Let's talk about Fannie Mae and Freddie Mac.

How could these two companies be "OK" a week ago — and now this week they seem on the brink of disaster? If you've heard of these two companies, but you're not really sure who they are and what they do, just understand — these two companies underwrite, back up or guarantee nearly half of the mortgages in the United States today.

Here is the news from this past week…

The Financial Accounting Standards Board (FASB) is drafting a rule that will force all corporations to account for financial risks. They (FASB) would like to make it harder for corporations to keep things off their balance sheet. In theory, that "sounds" good.

Years ago, Fannie Mae and Freddie Mac used to be government agencies. They are now publicly traded companies. Remember in the 1980's, the "era of big government" was ending. The mortgage business was something the Fed's didn't realy want to be in. And since this was a pretty profitable business (well, at the time, right?) these two businesses were sold off, went public. In theory, THAT "sounds" good, too…right?

Today they are considered GSE's (government-sponsored enterprises). Since they are publicly traded corporations, they have to abide by the same rules as all corporations, no exceptions.

Now stay with me, because this is where things get a little complicated.

If this new rule is adopted, it would trigger a need for about $46 billion in new capital at Fannie Mae and $29 billion in new capital needed at Freddie Mac. Ummm, that looks like $75 billion with a "b."

See, government-sponsored entities are required — by law — to hold more than five times the amount of capital for investments held in portfolio then for all of balance sheet assets. This would also force Freddie Mac and Fannie Mae to put assets back on their books that total somewhere between $3.5 and $4 trillion.

You read that right, between $3.5 and $4.0 trillion.
All kidding aside, that is a lot of money.

Still with me?

Remember, this is a proposed rule… and rules get proposed, and then shot down, all the time. And it also takes a very long time to get rules passed, and even longer still for rules to be implemented.

But you know Wall Street. When shareholders hear bad news, they run for the exits. Even if the show is still in the opening act.

Don't get me wrong, I'm not recommending purchasing either of these stocks. Both charts look like they're on life support. But the action this week in the stock market for these two stocks really appears to be an overreaction — at least temporarily. They could still go to zero someday.

But the news headlines this has created are making everyone freak out. The news media has taken the ball and is running with it, milking this for all the drama they can. And drama sells, mister.

Fannie Mae has raised about $14 billion the last few months to offset write-downs on mortgages that it guarantees. Freddie Mac has already raised about $6 billion in the same period. The thought of these two organizations needing to raise another $75 billion — just to meet some accounting regulations — just blew everyone away. That $75 billion doesn't even bring into play any potential future losses or write offs that Fannie Mae and Freddie Mac could have.

 Looking at relative strength changes really helps to drive home underlying themes in the market. As I have been saying for several weeks, there are only a few sectors that have been going up — most sectors have been just treading water — and some sectors are completely falling apart.

Here are some recent relative strength changes, you tell me if you can spot the underlying themes:

New relative strength buy signals: Dominion Resources, Cross Timbers, Cal Dive International, Natural Gas and Worthington Industries (a steel stock).
New relative strength sell signals: Bank of America, more local and regional banks (too many to list), Enstar and Fortis (insurance companies), Black & Decker and Pier One Imports.

Remember that relative strength signals tend to last approximately two years (some longer, some shorter). By the look of things, I think this may be round two for the financial stocks (banks, brokers, insurance companies). And it doesn't look like oil and other commodities are done yet either.

This article could be titled: Can (fill in the blank) go any lower? I'm not picking on Merck.

The reality is you could drop in Merck, Citibank, General Motors, Ford, J.P. Morgan, along with most other names in the Dow Jones Industrial Average (and most of the largest names in the S&P 500) and ask the same question…can this stock go any lower?

The short answer is: yes. Yes, all of these stocks can go lower — and I can show you the charts that will back up that statement. The real question is… what are you going to do about that?

I've lost count of the number of times people have told me "it's too late to sell — I might as well just hang on at this point." And over the next few months, the stock they are hanging onto gets sliced in half — again.

When your investment breaks the support line, it is no longer moving in an upward direction. That mutual fund or stock is telling you is it is changing direction — from northbound, over to southbound on the highway. Think about road trips you've taken — you may stop and get gas, you may stop off and see friends, you may stop to get something to eat. But the ultimate destination is in ONE direction. Mutual funds and stocks, guided by support and resistance lines, do the same thing.

So, again, when your investment breaks the support line, it is no longer moving in an upward direction. We try to avoid stocks that are trending in that direction. That's how investment accounts get destroyed.

When the market starts to fall, it's important to see where your particular stocks are sitting. If they're sitting above the support line, there's a chance that the stock may drift down to the support line — and then bounce right back up.

However, if the stock is already broken support, and the market then begins to fall, some stocks begin to "free fall" — since they already broke support, there is no safety net below.

And that's where many large-cap stocks (names that everybody knows) are sitting today.

If you've got any questions at all — about any mutual fund — or any stock whatsoever — you need to e-mail or call right away. I'd be more than happy to give you an instant analysis right over the phone.

Alaska Governor Sarah Palin is the youngest governor in Alaskan history — and — the first woman governor of Alaska. Palin was recently interviewed by Larry Kudlow, who is a terrific economist. Larry hosts a radio show on Saturday mornings in New York on WABC ("The Larry Kudlow Radio show"). I have called in and spoken with Larry on several occasions.

During the interview, Palin and Kudlow spend time talking about how to relieve the enormous demand for oil here in the United States by tapping the reserves found in the Arctic Natural Wildlife Reserve also known as ANWR.

Did you know that the area in question in ANWR is roughly 2000 acres — about the size of LAX (Los Angeles International Airport)? This is the area that is located just east of Prudhoe Bay in Alaska's North Slope…which happens to be North America's largest oil field and accounts for nearly 17% of all US oil production.

One of the big hurdles is it will take five years to get oil from that area to your corner gas station. It's a shame so much time is being wasted — we are all paying the price now at the pump. In her interview, Paling claims there are billions of barrels of oil and trillions of cubic feet of natural gas sitting there waiting for us to use.

Click here to read the interview. I think you'll enjoy it.

OK, no names are used in this post! But holy cow!

In the midst of the sell off this week, Bloomberg Radio interviewed a money manager about the current condition of the market. The money manager went on and on making predictions about the market. How would he know anyway?

Now, everyone is entitled to their opinion, and I've been wrong plenty of times. But at the end of the interview, the manager was asked, "what would you recommend an investor look to buy here?"

His recommendations were to buy: General Electric (GE) and Microsoft (MSFT).

Now, this manager probably has some wonderful reasons why he would suggest buying those names now. But when it comes to point and figure, I'm about as far away from those stocks as possible.

Look, we're approaching mid-year. Both the Dow and the S&P are down around nine percent.

Over time, one of the things I've learned is when the markets are rising, relative performance matters. You know…"OK, the yardstick returned 10%, how did you compare to the yardstick…did you beat the yardstick?"

But — when markets are falling, it's not relative performance that matters…it's ABSOLUTE performance. For example…"OK, the yardstick lost 10% this year." What everyone wants to know is "but did we MAKE money?"

People don't like losing money. And there is little consolation in hearing your broker or adviser tell you, "well, Mr. Jones, the market dropped 20% this year, but we only lost 15%."

There is ALWAYS the possiblity we can lose money. We want to minimize the truly lousy investments.