Around the markets: Fannie/Freddie Death Watch ending?

A few notes from around the markets Wednesday:

-- Not dead yet: Shares of Fannie Mae and Freddie Mac continued to rebound as Wall Street pulled back from the Death Watch. The companies both were able to borrow in the money markets today ($2 billion for Fannie, $1 billion for Freddie), which reminded equity investors that the credit markets will have the final say on whether the mortgage giants will have to go hat in hand to Uncle Sam. So far, the answer is they don’t.

Fannie’s shares jumped 86 cents, or 15.3%, to $6.48, and are up 47% from last week’s low of $4.40; Freddie’s stock shot up 78 cents, or nearly 20%, to $4.75, and is up 69% from last week’s low of $2.81. And yes, this sure looks like some short sellers are rushing to close out their bets.

-- Talking his book? T. Boone Pickens Jr., who is championing natural gas and wind power as the paths to escape our reliance on foreign oil, says he expects the price of crude to retake its early-July peak level of about $145 a barrel by year's end. "I think you’ll be back up there at some point before the year is out," Pickens said in a TV interview from the Democratic National Convention in Denver, according to Bloomberg News.

Near-term crude futures rose $1.88 to $118.15 a barrel today on concerns about the path that Tropical Storm Gustav may take in the Gulf of Mexico.

-- No pay hike, but presumably comped coffee: Starbucks Corp. CEO Howard Schultz and other top managers won’t get pay increases in the fiscal year beginning in October as the chain tries to get back on a growth track, the Wall Street Journal reported. Lower-level workers still will be eligible for raises. The Journal picked up the tip from starbucksgossip.com, which posted a copy of an internal company memo.

   Starbucks shares, up 8 cents to $15.59 today, are down 24% year to date after falling 42% last year.

Comments

[martscan]

As Agathe Christie was wont to say, "things aren't always as they seem." While on the face of Freddie's and Fannie's, Frick & Frack, price spikes it would be reasonable to assume that their debt buyers have renewed confidence in these two financial behemoths' stability and solvency..it would be more appropriate to look well beyond just Frick & Frack....such as the Fed funds target rate, to name one factor of the equation. The fact of the matter is that any firm having access to the Fed Discount window, including non-member investment banks, providing certain conditions remain relatively stable for 28 days, could engineer a virtual "mortal lock", as is said in the argot of horse bettors. A firm buying notes from, say, Frick, would also, simultaneously, borrow a like amount of the cost of their Frick notes from the Fed's Term Facility...which the Fed would give 97% of their market value in cash...and the Frick notes buyer would then use the Frick notes for collateral for the Fed loan. So an investment bank could effectively buy $100M of Frick notes yielding 2.858% and borrow 97% of the purchase price at a cost of about 2.4% for an annualized return on their $3M downstroke of 17.7%. Paper implicitly backed by the US Treasury becomes paper virtually explicitly backed by the US Treasury. Yes, I'm aware of the risks on both ends of this deal...but implementing strategies, arbs, carry trades, etc. such as this, is why Wall Street pays the big bucks.

[martscan]

Has it occurred to anyone that the leveraged Frick & Frack note purchase structure I outlined in my prior post might have been orchestrated by Ben and Hank? Billionaire Socialism at work under the guise of capitalistic free markets. Slick.

[Maggie Knowles]

It's good to see a company with responsible leadership that recognizes the need not give raises to the CEO and upper execs, but to still give raises for the folks on the front line. I stopped going to Starbucks because they want to charge me for soy milk instead of putting it on the counter with the dairy products. I might reconsider trying to reason with them to see my way and start buying their coffee again.

[martscan]

Maggie: Not to detract, too much, from your sentiment regarding Starbucks' 130 VPs and their Chairman, CEO and Pres, Schultz not getting raises...but considering that Schultz's compensation was over $10M last year... a comfortable $19M a year during 5 years of his previous stint as CEO...and I estimate an average income of just under $400K for the VPs....for some reason I can't bring myself to feel any compassion for them...especially in light of the fact that SBUX stock price has eroded from $40 to about 15 bucks in two years...and the slide started quite ahead of any culpability that can be pinned on present recessionary reasons. Further, the raises of 3.5% for store personnel...who average below $40K/yr, is far short of real inflation and the 2% for other job classifications is nothing, if not an insult.

Starbucks has been an exemplary employer....but as to free soy milk, I respectfully suggest you acclimate your palate senses to the taste of their regular cow's milk in your coffee.