Dow Jones' record-breaking dive

Dow Jones Industrial Average (DJIA) plunged to its biggest single-day dive ever at 777.68 points yesterday (Sept. 29) after the US Congress disapproved the US$700-billion bail-out package to shore up the financial market. It then closed to 10,365.45 points, its lowest in three years.

The stock index decline easily beats the previous record of 721.56 points posted on Sept. 17, 2001, when the market reopens after the 9/11 World Trade tragedy.

The selling was so intense, according to some traders and stockbrokers, as they have witnessed around 3,073 stocks dropping on the Big Board versus only 162 stocks that rose.

On a related happening, the Dow Jones Wilshire 5000 Composite Index recorded for the first time a paper loss of US$1-trillion across the market for the day.

US government rescues Fannie Mae and Freddie Mac

The US government has bailed out mortgage finance companies Fannie Mae and Freddie Mac last Sunday (Sept. 7). The move could be the largest bailout ever by the government to prevent more global financial market turbulence. Both mortgage firms, which guarantee almost 50% of the country's US$12-trillion in outstanding home mortgage debt, have suffered combined losses of about US$14-billion since last year.

On Monday (Sept. 8), the stock market rose on investors' sentiments that the bailout would stabilize the US housing sector and calm the jittery global financial markets. The Dow Jones Industrial Average (DJIA) closed up 289.79 points at 11,510.74 points, or 2.59% higher than previous level. The S&P-500 index finished up 25.48 points at 1,267.79 points, or 2.05% higher than previous. And the NASDAQ composite index ended up 13.88 points at 2,269.76 points, or 0.62% increase.

With this latest development, I will still maintain my wait-and-see stance if I am a long-term investor in the US. Feel the market tone if the bailout issue could really shore up confidence in the mortgage sector. The stock market's positive performance last Monday might just have been a result of speculation by short-term traders.

Freddie Mac and Fannie Mae in SOS

After the collapse of IndyMac, the US government is now planning to help Freddie Mac and Fannie Mae out of trouble.

The Fed and the US Treasury are willing to lend money and buy shares just to stabilize the two pillars of the American housing market.

Nonetheless, efforts by the government to save the couple seem not enough to boost investors' confidence. Wall Street continues to sag. Shares of Fannie Mae fell 5.1% to US$9.73 per share, while those of Freddie Mac slid 8.3% to US$7.11 per share, both in NYSE trading last Monday (July 14).

From the website of www.slate.com:

As of yesterday's close, Fannie Mae had a market capitalization of about $13 billion and Freddie Mac was worth about $5 billion. Given the massive size of their portfolios and the potential for losses, it's clear they will need to raise sums that may equal or dwarf their current market capitalizations. Given the firms' distressed state, buyers would certainly demand a discount. As J.P. Morgan CEO Jamie Dimon said in his now-famous formulation about Bear Stearns, "Buying a house is not the same as buying a house on fire." Fannie Mae and Freddie Mac are houses on fire. And this mentality leads to a vicious cycle: Investors jump ship because they fear dilution, and the more the stock slips, the more dilute capital-raising becomes.