At “A Dash” we have often noted that The Big Picture highlights the question of the day.  The prolific Barry Ritholtz points readers to many key topics.  We sometimes disagree with the conclusions, but never the agenda.  Regular readers  note the differences in opinion, but that is a form of selection bias.  We are free to pick the points where we object.  We explained this early on in our article (nearly three years ago), We’re Just Wild about Barry.  We often hold many positions similar to those recommended by Barry.  To illustrate this, let us consider Barry’s take on today’s trading.

Today’s Trading

Barry astutely notes as follows:

On CNBC today, someone blamed today’s selloff on the weekend Barron’s piece trashing Phony and Fraudy.

That raises an interesting question: Why would a Barron’s article, with essentially no new information in it, send Fannie down 22%, Freddie down 25%, and whack 2% off of the markets?

This really nails the question.  The only new information in the Barron’s article was that there was a source inside the Bush Administration.

Was this an intentional leak, as some have suggested?  We think not.

Political maneuvering is our sweet spot.  This is not the way that political actors float “trial balloons.”  The leak is inconsistent with official statements from Treasury Secretary Paulson, repeated by Treasury officials today.  It is also not a source that would logically be chosen for such a leak.  Political actors look for a regular and “friendly” source, not consistent with either this author or the publication.

Our Take

We agree with Barry that the market reaction was not precisely news-driven, but it did have an effect.  There are two very different questions.

1. The meaning for shareholders in GSE’s. If the article is correct, shareholders face serious dilution in positions — possibly wiping out common stock equity.  We successfully disputed this viewpoint last month, buying stock and selling calls in Fannie Mae, but we no longer have a position.
2. The meaning for other financial stocks. Anything that helps the housing market will help financial stocks and the rest of the market.  With that perspective, a stronger government position is a positive for the non-GSE financials.

We doubt that the Bush administration will embrace a nationalization of the mortgage market in front of the elections, as noted by Evan Newmark.  This issue will be confronted incrementally and reluctantly.

Perhaps today’s trading is more a reflection of this fact–uncertainty rather than logic.  In any case, investors should not extrapolate Fannie and Freddie problems to the overall market.  A more nuanced conclusion is needed.  If and when qualified potential buyers have more access to mortgages, the demand curve for housing will shift.  That is what we should be watching.