No Comments Written by Anthony Truong on September 6, 2008 – 4:02 pm

Dear Reader,

A New York Times article on Friday 5 September (see www.nytimes.com) revealed that senior members of the US administration met with the chief executives of Fannie Mae and Freddie Mac to discuss a government takeover of the companies. As mentioned in an earlier newsletter, I was expecting both companies to become insolvent and that the US government would be forced to come to the rescue in this manner, lest the entire mortgage market cease to exist in their wake.

Such a move (most likely headed by the Federal Reserve and the US Treasury) would wipe out current shareholders who have seen their holdings lose billions in value as the stock price of each entity has plummeted; Fannie closed on Friday at $5.50 and Freddie closed at $4.

The announcement is expected to come on Sunday 7 September, prior to Asian markets opening. This is actually ideal for my forecast, as I also previously pointed out that Fannie and Freddie would likely go into bankruptcy as wave 3 (which was confirmed on Thursday) took hold. If the announcement is made this weekend, there is no doubt it will add enough volatility to stock markets that is expected in third waves.

Stay tuned; I continue to recommend avoiding long positions. Cash is, and will remain for some time to come, king. If you’re a risk taker, consider holding cash in US dollars; short term I expect slight weakening in the USD, but it is looking more probable that a new trend is in place to the upside. For really aggressive risk takers, you might consider shorting or buying puts on the major stock indexes. As always, THIS IS NOT A TRADE RECOMMENDATION.