Blue Chips Rally after GSE Rescue

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"There remain open questions about the final structure of the GSEs, though these will be deferred to the next administration in the Oval Office after the Treasury Secretary was forced to pull the trigger on his bailout bazooka," wrote Action Economics analysts in a website posting Monday. Bond-market guru Bill Gross of PIMCO expects the news to help housing and the economy, notes Action, while a leading hedge fund, Paulson & Co., is looking to buy financial stocks.

"We believe the plan is a significant positive for the housing market, the economy, and the capital markets and that its announcement may prove a key turning point in the ongoing credit crisis," wrote Lehman Brothers economist Zach Pandl in a note Monday.

The extraordinary news concerning Fannie and Freddie somewhat overshadowed developments elsewhere in the financial sector.

Washington Mutual (WM) announced that Alan H. Fishman has been appointed CEO to succeed Kerry Killinger who is leaving the company. WaMu says Fishman has also joined the company's board.

Lehman Brothers Holdings (LEH) replaced key senior management, appointing new co-heads of its Fixed Income unit and new co-chief executives of the Europe and the Middle East segments. An unconfirmed report from Reuters also says that Korean regulators are urging Korea Development Bank to take a cautious approach to dealings with Lehman, and cites Japanese sources suggesting that Nomura Holdings is considering acquiring a stake in the firm. Merrill Lynch (MER) upgraded its recommendation on Lehman to neutral from underperform, saying that it believes the environment has improved for Lehman to be able to attract the equity capital it needs at a price around the current market.

Merrill also upgraded Goldman Sachs (GS) to buy from underperform.

Friedman Billings (FBR) upgraded shares of East West Bancorp (EWBC), (UCBH) and (ZION) to outperform as it believes that the government's decision to place the GSEs into a conservatorship has positive implications for bank stocks in general, specifically those with depressed valuations driven by uncertainty surrounding capital levels relative to exposure to housing-related losses.

Bankunited Financial (BKUNA) announces that it received notification Monday that the Office of Thrift Supervision has reclassified the bank's regulatory capital status from well-capitalized to adequately capitalized although the Bank's capital ratios exceed the statutory threshold for well-capitalized institutions. As a result, Bankunited is subject to restrictions on accepting brokered deposits.

While the GSE bailout garnered the lion's share of the market's attention Monday, traders were also looking ahead to reports on the U.S. trade balance Thursday and retail sales Friday.

Energy futures were mixed in volatile trading Monday as investors tried to get a handle on Hurricane Ike and what OPEC might do at its Vienna meeting Tuesday, and the weakness of the global economies. Ike pounded Cuba with lessened winds but the Weather Service believes it will intensify. Traders are worried the storm will hit the Gulf of Mexico energy infrastructure.

October WTI crude oil futures were were off $1.09 to $105.14 per barrel.

Gold traded on a heavier footing, with a broad dollar rally encouraging movement out of commodities and in to other assets. The improved risk profile generated by the U.S. GSE bailout weighed on gold, with some of last week's safe haven bid coming undone as equity markets moved broadly higher.

Among other stocks in the news Monday, Altria Group (MO) agreed to acquire UST Inc. (UST) in an $11.7 billion deal, which includes assumption of $1.3 billion in debt. Terms: $69.50 cash per UST share.

Gehl Co. (GEHL) agreed to be acquired by its largest shareholder, Manitou BF S.A., a manufacturer and distributor of material handling equipment headquartered in France, in a $450 million deal (aggregate enterprise value). Terms: $30 cash per Gehl share.

Hercules Offshore (HERO) reported that all of its drilling rigs, liftboats and marine vessels located in U.S. Gulf of Mexico have been accounted for, appear to have sustained no damage as a result of Hurricane Gustav. It said all of its contracted drilling rigs have resumed operations, except for three drilling rigs on stand-by and one drilling rig that was recently re-evacuated as Hercules Offshore takes precautions as it monitors Hurricane Ike.

Treasury market

Treasuries recovered sharply from early losses to trade higher Monday afternoon, as news of the

government's takeover of Fannie Mae and Freddie Mac failed to assuage concerns over the ailing health of the financial sector and the outlook for the economy. The 10-year note rose 14/32 to 102-28/32 for a yield of 3.65%. The 30-year bond rallied 25/32 to 103-00/32 for a yield of 4.26%.