Today's Investor Sentiment Makes No Sense

YOU KNOW THAT things have gotten about as bad as they can get when even the best news in the world is greeted as a sign of disaster.

On Tuesday, the price of crude oil dropped $9 per barrel following a press conference by President Bush, in which he urged drilling in the U.S. outer continental shelf. What could be better?

In today's super-pessimistic environment, the real question is: What could be worse? With the lower oil price a much-needed gift to American consumers, and the president's initiative a long-awaited move toward U.S. energy independence, guess what CNBC reported? That the sudden drop in oil was the result of a big bank going belly-up and having to liquidate its speculative long position!

Well, I hate to tell all those pessimists out there, but that move in the oil price — and further down-moves the rest of this week — is good news, not bad news. Even at somewhat lower prices, oil is still expensive, and it's going to present some economic difficulties. But wouldn't you rather see oil at $130 rather than $150? Can we just stop for one moment and say "thank you"?

And maybe, just maybe, there's more downside for oil. High prices seem to have opened up the political process for more domestic production, and that would increase global supply over the long term. And this week two important diplomatic initiatives between the U.S. and Iran were announced, and that lessens the possibility that oil supplies could be disrupted by hostilities in the Middle East. Those are solid reasons for the oil price to pull back.

As I wrote here three weeks ago there was no real reason for oil to have shot so high in the first place. So as far as I'm concerned, the oil price is due for a huge drop for no reason at all. But we have two reasons. Isn't that good news?

And how about the way Treasury's rescue contingency plan for distressed mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) was greeted by the market? It should've been good news that the government, which has always sponsored Fannie and Freddie (that's why they are called "government sponsored enterprises"), was going to do the right and proper thing and stand behind them. But noooo.

Instead, all that anyone seemed to focus on was how cataclysmic it was that Fannie and Freddie had to be rescued in the first place, and how terribly expensive it was going to be for the government to do it. At first, shares of Fannie and Freddie fell further — much further — after the rescue was announced!

And how many times this week have I heard some seemingly knowledgeable "expert" claim that this is a "$5 trillion bailout" that will "double the U.S. national debt"?

Let's get real. No one is talking about the Treasury buying out the $5 trillion of outstanding mortgage pass-through securities issued by Freddie and Fannie. And even if the government did that, it wouldn't increase the national debt by that amount — at least not in any conventional sense. Those securities aren't Treasury bonds representing debt of the U.S. government. They are mortgage bonds more than fully collateralized by prime residential real estate.

But that's not what the rescue is about anyway. The rescue is just a contingency plan, under which the Treasury would loan Fannie and Freddie some money if — I repeat, if — they need it, and would buy equity in the two firms if — I repeat, if — they need it.