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US STOCKS-Fannie, Freddie rescue plan set to lift Wall St
July 14, 2008 / 1:20 PM / in 9 years

US STOCKS-Fannie, Freddie rescue plan set to lift Wall St

* Rescue plan for Freddie, Fannie restores markets

* Still, Merrill cuts GSEs share price targets

* Belgium’s InBev buys Anheuser-Busch in sweetened deal

By Ellis Mnyandu

NEW YORK, July 14 (Reuters) - U.S. stocks headed for a higher open on Monday, buoyed by the government’s rescue plan for mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N and optimism about a $52 billion deal to acquire No. 1 U.S. brewer Anheuser-Busch Cos Inc (BUD.N).

As calm returned to markets around the world after Washington’s weekend emergency action, Wall Street was poised to open higher after Friday’s sell-off.

Fannie Mae and Freddie Mac shares each jumped more than 20 percent before the bell after the Treasury Department and Federal Reserve unveiled sweeping measures to lend money and buy equity if needed to shore up the government-sponsored enterprises. For details, see [ID:nN11340394]

Nevertheless, citing the chances of credit losses dragging on the stocks, Merrill Lynch cut its price targets on the two mortgage finance providers. Merrill Lynch reduced Freddie Mac’s price target to $7 from $20 and cut its price target on Fannie Mae to $9 from $22. [ID:nWNA0527]

Last week’s sudden plunge in the shares of the twin pillars of the U.S. housing market was fanned by fears they might be undercapitalized.

S&P 500 futures SPc1 jumped 15.30 points, above fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures DJc1 climbed 111 points, and Nasdaq 100 NDc1 futures rose 21.50 points.

“The move to shore up Fannie and Freddie was inevitable. All last week the situation felt like Bear Stearns,” said Arthur Hogan, chief market analyst at Jefferies & Co in Boston, referring to the government-arranged sale of the beleaguered Wall Street brokerage in March.

“We knew the government was going to step in and get some sort of package together to guarantee both of these guys, and that’s what we are getting. So I think the market is going to react positively in the near term.”

But he cautioned, “If you remember what happened after the Bear Stearns bailout, we bounced a little bit too, but it doesn’t mean we don’t have more problems.”

Any collapse by Fannie or Freddie could cause major damage to the U.S. economy and the global financial system, many investors feared.

Underscoring the financial sector’s continuing problems, federal banking regulators seized failed mortgage lender IndyMac Bancorp Inc IMB.N late on Friday after a run on the bank. It was the third-largest U.S. bank failure. [ID:nN11309472].

In deal news, Anheuser-Busch accepted a sweetened $52 billion takeover bid from Belgium-based InBev NV INTB.BR to create the world’s largest beer maker and end a month-long standoff. [ID:nSP122921]

Freddie Mac is scheduled to hold a $3 billion sale on Monday of short-term debt, seen as a key test of investor confidence. Shares of Fannie Mae rose to $13.80, up 34.6 percent before the bell, and Freddie Mac shares rose 34.2 percent to $10.40. Anheuser-Busch climbed 1.7 percent to $67.63 before the bell.

The Fed said Fannie Mae and Freddie Mac, which own or guarantee about $5 trillion in mortgages, could access its discount window for emergency cash while the Treasury said it would temporarily increase its line of credit to the two, as well as purchase equity in them, if necessary. (Editing by Kenneth Barry)

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