Morning folks, we’ve got more Fannie and Freddie news, Oil posting massive gains yesterday, a heads up one what CDSs are and why you should care and reasons to pay close attention to the GE results this morning.

Apologies for this post being somewhat late. The IT gremlins were having a party in some server somewhere.

Anyway the New York Times is reporting this morning that U.S. officials are considering a take-over plan for mortgage giants Fannie and or Freddie Mac. This would make the common stock effectively worthless. It’s election year and they are viewed as simply too big to fail so something will have to be worked out! But it’s going to be VERY expensive for the taxpayer. Oh the delights of moral hazard.

M&A news from Dow Chemical (they are buying Rohm & Haas) provided a boost to U.S. stocks, despite a further plunge in Freddie Mac and Fannie Mae and Lehman Bros falling to an 8 year low

Oil posted its biggest 1 day gain in a month on renewed supply worries: the Nigerian crease fire ended and OPEC warned that Iran’s supply could not be replaced if they were attacked. The latter comment is somewhat spurious as no one really wants the sulphur-rich oil they produce. It’s too expensive to refine so there are 60 tankers full of the stuff floating around unbought in the Gulf.

Deutsche Bank and Societe Generale economists warn that deflation threats, prompted by a global recession and a collapse in commodity prices, may overtake inflation concerns in 2009. The Mole thinks of inflation like the flu, but deflation is economic pneumonia.

Adult Education Is A Wonderful Thing
Yesterday I alluded to something briefly which is becoming very important, the buying of insurance or credit protection against the event of a default on bond payments. The instruments are called CDS (Credit Default Swaps) and it’s $64 trillion (no, that’s not a typo) unregulated market. Scary.

There are many market professionals who now view the price of buying this insurance protection (CDS) on a company as a better gauge of their financial health than the firms official credit rating (issued by the much discredited Moodys’, Fitch or Standard & Poor’s).

An example may help show what the CDS market may be telling us.Take a stock, say HBoS. The share price has recently mysteriously stabilized between 270 to 300 pence (very close to the rights issue strike!). The price of buying insurance or a CDS on HBoS has risen from 1% to 1.66%. This means that if you own $50m of HBoS bonds maturing in 5 years time, you can buy insurance on this sum for £830,000 per year (50m*1.66%) today. Of course should there be more bad news about this stock the cost of this cover will balloon.

Put bluntly, the market for insuring the name is showing a lot more angst than the equity price. HBoS has £180bn of unsecured debt and may have to sell it’s Australian business to shore up capital ratios.

Data To Watch Today .. If You Must
13.30 we get the U.S. trade Balance, which is expected to widen again to 62.5bn. I reckon a number north of this would put a bit of downward pressure on the dollar. 15.00 sees the release of a US Consumer Confidence number, where a further drop to a read of 55 is expected.

Equities: It’s GE, GE, GE day
The world’s largest conglomerate General Electric reports earnings today. Why is this so important to the market? Well, GE operates in nearly every country in the world and has it’s fingers in entertainment, medical devices, financial services, jet engines, plastics and infrastructure pies. So if they post poor numbers it will be hard for the market to go any way but down.

People normally watch for the earnings guidance but with GE any comments about the business prospects in Asia (where they do a lot of business) will also be listened to. Asia has been seen as the salvation for many a U.S. company with the weak dollar. However if demand is slacking off then some of the Dow Jones stocks, who have been propped up by good overseas earnings, may suffer. Oh, and lastly they have a huge financial services arm, so any big write-downs will be a sure sign that the credit crunch is spreading. A tone setting day in store then.

Oil (think BP, Total, Cadogan) and mining stocks (BHP Billiton) may ride any rally in Europe this morning on the back of a rebound in commodity prices.

It’s Friday with thinning liquidity so today could be a wild ride. Is Brad & Bi on the (Northern) Rocks and is Lehman’s about to be thrown to the Bear (Sterns)?