With speculation and analysis rampant on Friday, we are now, after Asian and European markets have run their courses, beginning to see where the proverbial ball is dropping.

(caveat: although I understand that other purveyors of MBS-interrelated data missed that whole "GSE takeover" thing on Friday afternoon, and even that some of you may have knocked off early and not had a chance to read or view any news since then, our discussion today is going to assume you've already briefed yourself with at least a foundational understanding of the situation.)

Here are a few of the vitals.

• Yes, you saw and will continue to see a dramatic tightening of MBS to treasuries.
• It's important to understand that the tightening is and will be tempered by skyrocketing Treasury yields
• From Friday, the 10 yr is down in price, oh, roughly 60 ticks. Said one anti-hyperbole spokesperson: "this is a slightly significant drop in treasuries."
• Although we'd assume the tightening, and although we'd assume (following the more refined details of the plan hitting newswires on sunday) that MBS would benefit from the news (thanks in no small part to one Mr. James Lockhart explicitly referencing the government's intention to reduce lending and borrowing costs for the US Housing market, and assuage fears of MBS investors), we still do not know to what extent the day will end with significant rise in MBS dollar prices.
  
• If that was a tad hard to follow for some, think of it this way: Many early opinions, especially by the casual observer jumped to the conclusion: "Oh, that should be great for mortgage rates!" While there are ways that can be true, remember that everything is relative in the capital markets. We DO know it will be great for mortgage rates COMPARED to treasury rates, but with treasury rates up over .25% session over session, we DO NOT know to what extent the "better by comparison" (all we're talking about is tightening spread for those who were in class that day) will translate to a rise in MBS prices.
• Here are some tidbits and context to consider for those of you wanting to throw your intellect around at this Thursday's Box Club Social
• The Fed will buy a billion dollars of preferred stock from both firms. Amaze your friends with your ability to seem unimpressed by the paltry sum of a billion dollars. "A billion?! Ha! What good is a billion dollars when they hold or insure over 5 trillion? A mere billion is but a small first step on what many view as a road leading to over 30 billion." If that doesn't shut them up, just maintain the stance that a billion of federal investment accomplishes nothing definitive yet.
• Perhaps the biggest winners today will be stock prices across the board, but especially in the financial sector. Now why would a plan that provides assurances for investors in MBS be a catalyst for Stock growth? It may have something to do with this whole "credit crunch," credit markets, risk buying (or lack thereof), and liquidity problem we've been having. In short, with Uncle Sam posting bond for the twins, the rest of the kids are feeling a bit more daring. Too much early morning analogy? Basically, RISK is the order of the day. Most things risk-related are seeing dramatic benefit in Asian and European markets overnight. Credit markets have risk, and equities markets have risk too! (By the way, I'd leave the GSE's stock prices out of that discussion...)
• Speaking of that, when your friends say "Yeah, well, why, uh, if stocks are doing, like, really really good, and stuff, and uh, if this whole, um, plan thingy you're talking about is spose'ta, uh, like help, uh, those two "F" names you talked about, then uh, why did I hear their stocks are down like, uh, 50% and stuff?" Oh your rebuttal will be sweet and vicious, perhaps with an upturned nose: "Indeed, good sir, and more to the point why would analysts at Citi have already cut Fannie's price target to 31 cents?! Well sir, it's important to note that two of investors' worst fears are realized. Not only have the dividend's on both the preferred and common stock been deleted, but the shareholders are not as well insulated from future losses by the american taxpayer as their wildest dreams might have hoped."
• Counterpoints are always good, especially if you happen to encounter someone at the Box Social or cocktail party with a modicum of information on the topic. So be prepared with these iron-clad rebuttals:
• True, risk appetite is increasing, but have you considered the impact of all of the paper that bond issuers have in the back room, waiting for a good time to sell? You know what oversupply does to price right?
• If capital markets are continually deleveraging from the orgiastic frenzy of the past few years, where does the bid come in? Where are your buyers? Sovereign wealth? Just as certain delicacies from their countries have made us queasy at one point, so has our soup du jour made them a bit queasy. Don't expect an overnight change of appetite to occur for them.
• With no "event" catalysing the announcment, AND with the announcement coming in what appears to have been a planned and staged "phased release" that occurred on the first Friday of a new month, just as the markets were closing, one might wonder what they know that we don't. To use the common tongue: "maybe it's real bad."

All of the above notwithstanding, and although the proverbial "ball" is much closer to the ground, we still do not know exactly where it has landed. You'll only have to wait for 3 more hours to find out! Granted, we might have a few unexpected bounces before said ball finally settles. Whatever the case, this is a once in a lifetime experience. Be alert and flexible in the following days and weeks. Like the Akido master, we can fight our best fight here by reacting to our opponent's actions as opposed to taking the role of the aggressor. In other words, don't make hasty decisions just because the biggest federal bailout in decades just took place with the two agencies that define your industry. Just keep the dial tuned here and I'll get you updates the moment they're available and relevant.