Over the weekend, the Federal Reserve and the Treasury Department announced a plan to help hurting mortgage giants Fannie Mae (FNM, $10.25, down $2.95) and Freddie Mac (FRE, $7.75, down $0.25). I can name quite a few stocks, and we’ve witnessed them here in the blog, that have lost 70%-80% of their values but they should get a big bounce today.

Lehman Brothers Holdings (LEH, $14.43, down $2.87) continues to commit highway robbery. There’s no other way to explain it. It was exactly one month ago I mentioned the company had raised $6 billion through an offering of common and preferred stock. What was the name of that analyst who “upgraded” Lehman on the eve of the offering priced at $28? The stock was $30 at the time.

Merrill Lynch (MER, $27.61, down $1.10) hit a new 52-week low of $26.50. Merrill’s high? 89 bucks. Merrill is set to raise capital (after saying new funds weren’t needed) as it expects the write down for its 2Q could exceed $6 billion. I mentioned Merrill was selling stakes in Bloomberg and BlackRock (BLK, $174.71, up $1.76) which are considered two of the largest holdings of the firm. Merrill has their fingers in other pies that aren’t as lucrative but these investments could also produce some much-needed capital.

We set stops on the Merrill Lynch July 32.50 puts (MERSA, $5.20, up $0.75) at $4.50 on Friday and this will probably get hit this morning. Merrill could be volatile and you could just sell half in case this suppose “rally” doesn’t hold. Either way we should net a great return from an entry price of $2.15 on 6/30. Merrill should trade higher due to the Fannie and Freddie news.

Wachovia (WB, $11.54, down $1.59) and Citigroup (C, $16.19, down 0.09) also set new lows Friday and they should rebound too. Even Goldman Sachs (GS, $162.48, down $7.68) was starting to have its armor chinked at.

Hopefully this is not another smoke-and-mirror show to fix something that can’t be fixed. We should get a clearer picture this week as dozens of financial institutions report 2Q results which are widely expected to be awful. What this news really means though is that our tax money could be used by the government as “we” help bail out Fannie and Freddie. The call options for both should zoom today. Keep an eye on Fannie’s July 10 calls (NJWGJ) which closed at $2.45. Freddie’s July 10 calls (FREGB) closed at 80 cents. The key will be if they hold their gains.

Although both are saying they don’t need to raise money at the moment, the funds are there in case they do. The rally this morning will be due to the short-covering from those who have shorted these stocks. Let’s see how much off a rebound we get and how much is due to short-covering. If we get a quick faded rally it won’t be a good sign. Either way you slice it, the fundamentals for these companies still don’t change. A $6 billion loss is a $6 billion loss in the case for Merrill.

Rick Rouse
Rick@OptionsMentoring.com