottom line? With a majority of the calls being SOLD, someone is looking to take in premium for profit. That’s the overwhelming trade being placed. The premium will be taken for profit when the XLF DROPS in price. Did you read that? When the XLF DROPS in price!!!!

    When you buy a call, you are bullish on the security moving up. You can do a call spread and still be bullish, but the bullish sentiment is not as strong. You’re adding some risk protection. If you want to make money if you think a security is going to drop, one way is to SELL a bunch of calls. You can buy some calls to limit risk, but your sentiment is the security dropping in price.

    What a great way to SUCKER a bunch of people! Brilliant move and here’s why. FNM, FRE bounce on “positive” news as the pundits spin it. A few other pundits say buy the financials as FNM and FRE don’t need a bail out. They’re in better shape than we thought! As if the pundits are now experts on Fannie and Freddie (most didn’t call it right on the way down, so most won’t call it right as these stocks rise). Buy financials as this is good news! GS, MS, LEH, MER, and C won’t loose a ton of money from a FNM and FRE failure. Now the brilliant move….. ride the pundit media pumping by using the options market. Mr. Mortgage knows best how “Headlines” are just that, Headlines. The Headlines don’t usually tell the “WHOLE” story. So, what happens today? Example headline…. “BULLISH BET IN OPTIONS MARKET ON FINANCIAL SECTOR!!!!” “Calls to Put ratio is HUGE.”

    What happens tomorrow? More CALL BUYING because people read headlines. Who are you buying those calls from? Somebody selling them to you and hedging their bet. Watch for large PUT buying soon.

    I will leave you with this as another caution. Guess which ETF dropped a bunch today, but had one of the LARGEST INFLOWS of money? Yup, the SKF. The SKF is the Proshares Ultra SHORT Financial ETF. Note that it’s not the regular Proshares Short Financial ETF. It’s the ULTRA short which seeks a 200% gain as the financial sector DROPS in price.

    Yes, while everyone piled into the XLF calls, I added to my SKF CALL position. My SKF calls make money as the financial sector tanks. As it tanks, people pile into the Proshares Ultra Short Financial ETF – the SKF. You can also buy PUTS on the XLF too. The DIA had one of the largest OUTFLOWS of money today. Profit taking on the DOW’s rise.

    Bearish folks. Don’t trust the headlines. The PUNDITS are out in full force.



    Call option volume in Financial ETF swells
    Thu Aug 28, 2008 5:27pm EDT
    By Doris Frankel

    CHICAGO, Aug 28 (Reuters) – The raucous debate in the options market over the outlook for U.S. financial stocks reached a fevered pitch on Thursday as trading surged in the main exchange-traded fund tied to the sector.

    The volume of call options traded swelled in the Financial Select Sector SPDR XLF.A fund, in what would typically be seen as a sign bulls were laying down bets on a recovery in the sector hit hardest by the year-old credit crisis.

    Yet some option experts cautioned against taking that activity at face value because a hefty portion of that volume came from traders selling near-term call positions, a trade that may well be a bet on more trouble ahead for banks, brokers and insurance companies.

    “At first take, the huge volume on the XLF could be interrupted as purely bullish on the financial sector. However, within that heavy call volume, some investors were taking advantage of the healthier premiums by selling call options,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

    In all, roughly 935,000 call options traded in the XLF vs. 213,000 put options, double the normal level, according to option analytics firm Trade Alert.

    Shares on the XLF, which holds financial-related components from the Standard & Poor’s 500 index .SPX rose 4.04 percent at $21.39, above the 50-day moving average.

    Financial stocks got a boost on Thursday buoyed by data showing the economy grew at a faster-than-expected pace in the second quarter and some positive company news.

    Speculation in call options is evident in the XLF following an upward revision to U.S. gross domestic product, reports Lehman Brothers is planning further employee reductions, and news of a management shake-up at U.S. mortgage finance company Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz), said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.

    Investors often buy equity calls, allowing them to purchase the company’s shares at a given price and time, to wager on share price gains. A put conveys the right to sell the stock.

    Call activity in the fund showed various plays and two-way traffic.

