Monster rally is fading

The Federal Reserve announcement about bailing out Fanny Mae (FNM)/Freddie Mac (FRE) sent stocks soaring, but the enthusiasm has eased. Last night when I came home, Dow futures trading in Asia were up 350. Pretrading Dow futures this morning were up about 250. Now Dow has bounced around & is up 169, advancers over decliners better than 3-1 & NAZ is up 14. Already the rally has settled back with more routine numbers & the short term up momentum is gone. FNM/FRE shares are now dollar stocks as their future looks like they will keep heading for zero. Financials have been bid up, but remain in the trading range they've been in for 3 months (with 302 being its high).

S&P 500 FINANCIALS INDEX

Value .. 297.17

Change .. 7.21

% Change .. 2.5%

Seat of the pants enthusiasm has been tempered by thoughts of reality, nobody is clear how this will play out. In addition, changes proposed will have to be approved by the Democrats in Congress during an election in what promises to be a close election. Here are some articles with early thoughts about the proposed new financial world.

•Fannie, Freddie Seizure May Trigger Default Swaps on $1.4 Trillion of Debt
•Paulson Loses Sleep in `All Consuming' Fannie-Freddie Rescue Negotiations
•Paulson Bets He Can Do What Eluded Fed: Get Banks to Lend in Down Economy

The rest of the world is supplying news. Washington Mutual (WM), largest S&L in the country, is down 53¢ to 3.74 as more problems emerge.

•Washington Mutual Ousts Killinger After Subprime Losses; Fishman Named CEO

Oil, up pennies, is still in play as the storm heads for the Gulf with its large investment in oil equipment. The Alerian MLP index is also up pennies in the 262s, remaining near its 2 year low.

A sense of reality is needed in evaluating the FNM/FRE news. Nobody knows what these enormous changes to the financial markets will bring. Election politics only adds more confusion. Meanwhile, the US economy is weak, strong exports may pull back on the stronger dollar, unemployment is high, retail sales are sluggish at best while housing & autos are in one their worst slumps in modern times. This may be a good time to keep the powder dry.