Morning Report - Hedge Funds betting on Fannie Mae

Vital Statistics:

	Last	Change	Percent
S&P Futures	1550.9	4.9	0.32%
Eurostoxx Index	2600.8	15.6	0.60%
Oil (WTI)	93.27	0.6	0.61%
LIBOR	0.279	0.000	0.00%
US Dollar Index (DXY)	82.61	0.111	0.13%
10 Year Govt Bond Yield	1.72%	0.01%
Current Coupon Ginnie Mae TBA	106	0.1
Current Coupon Fannie Mae TBA	104.3	0.0
RPX Composite Real Estate Index	190.1	0.4
BankRate 30 Year Fixed Rate Mortgage	3.54

Markets are higher this morning on no real news. The Japanese Yen continues to fall, and is now approaching 100 yen to the dollar. The new program of quantitative easing in Japan is re-igniting the yen carry trade, except now the Japanese are borrowing yen to invest in US dollar assets. In case you missed it, Japan's Nikkei 225 stock market index is up 52% since November. Incredible move. Japan's QE program will mean incrementally lower rates on US long-dated Treasuries and MBS. Bonds and MBS are flat this morning.

Alcoa kicks off Q1 earnings season after the close today. We will get JP Morgan and Wells Fargo earnings on Thursday before the open.

Friday's lousy jobs report probably means that any talk of ending QE this summer is probably over. After 3 consecutive economic slumps over the summer months, the Fed is going to stay aggressive. Chicago Fed President Charles Evans said "I'm going to have a lot more confidence if I begin to see indications that growth is well above trend and its going to be sustainable." The Fed is going to be wary of reducing stimulus given that the fiscal policy has tightened a little bit.

Fannie Mae's surprise profit has investors re-thinking the theory that they will be euthanized. Hedge funds are jumping into the preferred stock, which was issued in spring of 2008 as Fannie Mae was circling the drain before becoming nationalized. The 8.25% prefs have a $25 face value and were trading at $4.81 on Friday. All of this is predicated on the idea that Fannie Mae will be able to pay back the government. Once that happens, Fannie will restructure, and the bet is that there will be a place in the capital structure for the prefs. Risky bet, obviously, but big upside too.