    Option strategist Frederic Ruffy at said it appeared a large call spread involving the September $22 and $23 strikes was sold early in the day.

    If so, it was either a closing position or a bet that the fund will stay below $22 a share over the next few weeks into the September options expiration — taking advantage of time decay through the weekend, he said.

    Ruffy also noted some speculative call buying, particularly in the September $22 line, which is probably due to the strength in the sector.

    “I think the XLF and the financial sector as a whole is forming a bottom and it is a good point to start buying either the shares or taking some bullish option positions,” said Victor Schiller, president of options research firm Investors Observer.

    (Reporting by Doris Frankel)

  8. Thanks so much Stu for the kind words. I put a bit of time composing the analogy of the GSEs being like a 470 pound middle-aged diabetic undergoing a risky type of open heart surgery. Formally the situations are remarkably similar in terms of different types of risk.

    If we can postpone surgery for a bit and stabilize the patient, this is a good thing. BY NO MEANS is it a sign the patient won’t require surgery. We’re just doing what any competent surgeon would do before exposing a high risk patient to complicated surgery. Stabilize the situation before you wheel him in on the gurney, if at all possible. And any person who doesn’t think this is complicated in its execution is clueless.

    Kip, as a former market maker in derivatives, I’m extraordinarily familiar with the math behind the valuations of options described by the various models.

    For starters, I’m EXTREMELY BEARISH on the GSEs. Extremely bearish, especially for the equity holders.

    HOWEVER, there are some plain errors in your post.

    1. BY ANY STANDARD, the vegas (volatilities, either implied or historical) of ALL GSE options is EXTREMELY HIGH. So when you are purchasing premium, you are buying an asset that is wasting extremely rapidly.

    I’d bet 100 dollars straight up that you can’t recite the formula for the theta of an option and 20 bucks that you don’t know what the theta does.

    The THETA of an option is the rate of premium decay. And these options are decaying at EXTREMELY fast rates.

    So shorting puts is actually what a lot of top players are doing right now, rather than purchasing options with such high implieds.

    Remember 95% of people lose money in options. There’s a reason for that.

    Secondly, you have to examine the coincident fluctuations in open interest of the options to be able to make intelligent prognoses about sentiment here. Without such info, you don’t know if people are SELLING TO OPEN or SELLING TO CLOSE.

    Makes all the difference in the world!

    Be careful. 95% of all the people lose money in options. Not a figure to be snickered at, especially if you don’t know the basics like implieds and the importance of open interest fluctuations.

    Tony Buzan

  9. Tony,

    Gee, thanks for the education and I’m glad I’m one of the 5%. What is an option? I’m fully aware of how to trade options and didn’t appreciate the attitude. Besides, you took my opportunity to win $20.
    Did the discussion move from the XLF (my post) to volatility on the GSE’s? Those are two different securities and implied volatility on the GSE’s affects the option prices of the GSEs.

    Anyway, back to the XLF. Read a little closer to my post. I did say the majority of those options were done as sales – a way to make money. That can be done by yes…. taking advantage of theta and also …. maybe… just maybe…. a bet that the XLF is going to tank with the rest of the market very soon – so sell some options to collect premium.
    Bottom line, most people are going to read/hear the XLF headlines and pundit news reports spun as Large Call Buying only. They’ll believe the news since most will only focus on how bullish this is. Next, more people will lose money thinking it’s time to buy – and especially if they pile on and buy the options. It will add to the amount of people who lose money trading options.
    My post was to hopefully bring awareness to some people – without an I know more than you attitude – that the buying as reported is not necessarily a bullish move.
    So, read it a little closer before you jump at what you think is a chance to showboat with terms and figures. Also, don’t just assume that I don’t have access to determine if the activity was selling or for that matter even buying on the bid or the ask. Yes, it does make a difference and that information is helpful as an edge when trading options.

  10. Just some additional info summary (most of it you can find here on Mr Mortgage’s site) to place with how the media will spin buying financials….

