Sunday, September 07, 2008

TURN IN 1991

The following chart shows how the pure home mortgage play, Washington Mutual, performed relative to Wachovia Bank and the S&P 500 at the turn in 1990-91.;NYSE:WM&cmptzos=-18000;-18000&q=NYSE:WB&ntsp=0

Today, Fannie Mae and Freddie Mac were put into receivership. The US Government will buy as much as 100 Billion Dollars of preferred stock. The Government will supply lines of credit and it may buy mortgage backed securities directly.

This is the kind of action that marks major turning points. There is sometimes a "fake out" where the market moves the wrong way for a day, a week or two, but the action is in essence a clearing action. The government will ultimately make money off the deal. The initial preferred shares will pay 10% interest and the governments claim will be superior to other preferred shares and to common shares.

In the current cycle, financial shares have already shown relative strength. The "big move" is already underway.