This may sound like a broken record, but once again, market has been rattled by financial woes. By monitoring some of the action, you can't help but feel something in the group is about spring a leak. The funny thing today, is that we can use a lot of old scripts, same scripts from last week, or last month to sum up the action.
Same issue, same worry, same problem and same reaction! The thought and prospect of FNM/FRE being bankrolled by the government in the not too distant future is shaking everyone into a "wake-up" call on this otherwise slow summer day. According to Barron's, government is ready to recapitalize (take over) FNM/FRE operation and effectively wiping out the entire common shareholder and perhaps the preferred shareholder's equity. Also, it goes as far to say some debt obligation will be affected too. That, folks, is a huge deal and a scary one. The repercussion is huge if it actually happens. Believe it or not, a lot of financial products are still tied to the FNM/FRE debt. So, the carnage may not end with just the FNM/FRE shareholders. The other message that the market is getting that "NOBODY is safe"! Yup, there goes the confidence of seeing a speedy recovery in financial sectors. LEH asset sale concerns also weighted in and will continue to affect the group this week.
The problem with the current administration/system is that even though they know the problem is deep within the financial sector, it just takes time to resolve all of the issues. You can't just bail out all of the troubled financial companies in just one week. It may take weeks or months to find the troubled companies and it takes just as long to resolve the issues. We are probably 2/3 of the way through write-downs etc.
Commodity plays, on the other hand, are also seemingly on the cusp of further trouble. The silly upgrade of Agri. by Citi lasted a good one hour before everything closed down near the low of the day. Everything by Citi lasts an hour, we've seen this endlessly in their solar upgrades. The commodity index, CRX, is in danger of breaking below 800 again and some of us may actually be looking forward to it. Basically, there will not be a bottom in commodity plays until a panic induced bottom occurs.
Despite all the negative stuff out there, there's still couple of plays we are keeping our eyes on. Both AFAM and FSYS closed in the green and held up really well in the face of an overall negative environment. We discussed AFAM in detail last week, we got a nice pullback immediately after saying,... "than look for a healthy pullback to re-enter or enter for the first time, if you missed the first leg as in AFAM". There's a chance that AFAM can challenge its old high sometimes this week. We're also adding USPH, CRL to our Shadowlist based on recent earnings, near NCH and the fact they are in favorable groups in this environment.
Bottom line, be selective and be very patient with this market. We can't stress this enough and so we repeat and repeat.