A Keen Eye for the Obvious

*****I’m not quite as keen on the Monday sell-off. Stocks looked poised to continue the rally from Friday as China became the latest country to throw money at its slowing economy. 

But even though the major indices finished in the red, there were some positives to take from Monday’s decline. 

First of all, the selling didn’t beget more selling. Lately, all too often, we’ve seen market declines snowball. They start off small, but accelerate exponentially by the end of the day. If the Dow was down 200 at lunch, it was a good bet we’d see a 400-500 point loss by the close. 

Second, volume was light on the decline. Volume totals are often used as a measure of investors’ conviction. Monday’s volume totals on the New York Stock Exchange were the lightest we’ve seen in weeks. 

Third, "bad" news wasn’t that bad. Even though investors had China’s stimulus plan to celebrate, there was still plenty of bad news out there for the bears to chew on. AIG (NYSE:AIG) had to get more money from the Fed. CircuitCity (NYSE:CC) declared bankruptcy. Fannie Mae (NYSE:FNM) quarterly loss was far wider than expected. General Motors (NYSE:GM) and Goldman Sachs (NYSE:GS) were both whacked by cash and earnings concerns. 

I’m sure I could go on, but you get the point. There’s a lot of bad news already accounted for in stock prices. And the market’s decline was fairly tame. There was even a last-hour rally that took the Dow off its lows. 

*****The silver lining for Monday is that some order is returning to the stock market. Declines aren’t triggering stop-losses and margin calls that send stock prices plummeting. Hedge fund and mutual fund redemptions seem to have been completed for the time being. 

We’ve discussed it before but it bears repeating. When the markets are in free-fall, forced selling is what drive prices to frighteningly low levels. That’s when it really does feel like the end of the world. 

Now that it looks like some of those pressures are fading, we can get back to the good old-fashioned battle between the bears and the bulls. You know, the battle that’s measured in 10s instead of 100s. This finally feels like the environment where we can actually see stocks grind out the kind of small advances that really restore investor confidence   

Of course, it’s too early now to say the U.S. economy is on the mend and the recession is over. But a return to some sense of normalcy for stocks is a good sign that there is light at the end of the tunnel. 

 *****I can’t leave Fannie Mae’s earnings without adding a little color. Because the earnings were ridiculously bad. Analysts, bless ’em, were expecting the company to report a loss of $1.60 a share. Fannie Mae came out with a loss of $13 a share. 

I’m not sure I’ve ever seen analysts miss by that wide a margin. Maybe Fannie Mae’s accountants missed a decimal place somewhere. 

The official explanation appears to be that Fannie Mae had to take a $21 billion write-down for tax assets. I guess now that Fannie Mae is now a government entity, it won’t be getting any tax breaks. That’s a good start. Now if the government can figure a way to stick Fannie Mae and Freddie Mac (NYSE:FRE) with a $700 billion tax bill, I think we’d all appreciate it. 

*****My "Keen Eye for the Obvious" award for the day goes to the analyst who told the Associated Press "[Fannie Mae is] no longer being run for profit." 

Ya don’t say. I’m not going to print the analysts’ name. That just wouldn’t be fair to his friends and family.  

*****Bloomberg has a great article about the fall of Lehman Bros. and CEO Richard Fuld. This isn’t a numbers piece that details how Lehman’s mortgage investments went bad. Rather, it looks at the culture created by CEO Fuld and the difficulty he had facing the reality that the company he successfully ran since 1994 was falling apart around him. 

Definitely worth the read. Here’s the link: http://www.bloomberg.com/apps/news?pid=20601109&sid=aZ1syPZH.RzY&refer=home 

*****Chesapeake Energy (NYSE:CHK) announced this morning that it’s partnering with Norway’s state oil company, StatoilHydro for development and exploration. 

The press release says the companies will work together on exploration around the world and development in the Marcellus-Shale region of the Appalachia mountains. I don’t know what exploration the companies will officially do. This seems more about getting funds to develop current natural gas fields. StatoilHydro is paying $3.375 billion for the privilege. 

This is good news for Chesapeake. It will get necessary financing and retain a 67% interest in the Marcellus Shale venture.