    The FDIC just increased the amount of troubled banks on their list from 90 to 117. Loan delinquencies rose for the 9th straight quarter. The FDIC also stated they will need to increase FDIC amounts they hold. The Wall Street Journal ran a story stating the FDIC may need to borrow from the Fed. Wow! Who else needs a loan from the Fed? Why would the FDIC need to increase the amount of money they hold for emergencies? Yet, despite this, everyone thinks the financials are a buy? Add in the XLF call buying that will be spun so everyone thinks is a bullish move and the markets head up. Exactly what fundamentals changed indicating things are better? Is unemployment getting better? Home prices rising? Defaults slowing down?

    I am sure everyone noticed the additional round of Prime and Alt-A mortgage downgrades to the credit standings? Could this be because these mortgages have accelerated in their rate of defaults? These mortgages are defaulting at a faster pace than subprime did when that started. By the way, the write downs have not been taken for these loans – yet. Nor for the crumbling commercial real estate market and loan losses which have increased 128%. Have we really started touching on the credit card losses yet?

    Financials MUST raise capital to survive. Banks are barely lending to each other and what was seen as the “smart money” months ago buying into financials, turns out to be “not so smart”. These companies are stuck. If they raise money by issuing more shares, further dilution of share price occurs. Let’s keep in mind that a lot of heavy investing (Sovereign Weal Funds as an example) is saying, “No Thank You” right now. Just look at Lehman trying to get money from Korea.

    Recent large investors in financials have started using a clause to get paid the difference between any buy ins, vs. future stock issuances to raise capital should that price be LESS than they originally paid. Most new issuances of stock to raise money drive the stock price down. What else can they do to raise money? Well, if you’re Lehman, you can sell what’s left of your business that actually makes money. Thus, future earnings will be impacted. Hmmm…. Didn’t a rash of the statements just come out today – and the majority of news coverage happened AFTER the closing bell – stating future earnings of investment banks and other financials are being cut?

    The FDIC also reported (this week) that net income from insured banks and institutions DECLINED in Q2 of 2008 over Q2 2007. The net income was $5 billion which is an 86.5% decline.

    Yet, despite all this, we are hit with “most” headlines stating what a bullish move the XLF Call buying was today, and that this buying indicates sentiment has changed on the financials to….. BULLISH?

    Just be careful in the market folks. Keep reading the Mr Mortgage posts for the truth.

  11. Sorry, last post for a while….

    Thank you Mr Mortgage for the Reuter’s Post. The headline of that article is EXACTLY the main point I was trying to make. Just reading the headline only – as quite a few people will – gives the wrong impression.


    Call option volume in Financial ETF swells

  12. High guys, great discussion here on the options plays. I believe this is a sucker play to get people on the bullish side to buy options here. Seen it before and to me it is a clear attempt at a pump and dump. I’m currently short (hold put options)finacials, a bunch of regional banks and some homebuilders. If finacials have a short rally I’m going to add to my positions, especially names like WFC, WM, and Citi. I think the balloon has to burst here sooner than later as the balance sheets are total crap. As mentioned earlier the fundamentals and technicals are out the window. The market is trading on pure hype and B.S. from the wall street controled main stream media. Good luck going ahead.

  13. Taxation is indeed serfdoom. Ludvig Von Misses was right.
    Taxpayers end up slaves to the bankers. And it’s the politicians from every stripes that do the job.
    Indeed Operation “Pump and dump” and “Pimp and dumb” YOu are courageous to buy some puts. I noticed. How can you not notice. All the banking crap in Europe and the USA is going up. The problem is that people and markets don’t care about balance sheets. Do the morons care about the balance sheet of the US federal government ? or the states ? Yeah it’s funny farm time ! The hogs are back, at least until the elections.

  14. “**NOTE: a large majority of those CALLS were SOLD not PURCHASED. ”

    First, all options that were bought, were sold. And second, the chunky orders were lifts, taken at the offered price.

    There was a 33.5K Hit as part of a spread, 100K bust, and a lot of buys.

    14:52:49 621 .60 X ET 41.41 21.34
    14:52:49 1711 .60 I ET 41.41 21.34
    14:06:27 33.50K .52 A SP 39.47 21.24
    13:54:13 9994 .54 I ET 40.37 21.24
    11:39:52 930 .52 I ET 40.99 21.15
    11:38:25 1000 .50 O SP 39.79 21.16
    11:35:33 500 .50 I ET 39.60 21.17
    11:35:03 510 .51 I ET 40.10 21.17
    11:32:36 500 .51 P ET 39.16 21.22
    11:30:08 917 .51 I ET 39.15 21.22
    11:28:12 4990 .51 A 39.53 21.20
    11:20:16 554 .51 O SP 40.09 21.17
    10:31:48 96.05K .45 A LO 40.10 21.00
    10:04:57 847 .45 O 42.41 20.87
    10:03:51 500 .48 I SP 43.65 20.89
    09:42:05 3000 .41 A SP 40.58 20.85
    09:41:34 602 .44 O 42.38 20.84
    09:41:34 602 .44 I ET 42.38 20.84
    09:41:32 1264 .44 O 42.38 20.84
    09:40:25 100.00K .45 A *X 42.57 20.86
    09:31:01 75.00K .39 I ET 40.85 20.77
    09:30:46 1671 .39 I ET 40.68 20.78
    09:25:48 10.00K .42 A SP 42.33 20.78
    09:07:42 721 .40 X ET 42.42 20.71
    09:07:01 39.64K .44 I LO 44.28 20.73
    09:06:54 500 .40 I ET 41.90 20.74
    09:06:24 500 .40 O 42.07 20.73
    09:02:41 547 .41 I ET 42.45 20.74
    08:50:14 54.00K .44 I *X 43.40 20.78
    08:48:07 678 .43 O 42.68 20.79
    08:48:07 585 .43 I ET 42.68 20.79
    08:48:07 500 .43 P ET 42.68 20.79
    08:46:25 796 .42 I ET 42.65 20.76
    08:46:25 888 .42 O 42.65 20.76
    08:46:25 739 .42 P ET 42.65 20.76
    08:45:47 536 .41 O 41.94 20.77

  15. I like what 5755hsa had to say.
    You should see how they are manipulating gold price with paper while buying up all the physical at reduced prices coinciding with forced redemptions!
    They got it made for the winners in the world.
    Futures are the new method of manipulation for the infamous PPT.
    Look, if you see the big picture, it comes down to the government racking up massive debt bailing out like crazy, and then 2009 or perhaps 2010 will come
    and some kind of IMF bailout plan.
    Is this not Argentina!? Sure smells like Argentina.

    Btw, Maxwell House Columbian coffee is not a bad tasting coffee for the price. Not as good as Brown Gold, but nevertheless a decent tolerable Columbian as columbians go.

    PS. you know the fix is in when the feddies come out and say ‘Yawl can’t short financials no mo”

    Pffft. ‘Free market’

  16. Marc A. I get where you are going. From my own perspective, I don’t think I’m that brave to have bought puts or add to what I have here, as I have to place my bets on what I truely believe and what I am observing and how I interpret all of it. I think the emotional state of the market is still in the denial stage,(although I think that is changing rapidly) and as I mentioned its due to the lack of truth being brought forward. The media seems to take any type of negative event and spin it into gold. IMO we will exhaust this deal soon, and the panic stage will be upon us. I just cannot see how this whole thing won’t end up going very bad, as the FED is out of bullets. Bailing out FRE and FME cannot fix very much and trying to string it out until the elections will likely intensify the issues across the board for financials. I don’t think its possible to carry it much further as the clock is running out. Just my humble $.02.

  17. Benny;
    Good observation on Gold. Now we have these sleezy adds on TV…Send in your scrap gold for cash! Hey, I got news for ya. When something is trading for 850.00 per ounce I don’t consider it scrap! This to me says Gold…and probably Silver are headed much higher and these people buying up the “scrap” are going to get fat off of this…opportunity knocks! I think I’ll hang on to my scrap for a while.

  18. Scene: Wall Street, Tuesday September 2, 2008, 9:30am EDT:

    Let the bloodbath begin.

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